Understanding Withdrawals from Your Self-Managed Super Fund (SMSF)
Super benefits can be withdrawn and removed from the superannuation environment as a superannuation lump sum payment or as pension payments. The SMSF trustee can provide an income stream or a lump sum directly from the fund provided the fund’s trust deed allows a member to access their super balance in the manner requested. It is also important to take into account the superannuation laws, regulations, and tax legislation. The SMSF deed can restrict what is allowed under the superannuation legislation, making it essential to thoroughly read and comprehend the fund’s deed.
Rules to Withdraw Money from Your SMSF
SMSFs are concessionally taxed environments, and the super laws and the tax act include rules to ensure a member’s super is maintained for the sole purpose of providing retirement benefits to SMSF members, or to their beneficiaries if they die before retiring and some ancillary purposes. The super laws restrict withdrawals from a member’s super account balance until a condition of release is met.
When can I Withdraw Super from my Self-Managed Super Fund?
You can withdraw your super when you have reached your preservation age and met a condition of release. There are some exceptions when early release of super (refer below) is available under limited circumstances. Generally super is preserved and becomes unrestricted and accessible (able to be withdrawn by the member) when a condition of release is met.
A member’s super is categorised as follows:
- preserved benefits- not accessible by the member until a condition of release is met
- restricted non-preserved benefits- calculated at 30 June 1999 and fixed at that date (refer to the ATO website for further details) and not accessible by the member until a condition of release is met
- unrestricted non-preserved benefits – accessible at any time by the member
If your super benefits are categorised as unrestricted you can withdraw your super benefits at any time but you may be subject to personal tax if you are under 60.
When he turned 61 he was offered a job and he went back to work. John can continue to access the unrestricted component of his super.
What are the Conditions of Release?
Common condition of release includes the following:
- turning 65
- turning 60 years of age, but not having turned 65, and retired
- the death of a member
- reaching preservation age and starting a transition to retirement pension
- satisfying the criteria for early access to super (refer below)
Some conditions of release include cashing restrictions which limit the form of the benefit and the amount of benefit that can be paid. There are no cashing restrictions on the first 3 points above.
Tip – Retirement means you have ceased a gainful employment arrangement after turning 60 or you are over 60 and ceased gainful employment in the past and do not intend to be gainfully employed in the future for 10 or more hours in a week.
Gainfully employed means “employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment for 10 or more hours in one week. It includes salary, business income and commission income. it does not include voluntary work at the local charity, babysitting your grandchildren or income from passive investments.
A person who has never been gainfully employed is unable to retire from gainful employment and therefore would have to wait until they turn 65 to access their super.
A person who is self-employed would have to wind up or sell their business to cease gainful employment.
To satisfy ceasing gainful employment in the past can be satisfied by ceasing to work at say McDonalds when you worked there in your teenage years. It does not have to be recent employment.
Withdrawal of my Super when I reach My Preservation Age (At Age 60)
Your preservation age is met when a member turns 60 years old after 1st July 2024. Prior to this there was a sliding scale.
What is the importance of reaching my preservation age?
A member is unable to access their super benefits until they meet their preservation age subject to meeting the criteria for early release of super.
Withdraw Money from your Super Fund as a Pension
When you have satisfied a condition of release you can commence an account-based pension (ABP) or a transition to retirement pension (TRIS) (refer to our resources page “Can My SMSF Pay Me a Pension”).
An ABP is a retirement phase pension and counts towards a member’s transfer balance cap (TBC). The member must have met a condition of release such as reaching the age of 65 or turning 60 and retired to start an ABP. The SMSF receives concessional tax treatment on the income derived from the assets supporting the pension and the member is not taxed on the pension payments received if they are over 60. Generally, a member would be over 60 when starting a pension.
An exception is a death benefit pension as the death benefit beneficiary could be under 60. Generally, a spouse or a child of the deceased member who is under 18 at the time of death can receive a death benefit pension. Death is a condition of release without any cashing restrictions and therefore it qualifies as a retirement phase pension. A beneficiary is subject to tax if the deceased member at the time of death and the beneficiary are both under 60. However, no tax applies if the deceased member was over 60 or the beneficiary is over 60.
A TRIS can be started when a member is aged between preservation age and turning 65 and has not retired. It is a not a retirement phase pension and thus there is no tax exemption at fund level. The pension withdrawals are not taxed personally as the member must be at least 60 to start a TRIS. There is no limit on the capital allowed to start a TRIS. It is not counted as part of the TBC but when a member turns 65 it automatically transfers to a retirement phase pension which is reportable for TBC purposes.
Transfer Balance Cap
The transfer balance cap is the total amount a member can have in retirement phase pension accounts across all of their superannuation balances from all of their superannuation funds in their lifetime. A retirement phase pension includes an ABP but can also include other pensions such as market linked pensions, lifetime pensions, life expectancy pensions and flexi pensions.
The general TBC (GTBC) is $1.9 million for the 2024/25 financial year which is indexed in line with the consumer price index. Each member has a personal transfer balance cap (PTBC) and a proportionate amount of the indexation may be available. The calculation is complex, so we suggest you contact your SMSF Specialist to assist you to review or calculate the balance of your PTBC.
Tip – A member’s PTBC and the GTBC will be the same if they are starting a retirement phase pension for the first time. If you use up 100% of your PTBC when starting a pension, you cannot access any of the future indexation.
The Australian Taxation Office (ATO) keep a running tally of new pensions started and any pensions which are partially or fully commuted. The unused cap balance includes debits and credits recorded against your PTBC.
You can view your PTBC and your transfer balance account in your myGov account.
ATO Example: highest balance equalled transfer balance cap before 1 July 2021
Maryanne started a pension in her self-managed super fund (SMSF) valued at $1.6 million on 1 December 2017. On 1 July 2018, she commuted $400,000.
