From 1 July 2007, a super benefit is generally made up of:
- a tax-free component, and
- a taxable component which may include an element
- taxed in the fund, and/or
- untaxed in the fund.
Super funds will need to calculate these components for each benefit that is paid. The proportioning rule is generally used to calculate the tax-free and taxable components of a benefit.
When a super benefit is paid from a superannuation interest, the benefit will include both tax-free and taxable components calculated in the same proportion that these components make up the total value of the superannuation interest.
The tax-free component of a superannuation interest is the total value of the following segments the:
- contributions segment, and
- crystallised segment.
What is the contributions segment?
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.
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Roll-over super benefits are regarded as contributions. However, the taxable component of a roll-over super benefit is not included in the contributions segment.
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What is the crystallised segment?
The crystallised segment includes the following existing components of a super interest that are consolidated into the tax-free component:
- the concessional component
- the post-June 1994 invalidity component
- undeducted contributions
- the capital gains tax (CGT) exempt component, and
- the pre-July 83 component.
The crystallised segment is calculated by assuming that an eligible termination payment (ETP) representing the full value of the superannuation interest is paid just before 1 July 2007.
The taxable component of the superannuation interest is calculated by subtracting the tax-free component from the total value of the superannuation interest.
Although the taxable component can consist of an element taxed in the fund and/or an element untaxed in the fund, the taxable component of a superannuation interest in a taxed fund normally consists solely of an element taxed in the fund.
Applying the proportioning rule when paying a benefit
When a super benefit is paid from a superannuation interest, the benefit will include both tax-free and taxable components calculated in the same proportion that these components make up the total value of the superannuation interest.
Example1 - applying the proportioning rule when paying a benefit
Peter is 56 and he withdraws a lump sum from his super of $50,000 on 1 January 2008. Just before this benefit is paid, he had a superannuation interest with a value of $400,000. The superannuation interest includes a tax-free component of $100,000, made up of a $5,000 contributions segment and a $95,000 crystallised segment. The taxable component is $300,000.
Step 1:
Calculate the tax-free and taxable proportions of Peter's superannuation interest just before the benefit is paid:
Tax-free component = $100,000 = 25%
Value of the interest $400,000
The taxable percentage of the superannuation interest is 75%.
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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 of Peter's lump sum benefit is $37,500.
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Modifications to the proportioning rule
To determine the tax-free component of a disability super lump sum benefit, a modified version of the proportioning rule is used. The modification results in the benefit having a larger tax-free component than if the standard proportioning rule was applied.
Age of member
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Tax free component
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Taxable component
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60 years and over
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The entire payment is tax-free after a member turns 60 and funds are not required to:
- withhold any tax from a payment, or
- issue a payment summary.
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Preservation age but under 60
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No tax withheld.
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- Amount up to low rate cap - no tax withheld.
- Amount above low rate cap - withhold tax at the rate of 16.5%
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Below preservation age
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No tax withheld.
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Withhold tax at the rate of 21.5%
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If a member does not provide their tax file number before the payment is made, withhold tax at the rate of 46.5% from the taxable component.
No tax is withheld where the member has a terminal medical condition and applies for a lump sum super payment. For more information about tax-free super, refer to Access to super for members with a terminal medical condition (NAT 71600).
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The amount of the tax-free component, the taxable component and the amount of tax withheld are included on the payment summary at the relevant labels.
If the marginal tax rate(s) applying to the lump sum is less than the rate of withholding applied to the payment, the member will only be taxed on their taxable component at the marginal tax rate.
If the member's marginal tax rate is higher than the rate of withholding applied to payment, the member will receive a tax offset to ensure the rate of tax on the taxable component does not exceed the rate of tax withheld.
To obtain a copy of our publications or for more information phone:
- 1300 720 092 to order a publication, or
- 13 10 20.
If you do not speak English well and want to talk to a tax officer, phone the Translating and Interpreting Service on 13 14 50 for help with your call.
If you have a hearing or speech impairment and have access to appropriate TTY or modem equipment, phone 13 36 77. If you do not have access to TTY or modem equipment, phone the Speech to Speech Relay Service on 1300 555 727.
Last Modified: Tuesday, 20 January 2009