Understanding superannuation interests
Understanding superannuation interests and their tax components is important. The tax-free and taxable components of an interest can change over time. Understanding what these components are made up of, allows a trustee to keep track of those items making the eventual calculation of the components much easier.
Accumulation superannuation interests are taxed differently to pension superannuation interests. In addition, the tax-free and taxable components determine the tax payable when benefits are paid out from the fund. The trustee needs to keep track of the superannuation interests, and the tax-free and taxable components within each interest, to ensure the correct amount of tax is paid.
Before discussing the components of a superannuation interest, it is important to understand what a superannuation interest is.
What is a superannuation interest?
A superannuation interest is the total amount of lump sum benefits or entitlements that a fund can pay a member at a particular time. In most cases, this is the member’s total account balance in their superannuation fund.
In a self-managed superannuation fund (SMSF) this means that if a member is entitled to be paid a benefit from their SMSF, now or in the future, then that member will have a superannuation interest in the SMSF. Each member in an SMSF can only have one accumulation superannuation interest. However, each pension account held by a member will be a separate superannuation interest.
Example: Determining the superannuation interests
ABC Superannuation Fund which has two members – Mr Smith and Mrs Smith.
Mrs Smith has not reached retirement and is still contributing to the fund. She has an accumulation balance of $180,000 in the fund.
Mr Smith is working part-time and bolstering his income by receiving a pension from the fund. He has an accumulation balance of $50,000 and $150,000 backing a transition to retirement (TTR) pension.
The fund has two bank accounts, a term deposit, various shares and an investment property. What are the superannuation interests?
Mrs Smith: One superannuation interest – $180,000 in accumulation.
Mr Smith: Two superannuation interests – $50,000 in accumulation and $150,000 in pension.
If Mr Smith decided to commute his TTR pension back to accumulation because he wished to retire, then at the moment after commutation he will have $230,000 in accumulation – and hence one superannuation interest. If he then decides to commence two account-based pensions with his balance – one new pension for $200,000 and another for $30,000 he will have two superannuation interests since each pension account is a separate interest.
Similarly, if Mrs Smith also had money in a retail superannuation fund from past employment worth $15,000, then that balance will be a separate superannuation interest as it is in a different superannuation fund. If she rolled that amount into her SMSF then it would add to her accumulation balance and she would still only have one superannuation interest in the SMSF.
If Mr Smith decides to make his new pensions revert to Mrs Smith upon his death. Then, although Mrs Smith may receive those pensions in the future, they do not count as a superannuation interest for her until the pension reverts to her on her husband’s death.
How many superannuation interests can an individual have?
- Every new income stream (pension) is treated as a separate superannuation interest.
- If an individual is a member of more than one superannuation fund (SMSF or other superannuation fund) then the individual may have one or more superannuation interests in each fund.
There is no limit to the number of superannuation interests an individual can have.
Why do we need to distinguish between superannuation interests?
When a member meets a condition of release to access their superannuation and pay a benefit, the superannuation interest from which the benefit is paid (and why it is being paid) will affect the taxation and type of benefit that can be paid.
In addition, prior to benefit payments, the type of superannuation interest (pension or accumulation) held by an individual will determine the taxation of income earned on the assets supporting that interest in the superannuation fund. Income earned on pension interests is concessionally taxed.
What are the components of a superannuation interest?
There are two main components of a superannuation interest:
1. Tax-free Component
- Crystallised Segment
- Contribution Segment
- Taxed Element
- Untaxed Element
Each superannuation interest is made up of a tax-free component and a taxable component, each of which can also be broken down into two further components. These components are not always constant and can change over time. It is important to understand how they are calculated so that the trustee can keep track of these components as part of managing the superannuation fund.
Industry or retail superannuation funds will keep track of these components on behalf of their members and report them in annual statements. SMSF trustees will need to understand how each of these components is calculated so they can keep track of these items for their members. This is important to do regularly as it can be difficult to look back a number of years and correctly determine the value of each component.
The tax-free component
The tax-free component of a superannuation interest is used to determine the part of a benefit that is tax-free and does not count towards an individual’s assessable (or taxable) income.
Due to changes to superannuation law which took effect from 1 July 2007, the tax-free component involves two calculations.
