When calculating a super benefit, you need to identify and calculate the value of the various components that make up the benefit. To begin, you must determine the value of the member's super interest.
Generally, the value of a member's super interest is the total amount of lump sum benefits or entitlements that you can pay them at a particular time. In most cases, this is the member's total account balance in the fund.
Specific rules apply for determining the defined benefit superannuation interest for pre-July 1983 amounts.
You will need to calculate the components for each benefit that you pay. Generally, you use the proportioning rule to work out the components of a super benefit by determining the proportion of the tax-free and taxable components of the interest, and applying these proportions to the benefit.
The value of the super interest and the amount of each component is determined at the following times:
- an income stream – just before the income stream commences
- a lump sum – just before you pay the benefit
- commutation of an income stream to a lump sum – use the calculations when the income stream started
- rollover super benefit – just before you make the rollover
- commutation of an income stream rolled back into the accumulation phase in the fund – just before a new super benefit is paid.
Working out the tax-free component
The tax free component of a member's super interest is the sum of the value of the contributions segment and the crystallised segment.
The contributions segment generally includes all contributions made after 30 June 2007 that have not been, and will not be, included in your fund's assessable income. These are most commonly member contributions where a tax deduction has not been claimed by the member.
The taxable component of a rollover super benefit is not included in the contributions segment. However, any untaxed element in excess of the untaxed plan cap amount is included.
The crystallised segment of the member's super interest is that part of the interest that is the total of:
- the concessional component
- the post-June 1994 invalidity component
- the undeducted contributions
- the CGT exempt component
- the pre-July 1983 component.
See also:
Working out the taxable component of the super interest
The taxable component of a member's super interest is the total value of the member's super interest less the value of the tax-free component.
Contributions that would form part of the taxable component are generally amounts included in the assessable income of the fund. This would include concessional contributions and earnings.
The taxable component of a super benefit may consist of a taxed element and/or an untaxed element, depending on whether the benefit is paid from a taxed or untaxed source. Funds will need to determine these elements before paying any super benefits.
Taxed element
The taxed element includes amounts where a fund has paid 15% tax on the contributions or earnings. Concessional rates of tax will apply to benefits containing a taxed element. A taxed element may also include an amount that has been rolled over from an untaxed source.
Untaxed element
The untaxed element includes amounts where a fund has not paid any tax on the contributions or earnings. Higher rates of tax will apply to benefits containing an untaxed element.
Untaxed super funds are generally run by Commonwealth, State or Territory government departments, and are generally either:
- public sector super schemes
- constitutionally protected funds.
There are circumstances where a benefit paid from an untaxed super fund will contain a taxed element. These are where a:
- constitutionally protected fund pays a benefit attributable to the taxable component of any rollover super benefit received by the fund
- public sector super scheme pays a benefit sourced partly from contributions made to the scheme or the earnings on those contributions.
Where a super fund allocates an amount to a member from its reserves the calculation of the components is treated as follows:
- allocation from an accumulation interest is a taxable component
- allocation from an interest supporting an income stream – the tax-free and taxable components determined at the start of the income stream will apply.
The proportioning rule
Under the proportioning rule, the tax-free and taxable components of the member's super benefit are taken to be paid in the same proportion as the tax-free and taxable components of the member's interest in the super fund.
For example, if 30% of a member's super interest consists of a tax-free component and 70% consists of the taxable component, the benefit you pay from it must also have a 30% tax free component and a 70% taxable component.
The proportioning rule prevents a member choosing which components to withdraw when a super benefit is paid. This means that they cannot choose to withdraw just the tax-free component.
The proportioning rule does not apply to a super benefit if an alternative method is specified by the regulations or the ATO. This only applies in limited circumstances.
To work out the components of a super benefit using the proportioning rule you first need to:
- calculate the value of the super interest and the proportion of the tax-free and taxable components
- apply the proportion to the benefit being paid.
Example 1: Working out the tax-free and taxable proportions
Kevin is approaching his preservation age and is considering his options when he retires. The value of Kevin’s super interest is $400,000, which consists of the following components:
- tax-free component of $100,000
- taxable component of $300,000.
Work out the tax-free and taxable proportions of Kevin’s super interest as follows:
Tax-free proportion % |
= tax-free component ÷ value of the interest |
= $100,000 ÷ $400,000 |
|
= 25% |
|
Taxable proportion % |
= 100% – tax-free proportion % |
= 100% – 25% |
|
= 75% |
End of example
The proportioning rule is modified for disability lump sum benefits and super lump sum benefits that contain an untaxed element.