The balance of her transfer balance account just before indexation commenced on 1 July 2021 was $1.2 million. Maryanne wasn’t entitled to indexation as her highest ever balance was equal to her personal transfer balance cap and her personal transfer balance cap remained at $1.6 million.
She will have cap space available to start a new retirement phase income stream to the value of $400,000.
What is the Pension Minimum Drawdown?
There is no minimum pension drawdown required when a pension is started in June.
The super legislation requires a member to withdraw at least the pension minimum payment from each pension account which is an ABP or a TRIS. The pension minimum is calculated by multiplying the pension account balance by a percentage factor based on the member’s age at the prior 30th June or at the start date if it is part way through the year.
The percentage factor is 5%. $600,000 x 5% = $30,000
Sandra’s minimum pension payment for 2025 year which must be paid at least annually is $30,000.
Withdraw the minimum pension amount
If the pension minimum amount is not paid to the SMSF member or there is a shortfall the pension fails the pension standards and the pension ceases, resulting in the fund losing its tax exemption and any withdrawals ore treated as lump sum withdrawals. The fund may not fail the pension standards if the amount is small, 1/12 of the minimum pension payment, and the shortfall was an honest mistake which is rectified as soon as practicable after the trustees became aware of it. This is a one-off lifetime discretion which can be self-assessed by the trustee. The SMSF trustee can request the Commissioner’s powers of general administration to exercise his discretion if the trustee does not meet the criteria for self-assessment i.e. when the pension shortfall exceeds the 1/12 shortfall.
Access Your Super as a Lump Sum Payment
Provided a member has met a condition of release they are able to access their super as a lump sum benefit. A member, taking out a lump sum payment from their accumulation account, is taxed as a superannuation lump sum payment. A partial or full commutation of a member’s pension account is taxed as a superannuation lump sum payment. The pension minimum must be met prior to a partial commutation or sufficient balance retained to payout the pension minimum before the 30th June. The pension minimum is apportioned when the pension balance is fully commuted, and the pension minimum must be paid prior to the full commutation of the pension.
A member over 60 does not pay any tax on the withdrawal of a lump sum. A death benefit payment made to a spouse as a lump sum is tax free. However, a death benefit paid to an adult child as a lump sum payment is taxable. The underlying tax-free component remains tax free in the hands of the adult child. However, the taxed component is taxed at a maximum of 15% (plus Medicare) or 30% (plus Medicare) if the underlying component is an untaxed element.
Is there any limit on withdrawing a lump sum payment?
Apart from the member’s super balance there is no restriction on the amount that can be withdrawn as a lump sum payment.
Accidental withdrawals
It is wise not to cover up an accidental withdrawal.
A member may have linked bank accounts and have accidentally withdrawn $20,000 from his SMSF instead of his company bank account. On discovering the error the member transferred $20,000 from his company account to the SMSF bank account. The trustee believes the law of restitution applies to the honest mistake. There is certainly an argument to support this position, and the return of the money should resolve the issue. Of course, the SMSF must be able to satisfy the auditor that it was an honest genuine mistake.
In other circumstances where the $20,000 is withdrawn to align the member’s contributions to be within the contributions cap it is unlikely to be characterised as an honest mistake. The withdrawal is most likely a lump sum payment made to the member. Unless the member has a condition of release and is able to withdraw super from his account balance or it is a pension payment the member has illegally accessed their super early.
Withdrawal of a lump sum as an In-Specie Transfer
A withdrawal by a SMSF member can be satisfied by an in-specie transfer of a fund asset to a member. A pension payment cannot be satisfied by an-specie transfer of an asset as the superannuation laws require a pension to be paid in cash. The in-specie asset transfer will be a superannuation lump sum payment made from the member’s accumulation account or alternatively can be a partial commutation of the member’s pension account. The partial commutation does not count as part of the pension minimum requirement. A partial commutation of a pension reduces the pension capital and has to be reported to the ATO via the transfer balance account reporting requirements.
Susie’s spouse Fred passed away. Susie’s is entitled to a death benefit payment of $400,000 from Fred’s accumulation account in his SMSF. The fund owned BHP shares which were valued at $350,000. Susie decides to take $50,000 in cash and the remainder of the death benefit payment is satisfied by the transfer of the BHP shares from the SMSF to Susie.
The lump sum paid to Susie is a tax-free death benefit. The BHP shares is a disposal of a fund asset and is a capital gains tax event and the fund is liable for tax on the capital gains.
Tip – the in-specie transfer of a fund asset to a member must be valued at market value and evidence must be obtained to support this. The title must be transferred to the member.
Can I Withdraw Super Early from My Superannuation Fund?
Yes. Early access to your super from your self-managed superannuation fund is allowable under limited circumstances based on:
- compassionate grounds
- severe financial hardship
- terminal medical condition
- temporary incapacity
- permanent incapacity
- temporary residents leaving Australia permanently
- super balance is less than $200
- first home super saver scheme
Please refer to our resource page or the ATO website for further information in relation to the above grounds to access super early.
What happens if I Access My Super Illegally?
A SMSF trustee who Illegally releases benefits to a member may be disqualified from acting as a trustee of a SMSF or a director of the trustee or other administration penalties may be imposed.
Even if the member returns the illegal super payment to the fund, they may also have to pay tax on the withdrawal personally and may also be subject to tax shortfall penalties and interest. For more information checkout our page explaining Illegal Early Access to your SMSF.
Key Takeaways
- a member must meet a condition of release to access super
- the most common conditions of release are turning 65 and being over 60 (under 65) and retired
- SMSF withdrawals can be made as lump sum or pension payments
- early access to super is available in limited circumstances
- a member may be taxed at their marginal tax rate on an illegal withdrawal of super