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Tax on Pension Withdrawals


 
 
Commencing a Pension after Preservation Age

When you reach Preservation Age you have the option of commencing a Pension Income Stream from your SMSF.   A Pension simply means that periodically (e.g. each month or other period you nominate) cash is transferred from your SMSF Bank Account to your Personal Bank Account to fund your living expenses.  There are two types of Pensions you can start in an SMSF namely an "Account Based Pension" (commenced when "Retired" or over 65) and a "Transition to Retirement Pension" (commenced when NOT "Retired" and aged between Preservation Age and 64).  For more on Pensions click here.

 
 
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

 
 
Taxation of Pension Withdrawals taken when aged over 60

There is no tax payable on Pension Withdrawals after the age of 60.

 
 
Taxation of Pension Withdrawals when aged between Preservation Age and 59

Tax may be payable on Pension withdrawals by a Member aged between Preservation Age and 59.  By way of background it is important to understand that 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 a Member's Super Benefit in the SMSF.  This requirement is known as the "Proportioning Rule".  Under the "Proportioning Rule" 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
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 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 Member's tax rate less a 15% Pension Rebate.

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 Pension withdrawals will be tax free and 20% will be taxable where the Pension withdrawals are made between 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.

 
 
Timing of Pension Withdrawals income is important when turning 60

As detailed above no tax is payable on Pension Withdrawals after the age of 60, however some tax may be payable on Pension withdrawals made between Preservation Age and 59.  This means that where you are turning 60 in a particular financial year it may be financially advantageous to defer Pension withdrawals until you are over 60.

Example:

Assume you have commenced a Pension of $1,000,000 on 1 July 2017 and are 59 at the time.  On 10 March 2018 you will be turning 60.  Your Super Benefit is made up of a 100% Taxable Component.  You have nominated that you wish to take the Minimum Pension of 4% of your Super Benefit (i.e. $40,000).

If the Minimum Pension amount of $40,000 is taken before 10 March 2018, that is when you are aged 59, then the Pension will be taxed at your marginal tax rate less a 15% "Pension Rebate".  Assuming you are on the 39% personal marginal tax rate, you would be assessable on the $40,000 Pension withdrawn at 39%, resulting in $15,600 in tax.  Given that you also receive a 15% "Pension Rebate" on the taxable portion of the Pension withdrawn totalling $6,000 (i.e. 15% x $40,000), the tax liability is reduced to $9,600.  This means you will pay tax of $9,600 on the $40,000 Pension withdrawal in the above example.

Conversely by simply deferring accessing the Pension withdrawal until after 10 March 2018, when you turn 60, then the Pension withdrawn will be tax free!  The timing of the Pension Withdrawals in the example results in a tax saving of $9,600!