A superannuation balance will consist of two main tax components:- the ‘Tax Free (exempt)’ component and the ‘Taxable’ component. In order to determine the components of a superannuation balance in accumulation phase, it is first necessary to calculate the Tax-Free component. Everything else then becomes the taxable component.
How To Calculate the Tax Free Component
All of the Non-Concessional Contributions that have been made to the account are added up, less any withdrawals from the account, and this is the Tax-Free component.
Therefore, the taxable component effectively consists of Concessional Contributions, plus or minus any earnings within the account. Because of this, it is possible for a negative Taxable Component to be present if the balance on any given day is lower than the total Non-Concessional Contributions made to the account, due to capital losses, as was commonly experienced during the Global Financial Crisis (GFC).
In draw-down phase (aka pension phase, income stream phase), the calculation of the tax-free and taxable components is different. Upon commencement of a pension income stream, the taxable and tax-free components are crystallised (frozen) and their ratio remains static for the life of the income stream.
For example, if there was a superannuation accumulation balance valued at $500,000, consisting of $300,000 tax free component (60%) and $200,000 taxable component (40%), the ratio would change daily as a result of movements in the value of the fund balance. However, once an income stream commences, the proportions (60/40 in this case) are locked in. All earnings within the account (positive and negative) are allocated proportionately to each component. Also, all withdrawals, just like in accumulation phase, need to be made proportionately from each component.
Superannuation Tax Free Component: Tax
As mentioned, the tax free component of a superannuation balance consists of the Non-Concessional (after-tax) Contributions that were made to the account. Therefore, this amount has already had tax paid on it by the contributor before it was contributed.
Because the tax-free component has already had tax paid on it, it does not incur Contributions Tax upon entering the fund. It also does not incur any tax when withdrawn from the superannuation environment, whether that be in the form of a lump sum, portion of an income payment, or a death benefit paid to the estate/beneficiaries.
Superannuation Tax Free Component: Lump Sum
All withdrawals from the accumulation account within the superannuation environment must be made proportionately from each component.
The proportion of a lump sum withdrawal that is made up of the Tax Free component is received completely tax free.
Superannuation Tax Free Component: Pension / Income Stream
All pension payments received from a superannuation income stream must be made proportionately from each component.
The proportion of a pension income stream payment that is made up of the Tax Free component is received completely tax free.
Superannuation Tax Free Component: Death Benefit
The portion of a death benefit that consists of the Tax Free component is received by the beneficiary completely tax free. This is true whether the beneficiary is a ‘tax dependent’, ‘non-tax dependent’ or even an estate where tax dependents and/or non-tax dependents will benefit.