When you are aged over 60 all withdrawals, whether they are Pension or Lump Sum withdrawals are tax free. However when aged between Preservation Age and 59 Pension and Lump Sum withdrawals may be subject to tax and the tax will differ depending on the which withdrawal type you make.
Given the difference in the taxation treatment of accessing monies from your SMSF as a Pension or Lump Sum when you are aged between Preservation Age and 59, it is sometimes preferable to treat withdrawals as a combination of both a Pension and Lump Sum, rather than solely as a Pension once you commence a Simple Account Based Pension between the age of Preservation Age and 59. It is important to understand that if you have commenced a Simple Account Based Pension it means you are retired and this is a precondition to being able to take Lump Sum withdrawals.
Remember 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 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 withdrawal is tax free. The "Taxable" Component of the withdrawal is taxed differently depending on whether it is a Lump Sum or a Pension. That is the "Taxable" Component of the Pension withdrawal is taxed at the Members marginal tax rate less a 15% "Pension Rebate". Alternatively the “Taxable” amount up to the low rate cap amount of a Lump Sum withdrawal is tax free and the balance 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.
||Amount of cap
Barney is 58 and has a Super Benefit of $1,000,000 made up as follows:
- "Taxable" Component: $800,000
- "Tax Free" Component: $200,000
- Total Super Benefit: $1,000,000
In the above example this means that 80% ($800,000 / $1,000,000) of Barney's Super Benefit is taxable and $20% ($200,000 / $1,000,000) is tax free. Barney commences a Simple Account Based Pension on 1 July and must access 4% of his Super Benefit as a Pension (ie $40,000).
Assume Barney decides to access $150,000 from his SMSF in the 2017-2018 Financial Year. If the entire amount was treated as a Pension withdrawal, Barney would pay a whopping $16,432 in tax. That is he would be taxed on 80% of the Pension Income of $150,000 (i.e. $120,000). Tax on $120,000 is $34,432. After applying a 15% "Pension Rebate" of $18,000 ($120,000 x 15%) the net tax payable is $16,432. If Barney alternatively had chosen to take the Minimum Pension of $40,000 only and treat the additional withdrawal of $110,000 as a Lump Sum Withdrawal, the tax result would be completely different.
That is on the $40,000 Pension withdrawal, Barney would be taxed on 80% of the Pension Income (i.e. $32,000). Tax on $32,000 is $3,262. After applying a 15% "Pension Rebate" of $4,800 ($32,000 x 15%) the net tax payable is $0. It is noted that if the Pension Rebate creates a refund the refund is lost.
On the remaining $110,000 Lump Sum withdrawal, Barney would be taxed on 80% of the Lump Sum Withdrawal (i.e. $88,000). Given that Barney can access the first $200,000 (i.e. the low rate cap amount for the 2017-2018 Financial Year) in Lump Sum withdrawals tax free, the entire $110,000 would be tax free.
This means that Barney's withdrawal of $150,000 is now completely tax free (i.e. a Pension Withdrawal of $40,000 that is tax free plus a Lump Sum Withdrawal of $110,000 that is tax free). This simple strategy has saved Barney $16,432.