How Much Can You Earn Tax-free Outside Super Contributions?
The amount of income you can earn tax-free outside your SMSF contributions primarily depends on your age.
Residents Below 65
If you’re under 65, the tax-free threshold is $18,200. This means the first $18,200 you’ll receive won’t be taxed, saving you more money annually because your total taxable income has been reduced. This amount is based on ATO’s income tax rate table for individuals. So, from 2019 to 2020, there’s no resident tax rate if you have an annual income of $18,200 and below.
Moreover, if you’re earning taxable income, you may be eligible to receive either or both tax offsets to add to the threshold:
- Low-income tax offset (LITO)
If your taxable income is lower than $66,667, you’re eligible to receive LITO. Those who belong to the income bracket of $37,000 and below can receive a $445 tax offset. The tax offset amount is reduced by 1.5 cents per dollar for those earning $37,001 and above as the bracket rises.
- Low- and middle-income tax offset (LMITO)
If your taxable income is below $126,000, you can receive a maximum of $1,080 tax offset. The base offset amount is $255, and it will vary depending on your income bracket.
You don’t have to do anything to apply the offset. Eligibility will be automatically determined by the ATO when they assess your income tax return.
Any amount of unused offset can’t be refunded. The tax offsets won’t also reduce your Medicare levy.
Residents Over 65
If you’ve reached the pension age of 65, you can benefit from the Seniors and Pensioners Tax Offset (SAPTO) to reduce the tax you’ll pay on additional income.
But before you qualify for SAPTO, you must pass the rebate income threshold test that considers the following factors:
- Any taxable income
- Any employer super contributions
- Deductible personal contributions to your super
- Losses from rental properties or financial investments
- Fringe benefits your employer provides
For single individuals, the SAPTO can get you a tax offset of up to $2,230, so long as your annual income is less than $32,279. The offset amount is reduced as your income grows larger. Income equal to or exceeding $50,119 won’t receive any tax offset.
For couples living together, the combined income should not exceed $57,948 to receive the full tax offset of $3,204. The offset is progressively reduced as the combined income increases up to $83,579. Anything beyond this amount won’t receive any tax offset.
For couples living separately due to illness, with one living in a nursing home, the combined income to be eligible for tax offset must be less than $95,198.
Similar to the tax offsets given to those below 65 years of age, any amount of unused offset can’t be refunded. You’ll still need to fully pay the Medicare levy if you’re not eligible to receive exemptions or reductions.
LITO and SAPTO can be applied together, especially if your income is less than $37,000.
The best thing about the SAPTO is that it doesn’t count the income you receive from your super. The law states that gains from super funds are tax-free when you’re already above 60 years of age.