The Crystallised Segment calculates the tax-free component of a member’s superannuation interest at 30 June 2007. This calculation only needs to be done once for each superannuation interest.
The Contribution Segment is based on contributions received by the fund from 1 July 2007 that have not received concessional tax treatment.
Crystallisation refers to the process that determines the tax-free component of a superannuation interest at 30 June 2007. The crystallised segment consists of the total of the following components:
- the concessional component1
- the post-June 1994 invalidity component2
- un-deducted contributions3
- the capital gains tax (CGT) exempt component4, and
- the pre-July 83 component5. There is a calculator on the ATO website that will assist you with this calculation.
The crystallised segment is determined under Section 307.225 of ITAA 19976.
The contributions segment generally includes all contributions made from 1 July 2007 that have not been included in the assessable income of the fund. Typically these would be a member’s personal contributions not claimed as an income tax deduction.
- non-concessional contributions made after 1 July 2007 are personal contributions already taxed at the individual’s marginal tax rate – they would be included in the contributions segment.
- salary sacrificed contributions will be concessional contributions and therefore taxed at 15% in the fund; they will form part of the fund’s assessable income and will not be included in the contributions segment.
The contributions segment is determined under Section 307.220 of ITAA 1997.
The taxable component
The taxable component of a superannuation interest determines the amount of a benefit withdrawn from the interest that is taxable. In general, the individual will have to include this amount in their personal assessable income, and therefore pay tax on this amount if they receive the benefit under the age of 60. The taxable component is the value of the superannuation interest less the tax-free component, as calculated above.
The taxable component of a superannuation interest is an amount which (from the government’s perspective) has not yet paid all the tax owing on those amounts. It is made up of amounts which have received concessional tax treatment and have been taxed at a rate less than the marginal tax rate, or have not been taxed at all. The requirement to pay tax on the taxable component of a benefit is the government recouping the tax that is yet to be paid on those amounts. It effectively defers the payment of tax from when the amount was put into superannuation until it is paid out.
The taxable component is made up of taxed and untaxed elements which determine the amount of tax payable for different types of benefit payments.
This is the part of a superannuation interest that hasn’t had any tax paid on it at all, but which is still taxable. It must be included in an individual’s tax return as assessable income and will be taxed at their marginal tax rate.
Most superannuation interests will have no untaxed element. This element arises where a fund has received contributions on which no tax has been paid – either inside or outside of superannuation. These amounts may arise where a member has an unfunded defined benefit interest, or where a member receives insurance proceeds into the fund.
This is the amount of the superannuation interest that has already had tax paid on it in the superannuation fund. These amounts have been concessionally taxed in the superannuation fund, e.g. concessional contributions. This amount may or may not need to have additional tax paid on it once it is paid out of the fund as a benefit. Whether tax is payable will depend on the benefit type and the associated ‘caps’ available for concessional tax treatment. The key superannuation rates and thresholds7 published by the ATO provide guidance on the tax treatment of different benefit payments, and the caps available for concessional tax treatment for different benefit types.
Transfer between superannuation funds
If all or part of a member’s superannuation benefit is rolled out of one superannuation fund to another fund, the tax- free component of the roll-over becomes part of the tax- free contributions segment of the member’s accumulation interest in the fund which received the rollover.
The remaining amount of the roll-over will form part of the taxable component of the accumulation interest in the fund.
Important: SMSFs cannot hold untaxed elements as part of a member’s superannuation interest, so any untaxed element of a roll-over would be subject to 15% tax in the SMSF in the year it is received. The amount would then form part of the taxed element of the taxable component for that member’s accumulation superannuation interest in the fund.
Understanding superannuation interest components is important as they determine the tax payable when benefits are paid out from the superannuation fund.
To summarise, the components of a superannuation interest are made up of:
- Monies in superannuation that have already been at marginal rates – these will be part of the tax-free component
- Monies in superannuation that have been taxed in the superannuation fund (therefore at a concessional tax rate) – these will be part of the taxed element of the taxable component
- Monies in superannuation that have never been taxed – these will be part of the untaxed element of the taxable component.
When a benefit is paid out of superannuation, 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.
The ASIC Money Smart website has a useful page describing in simple terms the tax components of superannuation income streams (pensions).
For information on calculating the tax components of a superannuation interest visit our article titled ‘Superannuation interests: calculating the tax components’.