Below are some common scenarios where you must treat certain withdrawals as either Pension or Lump Sum withdrawals and the scenario where you have the choice on the withdrawal type.
Scenario 1: You have not commenced a Pension in the SMSF
If you have not commenced a Pension in the SMSF, you can only make Lump Sum withdrawals from the SMSF, provided you are over age 65 or are between preservation age and 64 and "Retired".
Scenario 2: You have commenced a TRIS and you were aged under 65 and NOT "Retired" when the withdrawal was made
If you are between preservation age and 64 and NOT "Retired", you are not eligible to make Lump Sum withdrawals and can only access your Super Benefit as a Pension withdrawal after commencing a TRIS.
Scenario 3: You have commenced an SABP and you just withdrew the minimum Pension amount during the Financial Year
If you have only withdrawn the minimum pension amount during the Financial Year, the amount withdrawn must be treated as a Pension withdrawal, given that Lump Sum withdrawals cannot be used to meet the minimum pension requirement.
Scenario 4: You have commenced an SABP OR commenced a TRIS previously but have since turned age 65 or declared retirement, AND you withdrew more than the minimum pension threshold during the Financial Year
If you have an SABP or R-TRIS, you are eligible to make both Pension and Lump Sum withdrawals. Given that Lump Sum withdrawals cannot be used to meet the minimum pension requirement, at least the minimum pension amount must be a Pension withdrawal to ensure that the minimum pension requirement can be met. You then have the choice to make either Pension or Lump Sum withdrawal in addition to the minimum pension amount, by considering the impacts of the withdrawals on your personal tax return, Transfer Balance Account and Centrelink entitlements.
Example
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 (i.e. $40,000).
Assume Barney decides to access $200,000 from his SMSF in the 2023-2024 Financial Year. If the entire amount was treated as a Pension withdrawal, Barney would pay a whopping $23,467 in tax. That is he would be taxed on 80% of the Pension Income of $200,000 (i.e. $160,000). Tax on $160,000 is $47,467. After applying a 15% "Pension Rebate" of $24,000 ($160,000 x 15%) the net tax payable is $23,467.
If Barney alternatively had chosen to take the minimum Pension of $40,000 only and treat the additional withdrawal of $160,000 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 $2,622. 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 $160,000 Lump Sum withdrawal, Barney would be taxed on 80% of the Lump Sum withdrawal (i.e. $128,000). Given that Barney can access the first $235,000 (i.e. the low rate cap amount for the 2023-2024 Financial Year) in Lump Sum withdrawals tax free, the entire $128,000 would be tax free.
This means that Barney's withdrawal of $200,000 is now completely tax free (i.e. a Pension Withdrawal of $40,000 that is tax free plus a Lump Sum withdrawal of $160,000 that is tax free). This simple strategy has saved Barney $23,467.
Remember that Barney cannot treat the entire $200,000 as Lump Sum withdrawal as he would fail to meet the annual minimum pension requirement in this case and at least $40,000 (i.e. $1,000,000 x 4%) must be treated as a Pension withdrawal. He will also need to report the $160,000 Lump Sum withdrawal via the TBAR.