Q & A – Part year defined benefit income cap

Find out what your peers are asking – based on real-life questions submitted to TechConnect.

By William Truong, Technical Services Manager

Q: My client is receiving a defined benefit income stream. He turned age 60 on 31 March 2022. 

How is his income stream payments taxed? 

A: For the period before age 60, the defined benefit income stream is taxed at marginal tax rates with a 15% tax offset for the tax element (but no tax offset for any untaxed element). 

Once he turns age 60, he is entitled to a defined benefit income cap (currently it’s $106,250* – 2021/22) in respect to the income from the defined benefit income stream. 

If all the income from defined benefit is under this cap, then it’s subject to concessional taxation – according to this table below:

 Tax component From 1 July 2021
Tax free component

Tax- free up to the defined benefit income cap of $106,250* from 2021/22.

50 per cent of the pension income over this cap is taxed at normal MTR (with no tax offset)

Taxable component - taxed element
Taxable component - untaxed element Taxed at MTR less a 10% offset but the offset is limited to 10% of the pension payment to the extent that it falls within the defined benefit income cap of $106,250*.

* $106,250 = $1.7 m (general transfer balance cap) / 16.

However, as your client is turning age 60 during the year, they are only entitled to part of the $106,250 cap based on a proportional rule. The reduction is achieved by multiplying the following:

Defined benefit income cap 

1+ days remaining in the financial year

days in financial year 

Hence, your client’s reduced defined benefit income cap is $26,780 worked out as:

 $106,250 x (1+ 91 days remaining in the financial year) / 365
 

More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

Disclaimer
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.