Q: If at 55, I take up to $195,000 out of my super as a lump sum tax free, when I turn 60 will I be able to draw down as a lump sum the rest of my superannuation without having to pay tax as well?
A: For an individual to access preserved super benefits they must satisfy a condition of release, such as or retiring ON OR AFTER REACHING preservation age, or, by turning 65, or, by terminating an employment arrangement on or after the age of 60. Other conditions of release are also available, but the three mentioned above are the most relevant for the question asked.
Note: Preservation age is 55 years for anyone born before July 1960, but if you turned 55 on or after 1 July 2015 (or will turn 55 after June 1960), then your preservation age is not 55 years. Your preservation age will then be at least 56 years, and as old as 60 years (if you were born after June 1964). For more information on your preservation age see SuperGuide article Accessing super: What is my preservation age?
In plain English, what the preservation rules mean is: if an individual was born on or after 1 July 1960, then he or she cannot access super benefits until at least the age of 56 (and retiring), unless they satisfy another condition of release. If an individual is born before July 1960, then his or her preservation age is 55 years.
Assuming an individual has reached preservation age and has access to super benefits, that is they have retired (or satisfied another condition of release), then how a lump sum is taxed depends on the components of the benefit.
A super benefit can be made up of two components:
The tax-free component of the super benefit is tax-free regardless of the age when a person receives the benefit. The taxable component is taxable depending on the age that the individual receives the benefit. If the individual receives the benefit on or after the age of 60, then the entire benefit – both tax-free and taxable component – is free of tax.
If an individual retires, and receives a superannuation lump sum on or after his or her preservation age (but before the age of 60), he or she can take advantage of the low-rate cap, an indexed lifetime limit that applies to an individual’s taxable component. An individual can receive up to $195,000 (for the 2015/2016 year) of the taxable component tax-free, provided the component is a taxed element (nearly all super benefits fall into this category, except certain benefits from public sector funds).
The low-rate cap is in addition to any tax-free component. If the taxable component of a lump sum exceeds the lifetime low-rate cap of $195,000 (for the 2015/2016 year) then tax is payable on the taxable component at the rate of 17.0% (including 2% Medicare levy).
Note: If an individual has withdrawn super benefits in the past, he or she may have used up some, or most, of their low-rate cap which means he or she may have to pay tax on the taxable component when he or she takes additional lump sums.
When an individual turns 60 and the superannuation benefits are from a taxed source (that is, nearly all super benefits except certain benefits from some public sector super funds), then any superannuation lump sums can be taken free of tax, regardless of previous superannuation withdrawals.