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Tax on Lump Sum Withdrawals


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Lump Sum Withdrawals

A Lump Sum Withdrawal is simply an amount accessed from your SMSF that is not a Pension Payment.  You can make Lump Sum withdrawals whenever you like from your SMSF once you turn 65 or aged between Preservation Age and 64 and "Retired", regardless of whether you have commenced a Pension.  You cannot make Lump Sum Withdrawals from your SMSF if you are aged between Preservation Age and 64 and are NOT "Retired".  This is the case even if you have commenced a TRAP. 

 
 
Preservation Age

Generally, you must reach preservation age before you can access your super. Use the following table to work out your preservation age.

Date of birth Preservation Age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 01 July 1964 60

 
 
Lump Sum Withdrawals where you have commenced a Pension

You can make Lump Sum withdrawals in addition to accessing Pension Income from the SMSF, when you reach age 65 or alternatively when you are aged between Preservation Age and 64 and "Retired".  In this case there is no limit to the amount of Lump Sum withdrawals you can make and you can take all your Super Benefit if desired.

If you are aged between Preservation Age and 59 and NOT "Retired" you can only access your Super Benefit as a Transition to Retirement Pension (TRAP) and pension payments are capped at 10% of your Super Benefit.

 
 
Tax on Lump Sum Withdrawals after Age 60

To the extent that a Member is allowed to make Lump Sum Withdrawals, there is no tax payable on Lump Sum Withdrawals after the age of 60.

 
 
Taxation of Lump Sum Withdrawals between Preservation Age and 59

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 Lump Sum 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 Lump Sum withdrawal is tax free.  The "Taxable" Component of the Lump Sum withdrawal is taxed as follows:

The amount up to the low rate cap amount is tax free. 
The amount above the low rate cap amount is taxed at 17%

 
 
Low rate cap amount

The application of the low rate threshold for super lump sum payments is capped. The low rate cap amount is reduced by any amount previously applied to the low rate threshold.

Income Year Amount of cap
2016–17 $195,000
2015–16 $195,000
2014–15 $185,000

 
 
Calculating the Tax on Lump Sum Withdrawals between Preservation Age and 59

The process to calculate the tax on Lump Sum 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.
  • Step 2: Determine the Taxable Component of your Super Benefit.
  • Step 3: Total of the Taxable and Tax Free Components.
  • Step 4: Calculate the Tax Free Component percentage equal to Note 1 divided by Note 3
  • Step 5: Calculate the Taxable Component percentage equal to Note 2 divided by Note 3
  • Step 6: Multiply the Lump Sum Withdrawal by the Tax Free percentage at Note 4. The result is Tax Free.
  • Step 7: Multiply the Lump Sum Withdrawal by the Taxable percentage at Note 5. The result is taxed at:
    • The amount up to the low rate cap amount is tax free.
    • The amount above the low rate cap amount is taxed at 17%.

Example:

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 Lump Sum withdrawals will be tax free and 20% will be taxable where the Lump Sum withdrawals are made between Preservation Age and 59.

Assume you decide to access $100,000 as a Lump Sum withdrawal and are eligible to do so in 2016-2017 financial year.  In this case an amount of 80% will be tax free and the balance will be taxable, namely 20% of the $100,000 or $20,000.  The $20,000 assessable amount is then taxed as follows:

The First $195,000 of your Taxable Component is tax free. 
The next $195,000 (The Taxable Component above $195,000) is taxed at 17%

In the above example as the taxable portion of the Lump Sum of $20,000 is less than $195,000, it is tax free.  If you are contemplating large lump sum withdrawals before age 60 and the assessable portion of the Lump Sum withdrawal is above $195,000, then it may be prudent to defer accessing larger lump sum withdrawals until age 60 when the lump sum withdrawals are tax free. 

 
 
Interactive Analysis

You can assess your own individual circumstances to determine if you can access Lump Sum Withdrawals and the tax on those withdrawals by viewing our "Super Access & Tax" Calculator, which can be found here.