The proportioning rule does not apply to benefits that consist entirely of a tax-free or taxable component. These include:
- super co-contribution payments made up of a tax-free component only
- super guarantee payments made up of a taxable component only
- contribution-splitting payments made up of a taxable component only.
Applying the proportioning rule
Once you have worked out the proportion of the tax-free and taxable components in the super interest, you must apply these same proportions to the super benefit you will pay.
Income stream benefits
To work out the components of an income stream benefit:
- work out the proportion of the tax-free and taxable components of the member's super interest when the income stream starts
- apply the same proportions when you work out the tax-free and taxable components of the member's income stream benefits.
Example 2: Working out the components if Kevin starts an income stream
Following on from example 1, Kevin uses his super interest to start an income stream and receives a monthly super income stream benefit of $2,000.
Apply the proportions to work out the tax-free and taxable components of Kevin's monthly super income stream benefit as follows:
Tax-free component |
= super income stream benefit x tax-free proportion |
= $2,000 x 25% |
|
= $500 |
|
Taxable component |
= total of benefit – tax-free component |
= $2,000 – $500 |
|
= $1,500 |
These proportions will continue to apply to all benefits you pay from the income stream, including benefits from the commutation of the income stream.
End of exampleYou must make sure that you withhold the correct amount for PAYG purposes when you pay the benefit – refer to PAYG withholding obligations
Lump sum benefits
To work out the components of a lump sum super benefit:
- work out the tax-free and taxable proportions of the member's super interest just before you pay the lump sum
- apply the same proportions when you work out the tax-free and taxable components of the member's lump sum benefit.
Example 3: Commutation of an income stream
Using the facts in example 2, Kevin has decided after receiving an income stream for 12 months that he wants to commute his income stream into a super lump sum.
When the lump sum is paid out, it will have the same proportions as determined when the income stream began. This means Kevin's super lump sum will have a tax-free component of 25% and a taxable component of 75%.
End of example
Example 4: Working out the components if Kevin takes a lump sum
Using the facts in example 1, instead of taking an income stream, Kevin uses his super interest and takes a lump sum of $50,000 on 1 December 2013. Apply the proportions to work out the tax-free and taxable components of Kevin's lump sum benefit of $50,000 as follows:
Tax-free component |
= 25% of benefit |
= $50,000 x $25% |
|
= $12,500 |
|
Taxable component |
= total of benefit – tax-free component |
= $50,000 – $12,500 |
|
= $37,500 |
After the $50,000 lump sum was paid on 1 December 2013 the:
- tax-free component of the super interest was $87,500 ($100,000 less $12,500)
- taxable component of the super interest was $262,500 ($400,000 – $50,000 – $87,500).
You must work out the proportions again each time you pay a lump sum.
Kevin made a $28,000 non-concessional contribution to the super fund on 5 May 2014. On 1 January 2015, he withdrew another lump sum benefit of $40,000. The value of the super interest just before the lump sum was paid was $385,000 (includes $7,000 fund earnings).
Step 1
Work out the tax-free and taxable components of Kevin's super interest just before the lump sum of $40,000 was paid on 1 January 2015.
Tax-free component |
= balance after lump sum payment on 1 December 2013 + non-concessional contribution made on 5 May 2014 |
= $87,500 + $28,000 |
|
= $115,500 |
|
Taxable component |
= value of interest before lump sum paid on 1 January 2015 – tax-free component |
= $385,000 – $115,500 |
|
= $269,500 |
Step 2
Work out the tax-free and taxable proportions of Kevin's super interest just before the lump sum of $40,000 was paid on 1 January 2015.
Tax-free proportion % |
= tax-free component ÷ value of the interest |
= $115,500 ÷ $385,000 |
|
= 30% |
|
Taxable proportion % |
= 100% – tax-free proportion % |
= 100% – 30% |
|
= 70% |
Step 3
Apply the proportions to work out the tax-free and taxable components of Kevin's lump sum benefit of $40,000 as follows:
Tax-free component |
= 30% of benefit |
= $40,000 x 30% |
|
= $12,000 |
|
Taxable component |
= total amount of benefit – tax-free component |
= $40,000 – $12,000 |
|
= $28,000 |
After the $40,000 was paid on 1 January 2015, the:
- tax-free component of the super interest was $103,500 ($115,500 less $12,000)
- taxable component of the super interest was $241,500 ($385,000 – $40,000 – $103,500).
If the lump sum super benefit arises from the commutation of an income stream, you determine the value of the super interest, and the amount of each of the components of the super interest, when the relevant super income stream commenced.
You must make sure that you withhold the correct amount for PAYG purposes when you pay the benefit.
Modifications to the proportioning rule
The proportioning rule is modified when you pay a:
- super lump sum with an untaxed element
- disability super benefit.
