Q: If at 55, I take up to $165,000 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 super tax free?
For an individual to access preserved super benefits they must satisfy a condition of release, such as or retiring on or after preservation age, turning 65, or terminating an employment arrangement on or after the age of 60. Note that preservation age is 55 years for anyone born before July 1960.
Assuming an individual aged 55 has access to super benefits, that is they have retired, then how a lump sum is taxed depends on the components of the benefit. A super benefit can be made up of two components – tax-free and taxable components.
The tax-free component of the super benefit is tax-free regardless of the age that a person received 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 components – is free of tax.
If an individual retires, and receives a superannuation lump sum on or after the age of 55 (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 $165,000 (for the 2011/2011 year) of their taxable component tax-free, provided the component is a taxed element (all super benefits, except certain benefits from public sector funds).
The low-rate cap is in addition to any tax-free component. If a lump sum exceeds the lifetime low-rate cap then tax is payable on the taxable component at the rate of 16.5%.
Note: If an individual has withdrawn super benefits in the past, he or she may have used up some, or all, of their low-rate cap which means he or she may have to pay tax on the taxable component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, 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.
Copyright for this article belongs to Trish Power, and cannot be reproduced without express and specific consent.