Q: Assuming a member turns 59 on the 9th of May 2023, and sets up a full pension fund to commence from 1 July this year (2023) shortly, when that member withdraws the lump sum before the 9th of May 2024 (next year), aged then 60, is the lump sum subject to tax or not?
A: The individual who’s looking to access the money is aged 59. So, they are below age 60 and therefore there can be a difference in tax compared to someone who was over age 60. So, what we can assume here is the individual has retired at age 59, otherwise they wouldn’t be able to access a full pension. It would have to be a transition to retirement pension.
So what we now need to look at are the tax on lump sum payments where the individual is above preservation age but still below age 60. So, when we look at how that applies here, you’ll see here I’ve given you a bit of a matrix around what you need to think about. So when we look at the tax on lump sum payments for someone who is between preservation age and below age 60, this is your resource. This is where you can go to have a look at it.
You’ll see here on the left-hand side, I’ve given you the different tax components – the taxable taxed component, the taxable untaxed, and the tax-free component. I’ve then given you in the second column in the gold column, how that money is being accessed. Is it being accessed by way of a lump sum, or is it being accessed by way of a pension? So, you’ll see there are different tax rates and different tax treatments.
What you’ve got in the middle column, the third column there, is the tax rate which applies. Now you’ll see there, I’ve got the tax rate up to what’s called the low rate cap. So for somebody who has reached preservation age and is below age 60, when they access their tax free component by way of a lump sum or pension, it would be tax free.
Where the member is accessing money above preservation age and below age 60, and it’s coming from the taxable tax component there, you’ll see that they won’t pay any tax up to what’s called the low rate cap. I’ll take you through that in a second. So, I won’t go through this slide in its entirety, but it’s there for you to reference.
You’ll see that the taxable tax component, which is the main one we’re looking at here, is actually tax free up to the member’s low rate cap. If they take out money above the low rate cap, it’s either, taxed at their marginal tax rate or 17 %, the lesser of those two amounts.
So quickly, what’s the low rate cap? The low rate cap is essentially an amount of money you can take from super as a tax free payment when you are allowed to access your money. When you’ve met a condition of release, but you’re not yet age 60. In the current 2023 financial year, the low rate cap is $230,000.
So where you can access your money, you’ve met a condition of release, retired, preservation age and retired, and you’re still below 60, you can still take out the first $230,000 of your taxable tax element, tax free. So it just gives you an added tax benefit. It’s called the low rate threshold. Now, be careful here. To be eligible to access your money, you still need to meet a condition release that allows access to your money to lump some benefits.
Essentially, you’re talking here about your unrestricted, non-preserved benefits. And it only applies on lump sums. It doesn’t apply to pension payments. We’re looking here at lump sum payments. So we’re eligible, you can take a lump sum from your super as a tax free when you’re under age 60, up to the low rate threshold. Now, this is a lifetime limit. So it means it’s the total amount you can take at the lower rate of tax over your lifetime. So you don’t have to access it in one go. If you take a lump sum here and a lump sum there, it is all combined together. And as I said, $230,000 is the limit in the current year. It goes up to $235,000 from 1 July this year.
Now, of course, this then becomes irrelevant, at age 60, when benefits become tax free anyway, when we access money after age 60, they do become tax free. So think about low rate caps. It could assist you if you are under 60 and looking to take a lump some benefit. The one thing that I just need to rehash is you only get access to low rate cap where you’re eligible to access your benefits when you have those unrestricted, non-preserved amounts.
That issue around low rate cap and the issue around tax on payments is covered in these two articles, which I’ve just given you a snapshot of on this slide.