Rio Tinto Staff Superannuation Fund
Tax considerations for your Transition to Retirement Pension
This fact sheet covers some
important issues that you may
wish to consider when you
commence a Rio Tinto Fund
(Fund) Transition to Retirement
Pension (TRAP).
In this fact sheet, we’ll explain:
• how your TRAP is taxed by the Fund
• why you may have a significant tax
liability at financial year end
• what you can do; and
• where to go for further information.
The information in this fact sheet applies
for Fund members aged below 60. Different
tax laws apply for those aged 60 plus.
Please refer to the Retirement Division
Product Disclosure Statement (PDS) for
further information.
How your TRAP is taxed by
the Fund
Like most income streams, your TRAP
income will generally be taxed if you are
under 60. The Fund withholds tax from
your TRAP payments at the prescribed
Pay-As-You-Go (“PAYG”) rates. The PAYG
rates are based on the current marginal tax
rates and include the Medicare levy (unless
a relevant Medicare levy exemption applies
to you).
When the Fund withholds PAYG tax from
your TRAP payments, the amount withheld
is determined on the basis of the TRAP
payment and does not generally take into
account any other income you may receive
for the year. The rate at which PAYG tax
is withheld from your TRAP payment may
therefore be different to the marginal tax
rate which applies to your total taxable
income for the full year if your other taxable
income means that you are in a higher
income tax bracket.
For example, if you receive income from
other sources, such as your employer, your
marginal tax rate(s) for the full year will be
worked out by adding together your
TRAP income and your income from
your employer (together with any other
assessable income you may have for the
year) less any deductions available to you.
As your total taxable income may be higher
than your TRAP income alone, the rate at
which you are liable to pay tax on your total
taxable income might be higher than the
rate at which PAYG tax was withheld from
your TRAP income because you may be
in a higher income tax bracket. In such cases
you may be required to pay an additional
amount when your tax return is assessed.
Your income sources are always considered
in total by the Australian Taxation Office
(ATO) when you complete a tax return at the
end of each financial year.
Please see overleaf for an example showing
how this situation can arise and one of the
options available to you through the Fund
that may help you cover your total
tax liability each year.
Worked example overleaf
What it means…
Income bracket refers to levels or
ranges of income that are taxed at
different rates.
Marginal tax rate refers to the rate
at which income at certain levels is
taxed. Australia’s income tax rates are
graduated, meaning that they increase
as your income increases.
Total taxable income includes all of
your income that must be assessed
for taxation purposes less any tax
deductions available to you.
Tax-free threshold means the amount
of income that every Australian
taxpayer is eligible to receive tax-free
per year. For the 2012/2013 year the
threshold is $18,200 so you receive
the first $18,200 of your total taxable
income tax-free.
Most Rio Tinto Fund members with
a TRAP claim this threshold through
their employer. However, if you have
stopped working, and currently don’t
claim this threshold on another income
stream, you may wish to claim the
tax-free threshold through your TRAP
by completing the relevant section
on the Tax File Number Declaration
form provided. This form is included
with the Retirement Division PDS, and
copies are also available through the
Fund Member Helpline.
R i o T i n t o S t a f f S u p e r a n n u a t i o n Fu n d
Tax considerations for your Transition to Retirement Pension
Issued by Rio Tinto Staff Fund Pty Limited (ABN 27 005 599 422), Australian Financial Services (AFS)
Licence No. 245641, as Trustee of the Rio Tinto Staff Superannuation Fund (ABN 98 438 661 856).
July 2012
RT0211
An example
What you can do
John is 58 and has assessable income from his employer of $100,000 per annum. John
has also commenced a TRAP in the Rio Tinto Fund, from which he draws down $45,000
per annum.
Being faced with tax you may not have
accounted for may be worrying, but there
are a number of strategies you can adopt
to ensure your total tax liability is well and
truly covered. You can then sit back and
enjoy the best your TRAP has to offer!
