What age are SMSF benefits tax-free

At 60 your superannuation lump sum or pension payments made to you from your Self-Managed Superannuation Fund (SMSF) are generally tax-free.

Lump sum death benefits paid to a death benefit dependant, or tax dependant, are tax-free regardless of age. A death benefit pension is tax-free when paid to an eligible pension recipient unless the deceased member at time of death and the dependant when the pension is paid are both under 60.

The tax-free component of a super benefit remains tax free when paid to a SMSF member or beneficiary such as a Death Benefit Dependant.

You can access your super at 65 or when you turn 60 and retired.  Whilst your super benefits may be tax-free at 60 it is crucial to ensure you have a condition of release to access your superannuation.

There are limited circumstances when you can access your super early such as satisfying a condition of release due to compassionate grounds, severe financial hardship, permanent or temporary incapacity and a terminal medical condition. A member receives a lump sum payment arising from a terminal medical condition tax free regardless of age whereas a super payment arising from permanent incapacity is taxed but some special conditions arise in relation to increasing the tax-free component.

Who is a Death Benefit Dependant

A death benefit dependant includes:

• a spouse (including a former spouse, de facto or same sex partner)
• a child under 18 (at the time of the deceased death)
• a person who the deceased member was in an interdependency relationship with
• a person who was financially dependent on the deceased

Hint – A death benefit pension cannot be paid to a child over 18 but under 25 unless they were financially dependent on the deceased member or is disabled. The pension must be commuted to a death benefit lump sum when they turn 25 unless the child is disabled.

In summary you, or your beneficiary, can receive SMSF benefit tax-free:

• when you turn 60
• lump sum death benefit paid to a death benefit dependant
• death benefit pension (depending on age) paid to a death benefit dependant
• tax free component of your super

Hint – A super payment may include an untaxed element which is relatively rare in a SMSF and has not been included as part of this article. Tax may apply to an untaxed element.

Pension Payments made to a SMSF member under 60

There are only limited circumstances where a SMSF member under 60 is able to receive a pension from their SMSF. The preservation age is 60 for all SMSF members which means super benefits cannot be accessed, at least, until they turn 60 subject to some exceptions.

A death benefit pension paid to a younger spouse or a child under 18 from a deceased member’s super who was over 60 at the time of death is tax free. Tax is payable on a death benefit pension paid to a surviving spouse who is say 50 and the deceased was 58 when they died.  The spouse does not pay tax on the tax-free component but will pay tax on the taxable component. However, when the surviving spouse turns 60 the pension payments will be tax free.

Hint – All super benefits consist of tax-free and taxable components and tax-free components arise from contributions which are made where no tax deduction has been claimed and can include member contributions, downsizer contributions, capital gains tax lifetime cap and government co-contributions.

Pension Payments made to a SMSF member over 60

A superannuation income stream benefit, or an account-based pension paid to a SMSF member aged 60 or over is tax free to the member regardless of the pension being a retirement phase pension or a transition to retirement income stream (TRIS).

For tax purposes the pension must be in retirement phase to be tax exempt at the fund level.  Retirement phase merely indicates the member has met a condition of release such as turning 65 or turning 60 and retired.

However, a SMSF member who receives a transition to retirement income stream (TRIS) after they turn 60 but before they turn 65 and not retired receives the pension tax free but at the fund level there is no tax exemption.