Proportioning Rule – restricting the way you withdraw your super

As part of the raft of changes effective from 1.7.07 the trustee is required to classify the components into tax free and taxable amounts for each <Separate Superannuation Interest>. Furthermore in withdrawing the benefit from a superannuation fund the benefit will be comprised of a tax free and taxable amount as determined by the Proportioning Rule S307-125.

• Calculation of tax free and taxable amounts
• Example
• Strategy Tip
• Transitional Proportioning Rule
• ATO Link

Calculation of tax free and taxable amounts

To calculate the tax free and taxable amounts the following steps are followed:

• Time to calculate the tax free and taxable components:
  1. LUMP SUM benefit – Immediately before it is to be paid; and
  2. Pension benefit – at the time the pension commences
• Calculate all of the <Tax Free>  amounts
• Calculate all of the <Taxable Amount> by the following formulae: 
  Formulae: Total Value of Interest  – Tax free Amount = Taxable Amount

  Remember that you cannot total the taxable amounts, the taxable amount is found by the formulae.

• Determine the percentage of the tax free and taxable component of the members account as provided by the following formulae:
• Tax free component of super interest / Total Value of superannuation interest
• Withdrawals of the members benefit shall apply the taxable and tax free percentage to payments and advise the member through PAYG obligations and PAYG summaries in order that the correct amount of tax (if any) is deducted on behalf of the member.

Example

Sally is 57 years old, and has $400,000 in her SMSF, of which $300,000 is taxable (75% of the fund amount) and $100,000 is tax-free (25% of the fund amount). Sally meets a condition of release, and withdraws $50,000 from her SMSF. Applying the proportioning rule, 75% of the benefit will be taxable ($37,500), and 25% will be tax-free ($12,500).
The proportioning rule ensures that all SMSF members receive consistent and equal treatment when accessing benefits.

Strategy Tip

Whilst “Cheery Picking” these components when withdrawing either as a Lump Sum or a Pension/TRIS is NOT allowed , Cherry Picking is allowed when commencing a TRIS/Pension. To understand the importance of cherry picking it is equally important to understand <Separate Superannuation Interests>.  This is because the rule applies to separate superannuation interests individually.

This is important if the separate superannuation interests have different components as the trustee can pay from an pension interest and refrain from paying from a accumulation interest, or can pay more from one pension interest and the minimum from another pension interest. There is no limit on the number of pensions or superannuation interests a member may have in a SMSF.

Accordingly the calculation of the tax free and taxable components as described above at points 1 to 4 above, needs to be done for each separate superannuation interest.

To understand this more in regards to how this can benefit a member, see a couple of strategies below:

• Retaining UNPB’s in the Accumulation Interest Strategy <click here>.
• Streaming tax free amounts using the re-contribution Strategy <click here>

Transitional Proportioning Rule

Where a pension commenced prior to 1.7.07 (“AP”), there is a transitional proportioning rule that needs to be taken not account until the person reaches 60.

Note that these AP did not include the pre July 83 component as a tax free component, accordingly this represents a planning opportunity to commute a portion of the pension early before 60 and in doing so it will determine the pre July 83 component thus increasing the tax free portion of the members account, click here to read more.

The proportioning rule
ensures that all SMSF members receive consistent and equal treatment when
accessing benefits.

ATO Link

Here’s what the ATO has to say about the Proportioning Rule <ATO-Link>.