The example assumes that the PAYG tax amounts withheld equal the tax determined by
applying the marginal tax rates, excluding the Medicare levy. Note that the actual amount
of PAYG tax which would be required to be withheld from the employment income and
by the Fund in the circumstances of the example may differ from the amount shown
depending on the frequency of the employment payments and individual circumstances.
The PAYG tax on John’s employment income withheld by his employer is:
Income bracket
Tax rate
Tax deducted by employer
$0 – $18,200
0%
$0
$18,201 – $37,000
19%
$3,572
$37,001 – $80,000
32.5%
$13,975
$80,001 – $100,000
37%
$7,400
Tax on employment income
$24,947
The PAYG tax on John’s TRAP income witheld by the Fund, is:
Income bracket
$0 – $18,200
Tax rate
Tax deducted by the Fund
19%*
$3,458
$18,201 – $37,000
19%
$3,572
$37,001 – $45,000
32.5%
$2,600
Tax rebate
(15% of annual TRAP income)
($6,750)
Tax on TRAP income
$2,880
John’s total tax deducted
$27,827
*Tax rate of 19% applies as John advised that the tax-free threshold was claimed for employment income
When John submits his tax return, the ATO combines all his income in order to calculate his
total tax liability. This means more of his income is subject to the 37% tax rate as shown below.
Income bracket
$0 – $18,200
Tax rate
0%
Tax deducted by the employer
$0
$18,201 – $37,000
19%
$3,572
$37,001 – $80,000
32.5%
$13,975
37%
$24,050
$80,001 – $145,000
Tax rebate
(15% of annual TRAP income)
($6,750)
John’s total tax liability
$34,847
Total tax actually paid = $27,827
Unpaid tax = $7,020
This example shows that John has unpaid tax of $7,020 which he will be required to pay
in full to the ATO.
Some good news
Despite getting a tax bill, John has still reduced his overall tax liability for the year by $6,750
— compared to the tax he would pay if he was earning the same assessable income without
using a TRAP. This is one of the great benefits that a TRAP can offer. A licensed financial
adviser can help you decide if a TRAP can help you achieve similar tax advantages.
Note:
A number of assumptions have been made in this worked example. They include:
• John purchased a TRAP with no “tax-free” amount.
• John elected for the tax-free threshold not to apply to his TRAP income.
• John earned no other income and had no other deductions that could be applied for
taxation purposes.
• The Medicare levy has not been included in this example.
• We have not considered whether John made salary sacrifice contributions or what his
pre-TRAP income consisted of. As part of a TRAP strategy, a person may make salary
sacrifice contributions to reduce their assessable income and offset these contributions
by drawing down from their TRAP account. This strategy has the potential to increase the
taxation benefits of using TRAPs for certain people.
• Pension income is from taxable sources only.
R i o Ti n t o S t a f f S u p e r a n n u a t i o n Fu n d
Tax considerations for your Transition to Retirement Pension
The most important thing to do first is
to seek advice from a licensed taxation
or financial adviser, who can examine
your personal situation and advise you
of your options. These options might
include a request to your employer or
the Fund to withold more tax from your
income. If withholding more tax from
your TRAP income is the best option
for you, just complete a Withholding
Declaration/Upwards variation agreement,
which is an ATO document and is included
with the Retirement Division PDS. You can
also obtain this document by calling the
Fund Member Helpline on 1800 687 134
or by downloading it from the ATO
website www.ato.gov.au
More information
For more general information about tax
and your TRAP, please contact your
regional Total Rewards Specialist on:
Western Region (WA)
Andrew Lucas
Dean Gorey
(08) 9425 8196
(08) 9424 7724
Eastern Region (Qld, NSW, NT)
Debra Goodwin (07) 3625 3970
Darren Beresford (07) 3625 3505
Southern Region (Vic, Tas)
Simon Tennant
(03) 9283 3053