The superannuation Tax Free component (aka tax-exempt component) is made up of all after-tax contributions made to superannuation (i.e. Non-Concessional Contributions).
A superannuation balance will consist of two main tax components: the Tax Free 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.
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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.
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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, regardeless of age.
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, regardless of age.
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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, regardless of age.
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.
How Much Can I Withdraw From Super Super Tax Free?
The tax-free portion of a lump sum withdrawal or pension payment can always be received tax-free, regardless of age.
You do, however, need to be eligible to access your super before making a withdrawal.
If over age 60, the taxable (taxed) component of a withdrawal or pension payment will also be received tax free.
Remember, all withdrawals, whether made as a lump sum or pension payments need to be made proportionately from the taxable and tax free components.
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how does the average person work out concessional contributions and non-concessional contributions into super over ones lifetime. How does one knows what went in over more than 25 years and in what proportions. one earned a salary and the employer put in the SGC. one knows the sgc% over time (4 to 9.5%) but who knows and can prove their salary over such a long period.
Plus there were so many other things that went into super like bonuses, retrenchments, rolled over amounts from pre-1992 employer super funds, rolled over funds since 1992, exit fees from employer funds, etc etc.
if this is so important in working out taxed and non-taxed super withdrawals upon retirement then why aren’t the CUMULATIVE concessional and non-concessional contributions recorded since 1992…..none of my super funds provided me with this information and only recently when i went over to a SMSF do i see the annual contributions but not the historical ones. now that i have a smsf i have been asked to provide the historical information which is near impossible and the ATO cannot help either….they agree that it is a minefield and with more baby boomers retiring it will be a major issue.
Can you shine any further light on the matter.
Hi Christine.
It would have been the responsibility of your former superannuation fund/s to record this information.
When you rollover your super, your former fund must provide a ‘rollover benefit statement‘.
This rollover benefit statement has all the relevant tax components on it.
You then provide this to the administrator of your SMSF.
Hi SuperGuy,
Love you page.
I have a question regarding a re-contribution strategy.
Client holds $103K in AMP, age 60. I am trying to determine the taxable component after the re-contribution of $100k. How do you go about working that out?
Details pre-withdrawal/contribution of $100k;
Fund balance: $103k
Taxable: $89k
Tax Free: $14k
Regards
Hi Remzi, thank you for your comments and question.
The $100k withdrawal would need to be proportionate and would therefore be 86.4% ($86,400) taxable component and 13.6% ($13,600) tax free component. The subsequent non-concessional contribution would be 100% tax-free component. Therefore, the super balance after the recontribution strategy would be:
Taxable – $2,592
Tax free – $100,408
The taxable component post-recontribution strategy is 86.4% of the remaining $3,000 that was not withdrawn. The tax-free component will be 13.6% of the remaining $3,000 that was not withdrawn, plus the $100k NCC.
If suitable, you could consider utilising the bring-forward rule and apply the recontribution strategy to the total balance, or waiting until after 1 July 2021 when the NCC cap increases.
Obviously, to make any lump sum withdrawal from super, the client will have needed to have met a full superannuation condition of release.
Regards,
Chris
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