As detailed in the article ‘Understanding superannuation interests’ the tax components of a member’s superannuation interests are quite complex, yet it is important to understand the components and how they are calculated in order to pay the right tax.
In a self-managed superannuation fund (SMSF) the trustees are responsible for keeping track of each member’s superannuation interests and the tax components of each interest. Reviewing these regularly can save time and worry in the event a benefit needs to be paid out. If the components are not already known it can be quite complex to look back at the history of each interest to work out its tax components.
Calculating the components of a Superannuation Interest
The components of a superannuation interest are calculated as:
Tax-free Component = Contribution Segment + Crystallised Segment
Taxable Component = Superannuation Interest – Tax-free Component
The tax-free and taxable components of a superannuation interest needs to be calculated:
- At a pension commencement
- Just prior to a lump sum payment or rollover
- On the commutation of a pension to a lump sum
Calculating the components of a Superannuation Benefit
Once it is established that a superannuation interest will pay a benefit; a method called ‘the proportioning rule’ can be used to work out the tax-free and taxable components of the benefit.
The Proportioning Rule
This rule states that the tax-free and taxable components of the member’s superannuation benefit are taken to be paid in the same proportion as the tax-free and taxable components of the member’s superannuation interest immediately prior to the pay out of the benefit.
Example: using the proportioning rule
Consider that a member has a superannuation interest worth $100,000 and the tax-free component is $80,000 and the taxable component is $20,000.
Then 80% of the interest is the tax-free component and 20% is the taxable component. These proportions are then applied to any benefit payment – the benefit will be 80% tax-free and 20% taxable.
The ATO has published a calculator to assist funds in determining the proportions of the tax-free and taxable component of a superannuation interest which can then be applied to calculate the components of the benefit under the proportioning rule: Superannuation benefit component calculator.The proportioning rule is modified for some benefits which contain an untaxed element and does not apply to benefits that are entirely made up of tax-free or taxable components.
Components of a Death Benefit
The tax-free and taxable components of a death benefit depend on the type of death benefit being paid.
In general, when working out the components of a death benefit the following apply:
- Lump sum benefit (dependents) – no need to calculate the components as the entire benefit will be tax-free.
- Income stream benefit (dependents only) – use general proportioning rule
- Lump sum benefit (non-dependents) – need to check whether tax deductions have been claimed or will be claimed on insurance premiums or benefits as modified proportioning rules may apply
Further information on working out the components of a super benefit for different benefit types and scenarios can be found on the ATO website: Calculating components of a super benefit.
Components of a Disability Benefit
The components of a disability pension are calculated using the general proportion rule.
The components of a disability lump sum benefit are calculated using a modified version of the general proportioning rule.
Transitional arrangements for income streams that commenced prior to 1 July 2007
Superannuation law changed the calculation of tax-free and taxable components on 1 July 2007. Transitional arrangements were put in place for calculating the tax-free and taxable components of an income stream (pension) that started before 1 July 2007, before and after a trigger event occurs.
Understanding superannuation interest components is important as they determine the tax payable when benefits are paid out from the superannuation fund. The trustee needs to keep track of superannuation interests, and the tax-free and taxable components within each interest, to ensure the correct tax is paid on benefits paid from a fund.
When a benefit is paid out of super, the tax-free component of the benefit, as the name suggests, will be tax-free. The beneficiaries might have to pay tax on any taxable components depending on their age, the type of the benefit, the amount of the benefit and the value of the taxed and untaxed elements in the taxable component.