This may occur when a lump sum or pension is paid to anyone who is at least 60 years old or in circumstances where a death benefit lump sum is paid to a superannuation dependent for tax purposes. 

Mr Colley noted that generally, a person has just one accumulation account in every self-managed superannuation fund of which they are a member. Their accumulation account is made up of any concessional contributions, non-concessional contributions, income and capital gains earned on the fund’s investments. These amounts are split into their taxable and tax-free components.

 “The tax-free component mainly consists of the non-concessional contributions made by the member to the fund. It can also include spouse contributions, child contributions, co-contributions, and any payments made under the low-income superannuation tax offset (LISTO),” he said.

“All other amounts made to the fund, such as concessional contributions and income from the fund’s investments, form part of the taxable component.

"The taxable component is calculated as a percentage of the person’s accumulation balance at the time a lump sum is paid from the fund, or just prior to the commencement of an income stream.”

In an example provided, John who is 67 years old has an accumulation balance of $500,000, which includes a non-concessional contribution of $100,000. The remainder consists of concessional contributions plus income earned on the fund’s investments.

John meets a condition of release and decides to withdraw a lump sum of $50,000 from his accumulation account. 

“The tax-free proportion of the amount he withdraws is equal to 20 per cent of his accumulation account ($100,000 of $500,000) and the taxable proportion is equal to 80 per cent of his accumulation account ($400,000 of $500,000),” Mr Colley said.

“This means that $10,000 of the lump sum is a tax-free component and $40,000 is a taxable component. Given John is over 60 years old, the whole amount that he receives will be tax-exempt.

“Before a pension commences in the fund, the proportioning rule is applied to the person’s accumulation account in the same way as it applies to lump sums. However, the tax-free and taxable proportions remain with the pension until it ceases."

Timing considerations for tax components

When considering the timing when someone has to pay tax on superannuation benefits, there are a number of circumstances in which tax is payable on situations affecting lump sums and pensions payable from an SMSF, according to Mr Colley.

These include lump sums withdrawn by the member prior to reaching 60 years of age, lump sum death benefits received by a non-dependant for taxation purposes. Furthermore, pensions are received prior to a person reaching 60 years of age and pensions received by a dependant for taxation purposes on the death of a member where they are both under 60 years of age. 

“A dependant, for taxation purposes, includes the spouse of a member, anyone dependent upon the member for support or anyone in an interdependency relationship with the member,” Mr Colley noted.

“The member’s children are treated as dependents for tax purposes if they are: under the age of 18, a disabled child of any age, or where the child received a benefit because the member died in the line of duty as a defence force or police force member. However, a tax dependant does not include an adult child of the member, unless they are disabled or the member died in the line of duty.”

 “For any pension that is taxed, the taxable and tax-free components of the lump sums and pensions are determined exactly in the same way as calculated above. Tax is payable on the taxable component of the lump sum or pension. However, in the case of a lump sum received by anyone between their preservation age (currently age of 58) and 60 years of age, the first $225,000 of the taxable component paid at any time during that period is tax-exempt.”

If a death benefit pension is paid to a beneficiary prior to reaching 60 years of age and the deceased was also under 60 years of age at the date of death, Mr Colley noted any amount that is taxable will be taxed at personal rates less a 15 per cent tax offset on the taxable amount. This treatment also applies to any pensions payable between preservation age and 60 years of age.

In an example, Maurice is 48 years old and Marcia is 42 years old. Maurice dies in an industrial accident and Marcia decides to receive a pension from his superannuation fund, which has a balance of $1.5 million, including an insured benefit. 

“The taxable component of Maurice’s benefit is equal to $1.2 million (80 per cent) and the tax-free component is equal to $300,000 (20 per cent). Given Maurice and Marcia were both under 60 years of age at the time of Maurice’s death, the taxable component of any pension payment received by Marcia will be taxed and receive a 15 per cent tax offset,” Mr Colley explained.

“The pension payment is $2,000 per week, of which 80 per cent will be taxed at personal rates less a tax offset equal to 15 per cent of the taxable amount of the pension.

“Anyone receiving a lump sum or an account-based pension from their SMSF, and who is at least 60 years of age, will receive the payment tax-exempt and the taxable and tax-free components of the benefit will be irrelevant.”