When a superannuation fund member satisfies a condition of release such as retirement, they may start to make withdrawals by lump sum/s, income stream, or a combination of the two.
In this article, we focus on the topic of withdrawal by income stream and the associated tax consequences. The focus is on account based super income streams which involve an income stream paid from a superannuation account in the member’s name. Less common are non account based super income streams which are not addressed in this article.
Minimum standards applicable to an income stream
There are a number of requirements and restrictions that relate to the operation of a super income stream. These include:
- A relevant condition of release must be satisfied.
- A minimum annual amount must be paid out.
- A minimum amount must be paid out before an income stream can be commuted to a lump sum.
- Restrictions on the ability to commute the income stream to a lump sum in certain instances.
- Restrictions on the ability to make contributions to the capital supporting an income stream once that income stream has already commenced.
- Restrictions on the ability to have the income stream transferred to a beneficiary of the member’s deceased estate where that beneficiary is a non dependant of the deceased member.
- Restrictions on using the capital value of the assets supporting the income stream as security to obtain finance.
There are further standards applicable in respect of a transition to retirement income stream which are not addressed in this article. The transition to retirement income stream is available for those who have reached preservation age but are unable to commence a retirement phase income stream.
The failure to comply with the minimum standards means the fund will no longer be considered to have offered an income stream for tax purposes. Instead, the payments will be treated equivalently to lump sum payments. This can result in potentially adverse tax consequences. For example, it means the super fund will not be eligible for 0% tax on income derived from assets supporting a retirement phase income stream to a retirement phase recipient (as there is no longer any compliant income stream). Instead, investment earnings (except non arm’s length income) will be taxed at the accumulation phase rate of 15%.
The failure to comply with the minimum standards also means that the individual’s transfer balance account will need to debited by the value of the super interests supporting the income stream just prior to the income stream no longer being in retirement phase.
There are special rules that apply to income streams which commenced before 1 July 2007. In essence, if the income stream operates within former income stream standards, the fund will be deemed to comply the new minimum standards.
Conditions of release
Common conditions of release include any of the following:
- Retirement and being at least preservation age.
- Retirement and being at least 60 years of age.
- Being at least 65 years of age irrespective of workforce participation status.
- Permanent disablement, terminal illness or death.
Minimum annual income stream amount
Subject to arrangements between the fund member and the super fund, a fund member has flexibility at law to decide on the frequency of withdrawals and the amount that may be withdrawn.
However, the following minimum standards apply:
- An amount must be actually paid at least once per financial year. The recognition of a liability to make a payment is not sufficient.
- The amount paid must exceed a minimum threshold. The minimum amount is dependant on member age and account balance,
For the 2023-24 income year:
- Under 65 years of age: 4% of account balance minimum annual payment
- 65 – 74 years of age: 5% of account balance minimum annual payment
- 75 – 79 years of age: 6% of account balance minimum annual payment
- 80 – 84 years of age: 7% of account balance minimum annual payment
- 85 – 89 years of age: 9% of account balance minimum annual payment
- 90 – 94 years of age: 11% of account balance minimum annual payment
- 95 years of age or older: 14% of account balance minimum annual payment
It is the member’s account balance and age as at 1 July of each income year that is relevant. That is, the minimum annual payout is not based on the account balance at the time the income stream commenced.
In the income year the income stream commences, the minimum amount is based on the account balance and member age on the day the income stream commences. The minimum withdrawal amount is pro rated for partial years to account for the days that the income stream was operating.
There is no maximum annual payment limit. Although note that transition to retirement income streams are subject to an annual payment limit of 10% of the account balance.
Note that the minimum annual amount will still need to be paid for an income year in which the member makes a commutation into a lump sum. Note that a payment to a member by commutation of the income stream will not count towards the minimum annual payment.
Tax outcomes
The tax consequences for the recipient of the income stream is dependent on the member’s age and the tax status of the underlying amounts.
Specifically:
- The income stream paid to a member who is over 60 years of age is not taxable at all if the super fund is a taxed fund.
- The taxable component of an income stream paid to a member who is between preservation age and 60 years of age is taxed at the marginal rate of the member less a 15% tax offset if the fund is a taxed fund.
- The taxable component of an income stream paid to a member who is under preservation age is taxed at the marginal rate of the member. There is a 15% tax offset if the income stream is received as a disability super benefit.
- The tax free component of a super account balance is not subject to tax in any to the above scenarios. This is because the tax free component represents a contribution made with post tax earnings where no deduction has been claimed in relation to that amount.
The tax free component of an account based pension includes non concessional contributions.
Any component of super interests that are not part of the tax free component will be part of the taxable component. This would typically include:
- Employer contributions
- Employee salary sacrificed amounts
- Personal contributions where a deduction is to be claimed
- Investment returns earned by the fund
At the time an income stream is commenced, the proportion of the total super interest that is the tax free component and taxable component must be determined and becomes locked in. The income stream paid out to the recipient will possess a tax free component and taxable component in accordance with the calculated proportions.
As an example, assume a member commences an income stream and that member has super interests comprising a $60,000 taxable component and a $40,000 tax free component. In this scenario, the taxable component is 60% of total super interest and the tax free component is 40% of total super interests. All income stream payments (and lump sum payments) will carry this 60% taxable / 40% tax free proportion. Similarly, earnings within the super fund after commencement of the income stream will be imputed with a taxable component and tax free component according to the locked in proportions. There is no ability to choose for certain payments to come exclusively from the tax free or taxable component.
The transfer balance cap limits the amount of capital that can be held in retirement phase to support the income stream. The value of capital in excess of the member’s transfer balance cap can be held in accumulation phase. The fund member’s transfer balance cap is calculated as the general transfer balance cap at the time the retirement phase income stream is commenced, plus the member’s unused cap space multiplied by any future increases in the general transfer balance cap. The general transfer balance cap is $1,900,000 in the 2023-24 income year.
When does the income stream end?
An income stream will generally end where any of the following occur:
- The capital supporting the income stream is used up.
- There is failure to satisfy the super standards.
- The income stream is fully commuted.
- The fund member becomes deceased and the income stream is not to a dependant beneficiary who is entitled to a reversionary income stream.
Super fund compliance requirements
There is a requirement for a super fund to report events that affect the member’s transfer balance account once a retirement phase super income stream commences, generally by completion of a transfer balance account report.
The super fund will generally need to obtain a valuation of capital supporting the income stream based on market value at the date the income stream commences.
There are many record keeping requirements in relation to the supply of income stream. This includes records of:
- Any income stream payments which are made and the relevant amounts paid.
- The value of the income stream at the time of commencement.
- Any earnings on assets supporting the income stream.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.