The tax treatment of super benefits and the proportioning rule

The tax treatment of a superannuation benefit depends on a number of factors:

• the age of the person;
• whether the benefit comprises a tax free component and or a taxable component;
• whether the benefit is in the form of a lump sum or an income stream (i.e. a pension); and
• whether the taxable component includes an element taxed in the superannuation fund (the fund) and/or an element untaxed in the fund.

At the outset it should be noted that all payments from superannuation to persons aged 60 and over will be tax free provided the payment comes from a taxed source. This will apply regardless of whether the payment is made as either a pension or a lump sum. Accordingly, where a person is aged 60 or over and not a member of a government superannuation scheme, they will generally not be required to consider the tax treatment of the various components of their superannuation benefit.

Superannuation benefits (i.e. lump sums or pensions) paid to persons under age 60 are subject to concessional rates of tax. Such benefits generally comprise a tax free component and a taxable component.

The tax free component of a superannuation benefit consists of 2 components or segments – the contributions segment and the crystallised segment.

The contributions segment generally includes all contributions made after 30 June 2007 that are not included in the fund’s assessable income. These are most commonly contributions made by a member of the fund where a tax deduction has not been claimed by the member.

The crystallised segment generally includes amounts that would have been tax free if they had been paid to the member of the fund before 1 July 2007 (e.g. undeducted contributions made before 30 June 2007).

Within the taxable component, the taxed element includes amounts where the fund has paid 15% tax on the contributions or earnings (e.g. contributions made by an employer on behalf of an employee are generally treated as concessional contributions and taxed at 15% in the fund).

The untaxed element includes amounts where the fund has not paid any tax on the contributions or earnings. A person would generally have an untaxed element where they are a member of an untaxed super fund run by the Commonwealth or a State or Territory government department (e.g. the public sector superannuation scheme).

This is illustrated in the following diagram:

The Proportioning Rule

Superannuation benefits paid to persons must be made up of the same proportion of tax free and taxable components as the total value of their superannuation interest. For example, if the total value of the benefit comprises a 30 per cent taxable component and a 70 per cent tax free component, any benefit paid to the person must also comprise a 30 per cent taxable component and 70 per cent tax free component.

To calculate the tax free and taxable components of a pension, you would first calculate the proportion of tax free and taxable components of the person’s superannuation interest. This calculation is performed when the pension commences. This proportion would be applied to determine the tax free and taxable components of the pension and would apply to all benefits paid under the pension, including benefits arising from the commutation of the pension into a lump sum. The ATO has provided taxpayers with a superannuation benefit component calculator to assist them in determining their tax free and taxable components.

To calculate the components of a lump sum superannuation benefit, first calculate the proportion of tax free and taxable components of the person’s superannuation interest. This proportion applies when calculating the tax free and taxable components of the person’s lump sum benefit.

Tax Consequences

The following table sets out the taxation consequences for a member who receives a superannuation member benefit that has been subject to tax in the fund.

Age of person	Lump Sum	Pension
60 or over	Not subject to tax	Not subject to tax
Preservation age to 59	Tax free component Not subject to tax Taxable component Person is entitled to a tax offset to ensure that the maximum rate of income tax does not exceed for amounts up to the low rate cap amount[1] — 0% and for amounts that exceed the low rate cap amount — 15%	Tax free component Not subject to tax Taxable component Amount is included in the person’s income but they are entitled to a tax offset equal to 15 per cent of the taxable component of the benefit

The following table sets out the taxation consequences for a member who receives a superannuation member benefit that has not been subject to tax in the fund (i.e. untaxed element).

Age of person	Lump Sum	Pension
60 or over	Person is entitled to a tax offset to ensure that the maximum rate of income tax for amounts up to the untaxed plan cap amount[2] does not exceed 15% Amounts that exceed the untaxed plan cap amount are subject to tax at the top marginal tax rate.	Amount is included in the person’s income but they are entitled to a tax offset equal to 10 per cent of the element untaxed in the fund of the benefit.
Preservation age to 59	Person is entitled to a tax offset to ensure that the maximum rate of income tax does not exceed: for amounts up to the low rate cap amount*— 15% for amounts up to the untaxed plan cap amount** — 30% Amounts that exceed the untaxed plan cap amount are subject to tax at the top marginal tax rate.	Amount is included in the person’s assessable income and they are not entitled to a tax offset.

 *The low rate cap for the 2018-19 income year is $205,000.

**The untaxed plan cap amount for the 2018-19 income year is $1,480,000

Preservation Age

A person’s preservation age depends on the person’s date of birth, as set out in the table below:

Date of birth	Preservation age
Before 1 July 1960	55
1 July 1960 – 30 June 1961	56
1 July 1961 – 30 June 1962	57
1 July 1962 – 30 June 1963	58
1 July 1963 – 30 June 1964	59
After 30 June 1964	60

Planning Opportunities

Individuals who intend to commence a pension might wish to top up their superannuation with additional non-concessional contributions (i.e. voluntary contributions where no deduction is available for the contribution) before they retire. This topping-up strategy can increase:

• the person’s overall superannuation benefit and therefore, the pension amount; and
• the tax free component of a pension, therefore reducing any tax payable on the income before age 60.

An individual who meets a full condition of release such as attaining age 55 and retiring, may consider:

• taking a lump sum benefit, given that the taxable component of the lump sum up to the low rate cap may be received tax free; and
• then returning that amount to the fund as a non-deductible superannuation contribution.

The effect of the recontribution strategy is that the taxable component of the withdrawn benefit is converted into a tax free component when it is re-contributed.

There are two limitations on this strategy:

• the amount taken as a lump sum should not exceed the low rate cap. For the 2018–19 income year, this means that where an individual is aged 55 to 59, the first $205,000 of the taxable component of a superannuation benefit may be withdrawn tax free; and
• the re-contribution should not exceed the person’s non-concessional contributions cap (for the 2018-19 income year the non-concessional contributions cap is $100,000 assuming the person has a total superannuation balance of less than $1.6 million).

Note: The contents of this article are for the purposes of providing general information only. Persons should seek appropriate advice from a licensed financial planner before undertaking any investments or strategies with respect to their superannuation interests.