Superfund pensions are tax free if you are over 60 years old.

Members of a superfund can start a pension once the meet the condition of release. The most common condition is age and the age will depend on the member’s birthdate. Below is a table summarising the ages :

Preservation age

Date of birth Preservation age
Before 1 July 1960 55
From 1 July 1960 to 30 June 1961 56
From 1 July 1961 to 30 June 1962 57
From 1 July 1962 to 30 June 1963 58
From 1 July 1963 to 30 June 1964 59
On or after 1 July 1964 60


How do I start a pension?
For most people, the preservation is 55 years old.

The member can start a pension by writing a letter to the trustee of the superfund, saying that they would like to commence a pension. The trustee will send a confirmation letter to the member, saying that they receive the request to commence a pension and that the request has been acted upon. Details of the minimum pension (pro-rated for the year) and maximum pension the member can withdraw is also provided.

Types of pension a member can start.

As of 1 July 2007, a member can start either a Transitional-to-Retirement-Income Stream (TRIS) or an Account Based Pension (ABP). A TRIS has a 10% maximum withdrawal limit per annum whereas and ABP has no maximum. To start an ABP, the member has to retire from gainful employment. With a TRIS, a member can still continue to work. A TRIS and ABP requires a minimum withdrawal each year. Below is the minimum withdrawal percentage dependent upon the member's age.

Age of recipient

Percentage factor

Under age 65

4%

65 to 74

5%

75 to 79

6%

80 to 84

7%

85 to 89

9%

90 to 94

11%

95 and older

14%

The minimum percentages shown above are for the 2014/15 financial year.

For example, member John is 58  years old and commences a TRIS with his account balance of $300,000 on 1 November 2014. John’s minimum  withdrawal amount for the 2014/15 financial year would be :

$300,000 x 4% x 243 days /365 days  = $7,989.03

John’s minimum pension withdrawal for 2014/15 is $7,990 (rounded to the closest $10). John must take out at least $7,990 as pension. He must not take out more than his 10% maximum limit which is $30,000 (Remember, a TRIS has a max limit of 10%). 

Earnings allocated to pension accounts are tax-free

Earnings are dividend, interest income, realised capital gain, rental income and distributions received by the superfund. At the end of the financial year, the earnings are allocated to each member accounts. The allocation methodology will depend on the trust deed but in most cases it is based on a complex daily average weighted balance.

When a member commences a TRIS or an ABP, the earnings which are allocated to their pension account is tax-free. TAX-FREE! This is a great advantage and can quickly increase the returns of the superfund.

For example, we have a husband and wife, Jack and Jill, aged 60 and 52 respectively. The husband commenced an ABP with an account balance of $300,000. The wife couldn’t start a pension because she hasn’t reached her preservation age of 55 years old. Her account balance is $150,000. Let us say that at the end of the 30/6/2015, the superfund generated earnings consisting of $14,000 in interest and fully franked dividends:

Interest                                 $4,000
Fully franked dividends        $7,000 (net of imputation credits)
Dividend imputation credit   $3,000
Taxable income                    $14,000

At year end, the superfund splits the earning based on the account balances. Since Jill hasn’t made any super contributions this would be an easy calculation to split the earnings.

Jack’s ABP account will be allocated earnings of :

Interest $4,000 x $300,000 / ($300,000 + $150,000)                                = $2,666.67
Fully franked dividends  $7,000  x $300,000 / ($300,000 + $150,000)     = $4,666.67
Dividend imputation credit $3,000 x $300,000 / ($300,000 + $150,000) = $2,000.00

Jill’s accumulation account will be allocated the balance of earnings :

Interest                                $1,333.33
Fully franked dividends       $2,333.33
Dividend imputation credit $1,000.00

The earnings allocated to Jack’s ABP account will be TAX FREE! However the earnings allocated to Jill’s accumulation account is taxable.

Their superfund tax return will have a taxable income of $1,333.33 + $2,333.33 + $1,000 = $4,666.66.

SMSF 2015 tax return

Taxable income                             = $4,666.66
Tax payable = $4,666.66 x 15%   =  - $699.99
Less Dividend imputation credit    = $3,000.00
Less ATO Supervisory Levy 2015   =    $259.00 (this levy is charged by the ATO on all SMSFs)
Tax refundable                             = $2,041.01

When the 30 June 2015 self-managed superfund tax return is lodged, Jack and Jill’s superfund can expect a tax refund of $2,041.01.

What if I'm 55 to 59 years old, is my pension tax-free?

If you start and income stream when you are between 55 to 59 years old, the pension you withdraw is taxable in your tax return. It forms part of your taxable income. The only relief you get is a 15% tax offset on the taxed element of your pension. 

What is the taxed element? The taxed element is made up of concessional contributions (contributions where 15% contributions tax has been paid) and taxable earnings generated by the superfund. There might also be a tax-free component. A tax-free component is made up of non-concessional contributions (contributions where no contributions tax has been paid). This happens when a member makes a personal contribution but did not claim a deduction for it. Tax-free component can also arise from the conversion of pre-1 July 2007 super balances that has an undeducted purchase price in it.

When you take out your pension, it may be made up of tax-free and taxable components. The tax-free component is of course tax-free. But the taxable component is taxable and forms part of your taxable income. The only consolation you have is a 15% tax offset on the taxed element of the taxable component. Let me illustrate this for you :

Mr Enki is 57 years old and has a TRIS pension. On 1 July 2014 the opening pension account balance is made up $80,000 taxed element plus $20,000 tax-free component. His minimum pension withdrawal percentage is 4% (please refer to the table above). The minimum pension he has to withdraw is $100,000 x 4% = $4,000 and the maximum is $10,000 (which is 10% of $100k). Let us assume he chooses to withdraw the minimum amount of $4,000. Now that $4,000 TRIS pension is made up of :

Tax-free component  $3,000 x 20%  =   $800
Taxed element       $3,000 x 80%     = $3,200
Total TRIS pension                            = $4,000

The tax-free component of $800 does not get included in Enki's personal tax return. But the taxed element of $3,200 does get included in his tax return. Lucky him, he receives a 15% tax offset on it: 

Tax-offset for taxed element (section 301-25)  $3,200 x 15% = $480

Don't worry, you don't have to do all this calculation for taxed element and tax offset. The accountant preparing the tax return for your SMSF will handle this and issue a 2015 payment summary which show these figures.

Still confused? Please contact us at info@superfund.me with your questions.

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Chartered Accountants

Jimmy CK Chong is a Chartered Accountant & registered tax agent. Contact him via:
Tel : 08 9440 0871
Mob : 0433 117 110
Email : jchong@superfund.me

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