Q: As my SMSF balance is about double the transfer balance cap, how does proportioning of the income work in the portions that are separated into pension phase and accumulation phase? Both the income stream from the pension phase and any lump sum withdrawals from the accumulation phase would be tax free as I’m over 60. If I made a lump sum withdrawal from the accumulation portion, does re-portioning take place? Is portioning a fluid process so that balance changes in the two separate sides continue to vary?
A: Look, the whole issue around proportioning of members balances across the tax components, it can often be quite confusing. I want to try and if I can, make it as simple as possible here. Remember that any withdrawal that we might make from a taxed super fund, like our usual super funds, those payments would usually be tax free to us when we’re aged 60 or older.
But there are going to be events later, sometime in the future, where another recipient might become entitled to our benefits, for instance, on our death. And that’s why the whole tax components become even more important or more relevant.
So the way that I would start by answering this question is to say to you, remember that the accumulation phase balance and your pension or retirement phase balances are to be treated completely separately. They’re separate interests or separate accounts within your super fund. Now, if you’ve got multiple super funds, then you would have multiple interests across multiple super funds. So just remember that the accumulation phase and the retirement phase, balances are always treated separately. As such, they will each have their own tax components.
So as an example here on your screen, I’ve got on the left hand side of the slide the accumulation phase. And we’re saying that at a point in time that the tax free component is a quarter or 25% and the taxable component is 75%. That same member also has a pension, a retirement phase account or interest, and it has its own separate tax components there, you’ll see, which are 65% and 35%.
Now, that’s just the starting point to show you that each of those accounts or each of those interests has to be dealt separately in regards to its tax components. Let’s start, if we can, with the pension on the right hand side. Now, once that pension is created, once we start the pension, and in this case, remember, I’ve said 65% tax free and 35% taxable, those tax components will never change.
Whilst that pension is in place, those tax components, the 65% and 35%, will remain the same throughout the life of that pension. Now, all pension payments, or in some cases, if we want lump sums from a pension, they would need to come out according to those components, so 65% tax free for any pension payment or lump sum payment, and 35% of the payment would be the taxable component.
All the earnings that the assets in our pension generate, so for instance, rental income or dividends or fixed interest or cash returns, those sorts of things, they are all allocated in those same proportions of 65%, 35%. Hence, while those tax components of the pension remain the same throughout the life of the pension, they will never change. So proportioning for pensions is really easy. Once struck, those components remain the same.
In accumulation phase, it’s a little bit different and it’s not as fluid as the question asks. Is it a fluid process? It is a fluid process. But what you need to think about is that the tax components of the accumulation phase will often change. The reason why they often change is that whilst our money is in accumulation phase, all the earnings are allocated to the taxable component. They don’t go to the tax free, they don’t go proportionally. All the earnings go to the taxable component. So you’ll start to see the taxable component increasing over time.
Any amount that we withdraw when we’re eligible from the accumulation phase must be also taken proportionally. Hence why it’s immediately prior to a payment or a benefit payment being made from the accumulation phase. That is when we work out what the tax components are at that time.
So it’s not as fluid as it is in retirement phase, but yet you just need to keep in mind that any amount that you take from that accumulation must be done proportionately. Now, there is an article on the website. It’s a great article that Janet has put together not long ago and updated. It’s around proportioning rules and super in tax. It’s what it is and why it matters. It takes you through the proportioning rule and how it works. But look, I hope that answers your question, depending on whether in pension or accumulation phase.