Paying a lump sum with an untaxed element
Where the super interest existed just before 1 July 2007, a modified version of the proportioning rule is used to determine the tax-free and taxable components, taking into account the crystallisation of the pre-July 1983 component.
The tax-free component for an untaxed element is only calculated when a lump sum benefit is withdrawn from your fund or rolled over into a taxed super fund.
The modification to the proportioning rule means that the tax-free component of the benefit is increased, and the untaxed element is reduced, by the lesser of the following amounts:
- the amount worked out by applying the formula below, and
- the amount of the untaxed element.
If the lump sum is in part attributable to a crystallised pre-July 1983 amount, when you are working out the tax-free component, the amount that is attributable to the crystallised segment of the super interest is ignored.
Example 5: Apply the proportioning rule
Peter is 56 and he withdraws a lump sum benefit of $50,000 on 1 January 2008. Just before this benefit is paid, the value of Peter’s super interest was $400,000. The super interest includes a tax-free component of $100,000 (made up of $50,000 contributions segment and $50,000 crystallised segment) and the taxable component is $300,000 consisting solely of an untaxed element.
Step 1:
Calculate the tax-free and taxable proportions of Peter’s super interest ($400,000) just before the benefit is paid:
Tax-free component of $100,000 = 25%
Taxable component of $300,000 = 75%
Step 2:
Apply that proportion to calculate the tax-free component of Peter’s lump sum as follows:
$50,000 x 25% – $12,500
The taxable component, untaxed element, of Peter’s lump sum benefit is $37,500.
Example 6: Modified proportioning rule – lump sum with untaxed element
Assume in example 5 that Peter's total eligible service period is 14,245 days and the number of pre-July 83 days is 4,250 days.
The tax-free component of Peter's lump sum is increased, and the untaxed element is reduced, by the lesser of:
(i) |
($12,500 + $37,500) x 4,250 = $14,918 |
(ii) |
$37,500 |
As a result the tax-free component of Peter's lump sum benefit is increased by $14,918:
$12,500 + $14,918 = $27,418
The taxable component, untaxed element, is:
$37,500 – $14,918 = $22,582
End of examplePaying a disability super benefit
A disability super benefit is a benefit you pay:
- to a person suffering from ill-health (physical or mental)
- where two legally qualified medical practitioners have certified that, due to ill-health, it is unlikely the person can ever work in a job they are reasonably qualified for.
You can pay a disability super benefit as either an income stream or a lump sum.
Disability lump sum benefits
If you are paying a disability lump sum benefit to a member, the tax-free component of the benefit is increased for future service benefit if the member had continued working. This reflects the time that the member would have expected to have been working if the disability had not occurred.
The modification to the proportioning rule means that the tax-free component of a disability lump sum benefit is increased. The taxable component is worked out as usual once the final tax-free amount is worked out.
To work out the tax-free component of a disability lump sum benefit, add together:
- the tax-free component worked out under the general proportioning rule
- the amount worked out under the formula in subsection 307-145(3) of the ITAA 1997 (the modification formula):
Amount of benefit x days to retirement
Service days + days to retirement
For the purpose of applying the modification formula:
- Days to retirement means the number of days from the day the member became unable to work to their ‘last retirement day’.
- The member’s last retirement day is generally when they would turn 65. However, if their employment or office would have ended when they reached a particular age or completed a particular period of service, their last retirement day is when that would have happened (whether that is before or after age 65).
- Service days means the number of days in the ‘service period’ for the disability super lump sum benefit paid to the member.
- The service period for the disability super lump sum generally starts on the earlier day worked out using the following table.
In this case: |
The service period starts on: |
|---|---|
Some or all of the disability super lump sum paid to the member from the particular super fund accrued while the member was a member of the fund |
The day the member joined the particular super fund Example: |
Some or all of the disability super lump sum paid to the member from the particular super fund accrued while the member was employed by an employer who contributed to the fund for the member in respect of a period of employment that commenced before the member joined the fund |
The day the member became an employee of the employer Example: |
The service period for the disability super lump sum ends on the earlier of the day:
- the disability super lump sum is paid from the particular fund
- the member ceases to be a member of that fund.
However, if some or all of the disability super lump sum paid to the member from the particular super fund is attributable to a rollover super benefit paid earlier into the particular fund, the service period for the disability super lump sum includes any days in the service period for the rollover super benefit that are earlier than the start of the service period for the disability super lump sum worked out using the table above.
More than one rollover super benefit may have been paid to the particular fund.
In the modification formula’s denominator, any days that are included in both ‘service days’ and ‘days to retirement’ are to be counted only once.
See also:
- Sections 307-145 and 307-400 of the ITAA 1997.
