www.esuperfund.com.au

Questions & Answers – Paying Tax on Withdrawals


+ Can I take a lump sum after I commence a Pension?

There are no restrictions in accessing your capital when you commence a Retirement Phase Pension (SABP or R-TRIS). In effect your SMSF is like an ATM where you can access any amount as a Lump Sum over and above your pension withdrawals. However always be careful that tax may be payable on Lump Sum Withdrawals if aged under 60.

However with a TRIS, you cannot take any Lump Sum withdrawals whatsoever. You are limited to taking up to 10% of your Member Benefit each year as a Pension Payment only. Importantly however, to avoid this restriction your TRIS enters the retirement phase once you "Retire" or turn 65 enabling you to make Lump Sum Withdrawals in retirement.

+ Can I choose to take withdrawals from an SMSF as a Pension or Lump Sum when aged between Preservation Age and 59?

If you have NOT commenced a Pension from your SMSF all withdrawals made from your SMSF will be treated as a Lump Sum withdrawal when aged between preservation age and 59 and “Retired”. Alternatively, if you have commenced a Pension from your SMSF, you have the choice to make either Pension or Lump Sum withdrawal in addition to the annual minimum pension amount, which must be made as Pension withdrawals.

We caution that pension withdrawals and lump sum withdrawals are two different withdrawal types and different rules apply. For more information on the difference between pension withdrawals and lump sum withdrawals, please click here.

+ Do I pay tax on Pension Payments I receive from my Pension Withdrawals if I am Over 60?

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

+ Do I pay tax on Lump Sum Withdrawals I receive from my Simple Account Based Pension (no lump sum withdrawals are allowed for a TRIS) if I am Over 60?

No. You can make lump sum withdrawals whenever you like from your SMSF once you have commenced a Simple Account Based Pension. There is no tax payable on lump sum withdrawals from an SMSF after the age of 60. This means you can access every last cent in your SMSF after 60 and use it in any way you like, tax free! Remember 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.

+ Do I pay tax on Pension Payments I receive from my Pension if I am between Preservation Age and 59?

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.

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 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.

+ Do I pay tax on Lump Sum Withdrawals I receive from my Simple Account Based Pension (no lump sum withdrawals are allowed for a TRIS) if I am between Preservation Age and 59?

This depends on the amount of the Lump Sum Withdrawal made. 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
2019–20 $210,000
2018–19 $205,000
2017–18 $200,000

Remember 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.

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 in the 2019-2020 Financial Year and are eligible to do so. 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 $210,000 of your Taxable Component is tax free.
  • The Taxable Component above $210,000 is taxed at 17%

In the above example as the taxable portion of the Lump Sum of $20,000 is less than $210,000, it is tax free. If you are contemplating large lump sum withdrawals before age 60 and the assessable portion of the Lump Sum is above $210,000, then it may be prudent to defer accessing larger lump sum withdrawals until age 60 when the lump sum withdrawals are tax free.


Set up your SMSF with ESUPERFUND Today!
APPLY NOW