This depends on the amount of the Pension. Your Super Benefit is made up of two components, namely a Tax Free Component and a Taxable Component. The Tax Free Component typically comes from after tax personal Non Concessional Contributions made by you over time. The Taxable Component typically comes from Concessional Contributions made by you over time which include Employer Contributions and Salary Sacrifice Contributions. Any Pension Withdrawals must be paid in the same proportion as the Tax Free and Taxable Components of the Member's interest in the SMSF. This requirement is known as the "Proportioning Rule".
Under the "Proportioning Rule" and where the Member is aged between Preservation Age and 59, the "Tax Free" Component of the Pension withdrawal is tax free. The "Taxable" Component of the Pension withdrawal is taxed at the Members marginal tax rate less a 15% "Pension Rebate". As a general rule of thumb, assuming that the Member has a minimal "Tax Free" Component and the Pension is the Members sole source of income, then the Member can generally take approximately $40,000 per year in Pension income tax free. Some tax may apply on income drawn above this amount.
Calculating the Tax on Pension Payments between Preservation Age and 59
The process to calculate the tax on Pension Withdrawals paid to a Member who is aged between Preservation Age and 59 is as follows:
Step 1: Determine the Tax Free Component of your Super Benefit (Note 1)
Step 2: Determine the Taxable Component of your Super Benefit (Note 2)
Step 3: The Total of the Taxable and Tax Free Components make up your Total Super Benefit (Note 3)
Step 4: Calculate the Tax Free Component percentage equal to Note 1 divided by Note 3 (Note 4)
Step 5: Calculate the Taxable Component percentage equal to Note 2 divided by Note 3 (Note 5)
Step 6: Multiply the Pension Payment by the Tax Free percentage at Note 4. The result is Tax Free.
Step 7: Multiply the Pension Payment by the Taxable percentage at Note 5. The result is taxed at the Members tax rate less a 15% Pension Rebate.
As an example assume you have a Super Benefit of $500,000 made up as follows:
- "Tax Free" Component: $400,000
- "Taxable" Component: $100,000
- Total Super Benefit: $500,000
In this example your "Tax Free" percentage is 80% ($400,000/$500,000) and your "Taxable" percentage is 20% ($100,000/$500,000). Under the "Proportioning Rule" this means that 80% of your Pension withdrawals will be tax free and 20% will be taxable where the Pension withdrawals are made between the Preservation Age and 59.
Assume you withdraw the minimum pension of 4% per annum on your $500,000 Super Benefit (i.e. $20,000). The Pension withdrawn of $20,000 will be 80% tax free (i.e. $16,000) and 20% taxable (i.e. $4,000). In addition you will be allowed a 15% "Pension Rebate" on the taxable portion of the Pension withdrawn, further reducing your tax liability.
In the above example assuming, you are on the 34.50% personal marginal tax rate, you would be assessable on the $4,000 taxable portion of the Pension withdrawn at 34.50%, resulting in $1,380 in tax. Given you also receive a 15% "Pension Rebate" on the taxable portion of the Pension withdrawn of $4,000 (i.e. 15% of $4,000 or $600), the tax liability is further reduced to only $780. This means you pay tax of $780 on a $20,000 Pension withdrawal in the above example.