Taxation Ramifications Of Early Access To Retirement Savings

You may hear people talk with some optimism about ‘‘getting at their super early’’ — it is possible but there is also a price.

Let me explain.

When a super fund member accesses their superannuation savings, they are usually not aware of how the money is paid from their superannuation fund.

Of course if the superannuation fund is a self-managed superannuation fund (SMSF) and the member is aged 60 or over, it really does not matter as there is no tax payable on the superannuation benefit received by the member.

However, if the SMSF member is under the age of 60, then tax may be payable depending on the amount paid out and the components of their superannuation benefit.

When most SMSF members receive their superannuation benefit it will consist of a tax-free component and a taxable component. The tax-free component represents the personal contributions made into their SMSF where they did not claim tax deductions on the contributions.

The taxable component is made up of contributions such as employer contributions, salary sacrificed contributions, personal contributions where tax deductions have been claimed and investment earnings received by the SMSF. The SMSF would have paid a maximum tax of 15 per cent on this money and when the money is paid out to the member, as a superannuation benefit, it is represented as a taxable component.

Now, if an SMSF member’s superannuation savings does consist of tax-free and taxable components, unfortunately they cannot just choose to access their tax-free component.

Under the taxation law, all money withdrawn from a superannuation fund must be paid in the same tax free and taxable proportions as they exist in the fund.

This means, if an SMSF member’s accumulation account has 20 per cent tax free money and 80 per cent taxable money, then their lump sum superannuation benefit must be paid out in the same percentages.

For example, if a member withdraws a lump sum super benefit of $300,000, then $60,000 would be the tax free component and $240,000 would be the taxable component. Of course it should go without saying that the member should only access their superannuation savings if they have met a condition of release under the superannuation law.

There is no tax payable on the tax free component regardless of the age of the member receiving the lump sum benefit. However, if the member has not reached their preservation age when accessing the money, then tax is payable at a maximum of 20 per cent plus the Medicare Levy on the taxable component. If the member has reached their preservation age but is under the age of 60, then the first $200,000 (i.e. low rate cap for 2017/18) is tax free and the balance of the money is taxed at maximum of 15 per cent plus the Medicare Levy.

Of course if the SMSF member is aged 60 or over, then no tax is payable on both the tax free and taxable components.

The same rule applies to members commencing an account-based pension from their SMSF. The tax-free and taxable components are determined at the commencement of their pension. The percentages remain the same throughout the duration of the pension. Each time a pension benefit is paid from their SMSF, it is paid in the same percentages.

Understanding the treatment of superannuation will assist you with decisions when accessing your savings.

By Monica Rule

The Australian

28 November 2017

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