Step 1: Determine the Tax Free Component of the Deceased's Super Benefit
Step 2: Determine the Taxable Component of the Deceased's Super Benefit
Step 3: The Total of the Taxable and Tax Free Components makes up the Deceased's Total Super Benefit
Step 4: Calculate the Tax Free Component percentage equal to Step 1 divided by Step 3
Step 5: Calculate the Taxable Component percentage equal to Step 2 divided by Step 3
Step 6: Multiply the Pension Payment by the Tax Free percentage at Step 4. The result is Tax Free.
Step 7: Multiply the Pension Payment by the Taxable percentage at Step 5. The result is taxed at the Beneficiary's tax rate less a 15% Pension Rebate
Barney is 58 and has a Super benefit of $500,000. His Super Benefit is broken down into a "Taxable Component" of $400,000 (built up from Employer Contributions) and a Tax Free Component of $100,000 (built up from Personal Non Concessional Contributions). This means that 80% ($400,000 / $500,000) of Barney's Super Benefit is Taxable and 20% ($100,000 / $500,000) is Tax Free. Barney has executed a Death Benefit Agreement, nominating his Spouse Roxy (also 58), to receive his Super Benefit on death as a Pension. On Barney's death (assuming he is under 60), Roxy will commence to receive a Pension Income from the SMSF. Roxy must access a minimum 4% of Barney's Super Benefit as a Pension, that is $20,000. This means that 80% of the Pension will be Taxable (ie $16,000) and 20% will be Tax Free (ie $4,000) to Roxy. In addition Roxy is allowed a 15% "Pension Rebate" on the Taxable Component of the Pension further reducing the tax bill. Assuming Roxy is on the 34.50% tax rate she would be assessable on $16,000 at 34.50% resulting in $5,520 in tax. Given Roxy is also entitled to a 15% Pension Rebate on the taxable portion of the Pension of $16,000 (ie 15% of $16,000 or $2,400), the tax bill is further reduced to $3,120. This means that Roxy pays tax of $3,120 on a $20,000 Pension Payment in the above example. After Roxy turns 60 the Pension Payments will be tax free.