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Taxation of super benefits

Proportioning - pension phase

Section: 7.15

A super interest in pension phase, where the pension commenced on or after 1 July 2007, is valued at commencement of the pension. The proportions of tax-free and taxable components are applied to all payments made from the income stream, whether they are lump sum withdrawals or pension payments.

Example
The super interest used to purchase a pension on 2 July 2007 consisted of the following components:

- $60,000 tax free, and
- $40,000 taxable component.

The pension is valued and proportioned at commencement (prior to fees and charges). The pension is 60% tax free and 40% taxable. Every income payment and commutation from this pension will be 60% tax free and 40% taxable.

Proportioning rules where a pensioner dies

Where a member who is in receipt of an account based, allocated or term allocated pension dies, the existing pension proportioning rules continue to apply to the super interest following the member's death provided either:

  • the pension is automatically reversionary
  • a valid binding death nomination is in place which requires the trustee to continue to pay the death benefit as an income stream.

Where no such reversion or nomination is in place, special proportioning rules apply on the death of a pensioner, provided:

  • the deceased was in receipt of an account based, allocated or term allocated pension.
  • no amounts other than investment earnings, insurance proceeds or an anti-detriment amount have been added to their super interest.
  • their death benefit is paid as a lump sum or income stream (or combination of both) on or after 4 June 2013.
  • their death benefit is paid as soon as practicable.

These special rules allow the deceased member's super balance at the date of death (plus earnings on that balance between death and benefits being paid) to retain their existing tax free proportion during the period between the member's death and the payment of their death benefits. However, any insurance proceeds or anti-detriment amount will form part of the taxable component.

Example

Gina dies on 1 July 2014 with an existing account based pension balance of $300,000 and a tax-free proportion of 50%. Her death benefit is paid as a lump sum as soon as practicable on 1 January 2016, at which time earnings have increased her existing balance to $350,000. Life insurance proceeds of $200,000 and an anti-detriment amount of $50,000 are also then added to her benefit just prior to her death benefit being paid.

Under the special proportioning rules, the existing tax-free proportion of 50% applies to Gina's super balance at her date of death plus investment earnings. This would provide for $175,000 of tax free component and $175,000 of taxable component. The life insurance proceeds and anti-detriment amount are then added to the taxable component.

The lump sum death benefit paid will therefore consist of $175,000 tax-free component and $425,000 taxable component.

Income streams commenced prior to 1 July 2007

Different tax proportioning rules (including the use of a flat dollar tax-free/deductible amount) applied to superannuation income streams commenced prior to 1 July 2007. These existing arrangements continue to apply to that income stream after 1 July 2007 until a trigger event occurs, which includes:

  • being aged 60 or over at 1 July 2007
  • reaching age 60
  • partially or fully commuting the income stream
  • death

Last modified: Tuesday, May 2, 2017