Disability income stream benefits
If you pay the disability super benefit as an income stream the proportioning rule is used to calculate the tax-free and taxable components.
Income streams started before July 2007
A super interest, where at least one income stream benefit was paid before 1 July 2007, is valued and proportioned once a trigger event occurs. Until a trigger event occurs, the tax-free component continues to be worked out using the deductible amount that was applied to the benefit before the law changes came into effect.
Trigger events
There are four events that will trigger a change in the way you work out tax-free and taxable component:
- if the member was 60 years old or older on 1 July 2007
- when the member turns 60 years old
- when the member dies
- when the income stream is partially or wholly commuted.
While it is unlikely, there may still be some instances where an income stream has not already been subject to a trigger event since 1 July 2007, for example:
- disability income stream benefits
- death benefit income streams paid to a non-dependant (payments to a dependant are tax-free so the proportions do not need to be calculated).
For a super income stream paid from an untaxed source the only possible trigger event is commutation. This is because legislation provides that the trigger event of turning 60 and the death of the person who is the holder of the super interest only apply where there is no untaxed element.
When a trigger event occurs, the value of the super income stream interest and the tax-free component of the super interest are calculated at the time just before the trigger event occurred. If there are two or more trigger events, the tax-free component is determined at the time just before the earliest of those events.
When a trigger event occurs the tax-free and taxable components are calculated as:
- tax-free component = the total of the unused undeducted purchase price + the pre-July 1983 component
- taxable component = the value of the super interest less the tax-free component.
If the income stream started before 1 July 1994, a pre-July 1983 component is not added.
The tax-free and taxable components of all future income stream benefits paid after the trigger event will be paid using the same proportions as those that make up the total value of the super interest supporting the income stream just before the trigger event.
Example 7: Super income stream after a trigger event
Chris receives a death benefit income stream of $2,000 per month. He received payments from this before 1 July 2007. On 30 September 2014, Chris turned 60.
On 30 September 2014, the balance of Chris's super income stream account was $230,000. Chris's UPP was $100,000.
The annual deductible amount applying to Chris's income stream immediately before 1 July 2007 was $5,000.
Between the start of the super income stream and 30 June 2007, Chris claimed $18,000 as an annual deductible amount for the super income stream.
The tax-free component of income stream payments made from 1 July 2007 to 30 September 2014 was $35,000.
As Chris turned 60 years of age on 30 September 2014, a trigger event occurred on that date.
Chris's eligible service period is 13,606 days (1 July 1977 to 30 September 2014).
Step 1
Assume a notional payment has been made equal to the value of the super interest just before the trigger event.
The notional payment is $230,000.
Step 2
Work out the unused UPP of the income stream, less any tax-free components of any benefits paid from the income stream after 1 July 2007.
For Chris's income stream, the unused UPP less the tax-free components is $47,000 (that is $100,000 − $18,000 – $35,000).
Step 3
Work out the pre-July 1983 component of the notional payment. In the calculation, the last date for Chris's service period is 30 September 2014.
Chris's pre-July 1983 component is the lesser of:
- $230,000 x 2,191 days ÷ 13,606 days = $37,038
- $230,000 − $47,000 = $183,000.
- If the income stream had started before 1 July 1994, the pre-July 1983 amount would have been nil.
Step 4
The tax-free component of the super interest is the total of the amounts worked out in step 2 and step 3.
$47,000 + $37,038 = $84,038
The taxable component of the super interest is the amount remaining after subtracting the tax-free component from the super interest.
$230,000 − $84,038 = $145,962
Step 5
The tax-free and taxable proportions of the super interest are worked out as follows:
Tax-free proportion % = $84,038 ÷ $230,000
= 36.5383%
Taxable proportion % = 100% − 36.5383%
= 63.4617%
Work out the tax-free and taxable components of Chris's monthly income stream payments:
Tax-free component = $2,000 x 36.5383%
= $730.76
Taxable component = $2,000 − $730.76
= $1,269.24
End of exampleWhen working out the proportions, do not round down the decimals. The legislation does not provide for a rounding rule. In the example above, we calculate the proportions to four decimal points for illustration purposes only.
In some cases, such as when the fund member turns 60, super benefits paid from a taxed fund after a trigger event are tax-free. Working out the tax-free and taxable components will have no effect on other benefits you pay from the income stream to the recipient.
However, you must still work out the proportion of the tax-free and taxable components of a member’s super interest. This is relevant in other circumstances, such as the member’s death where the death benefit beneficiary is a non-dependant, or for rollovers to other funds.
You will need to calculate the components for each benefit that you pay. Generally, you use the proportioning rule to work out the components of the super benefit.