The fund has a pension member who recently turned 60. The system is displaying a tax-free proportion other than 100%?
The fund is in pension phase. Should all member balances now be tax-free?
When a pension becomes tax-free there are three different concepts to ensure you are familiar with:
Member Components (Taxable and Tax-Free)
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.
To work out the components of an income stream (pension) is calculated as the proportion of the tax-free and taxable components of the member's super interest when the income stream starts. You apply the same proportions when you work out the tax-free and taxable components of the member's income stream benefits such as paying pensions, lump sums or adding earnings
Do I need to change the tax free percentage to 100% when a member turns 60?
No. Leave the current tax-free proportion the same as calculated at the commencement of the pension. Note: SF360 does not allow you to edit the tax-free percentage.
I am over the age of 60, isn't calculating the components is a waste of time since pension payments are tax-free?
The components of a Member Balance remain important after the age of 60 because upon a fund member’s death, the member’s family may end up paying tax depending on the benefit components.
If the death benefit is paid as a lump sum to a dependant of the deceased, it's tax free. It's not assessable income or exempt income. The SMSF doesn't withhold tax from the payment and the recipient doesn't include it in their income tax return.
If the death benefit is paid as an income stream, or is paid to a non-dependent or the trustee of a deceased estate, there may be tax to pay. Your SMSF will need to determine the taxed and untaxed elements of the benefit, calculate the applicable tax and, if appropriate, withhold tax from payments.
What makes up 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.
The taxable component of a super income stream is the amount of the income stream minus the tax-free component.
Pension Payments and age 60 (Tax Free)
The concept of age 60 and a pension becoming "Tax-free" refers to PAYG
For Pension payments made when the member is aged 60 or over
Pension payments are not subject to PAYG (i.e they are Tax Free)
For Pension payments made when the member is aged under 60
No tax is payable on the tax-free component of your pension payment.
The taxable component of your income payment will be added to your taxable income. It will be subject to PAYG (your marginal tax rate), less a tax offset equal to 15% of the taxable portion of the payment.
Fund Earnings and Tax Exemption (Tax Free)
Most Income that a complying SMSF earns from assets held to provide for super income stream benefits is exempt from income tax. This is referred to as exempt current pension income (ECPI).
in Simple Fund 360 the ECPI calculation is determined by the Fund Pension Policies screen. The Fund Pension Policies screen allows you to request an Actuarial Certificate directly from Accurium and Act2 Solutions and enter the non-deductible expense proportions for a fund. Users can also manually input actuarial details if they have obtained an actuarial certificate externally.
If an SMSF's assets are not specifically set aside for paying a super income stream benefit, the SMSF must determine the amount of exempt income using the unsegregated method. An SMSF with unsegregated assets needs to obtain an actuarial certificate that certifies the proportion of income that is exempt.