FAQ: Will I pay tax when I draw on my super balance?

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If you run an SMSF, there will come a point where you draw on your super balance and enjoy the fruits of your labour. Naturally, you will want to ensure you get as much value from your savings that you can, and that you avoid paying any unnecessary tax.

Do I pay any tax when I draw on my super balance?

This will depend on your age, the components of your super balance and how the benefits are drawn – in other words, whether they’re drawn as a pension or a lump sum.

There are two broad kinds of super funds: Untaxed, comprised of certain public sector funds to which different tax rules apply, and taxed, such as SMSFs and most large super funds. Assuming your super is being drawn from the latter and you are 60 years or older, you will pay no tax on the amount you receive, regardless of what form it’s in.

Take note that it’s important to keep track of the components of your super balance, as this will affect the tax treatment of your super when or if it is inherited. However, these components are particularly important to keep an eye on if you’re aged under 60.

How do these components affect me?

Super from a taxed fund is usually comprised of two components, based on the type of contributions made to an account:

  1. The ‘taxable taxed’ component
  2. The ‘tax-free’ component

When you draw money from your fund, it will be split in proportion with the relative component balances at that time. For instance, if your super is 30 per cent taxable taxed and 70 per cent tax-free, the pension will have the same 30/70 split for its entire duration. You won’t be able to pick and choose which component you want to draw.

However, it is possible through tax effective pension structuring to draw more money from a pension with a higher tax free component, which could result in you paying less tax. This is the kind of help with an SMSF that the experienced advisors at Aquila Super help fund members with on a daily basis.

What happens if I start drawing from my super when I’m under 60?

First of all, it’s important to note that if you’re under 60, you won’t pay tax on any tax-free component you draw from your super – no matter how you draw out the money. The rules regarding taxable taxed components differ, however, depending on whether or not you’re reached preservation age (currently 55).

If you have reached preservation age but are under 60, you can access your low rate cap ($195,000 for the year ending 30 June 2016) and not pay any tax on the taxable taxed component of lump sums you draw up to this cap. For lump sums you draw above this cap, this component is taxed at a maximum rate of 15 per cent.

If you are below preservation age, meanwhile, taxable taxed component of lump sums you draw are taxed at a maximum rate of 20 per cent. However, the circumstances under which someone of this age can access their money are very limited.

This is different again if you decide to draw your money as a pension while under 60. The taxable taxed component of this will be taxed at your marginal rate (less a 15 per cent tax offset if you have reached preservation age).

What you decide to do will depend on your own, unique set of circumstances. It’s worth seeking out professional advice before you make any decisions. If you want to know more about the tax consequences of accessing your super, please contact one of our expert tax advisers.