If your money in super is withdrawn in the form of a lump sum payment prior to age 60, tax may be payable on the benefits.
There are two components within super: the tax free component and the taxable component. The tax payable on any lump sum withdrawal will depend on the proportion of each component within your super fund and your age.
Super lump sum payments must be taken proportionately from the taxable component and tax-free component of your super balance. So if 10% of your super benefit is the tax free component, then any lump sum withdrawal from your fund will have 10% as tax free component and the remaining 90% will be taxable component, whether you withdraw $100 or $100,000. This is known as the ‘proportional rule’.
You will pay no tax on your tax-free component, however tax will apply to your taxable component based on your age and the amount being withdrawn. The tax free component is made up of your total non-concessional contributions paid into your account prior to retirement. The taxable component is the balance of your account balance consisting of concessional contributions and earnings generated over the years.
The table opposite shows how the taxable component is treated for lump sum withdrawals from a taxed superannuation fund. As shown in the table, once a member turns 60 years of age, both the tax-free and the taxable component are tax free. Where a member is aged between preservation age and under 60, the taxable component is taxable, but a member will be eligible for a low rate cap of $225,000 for 2021/22 year. This means that the first $225,000 will be exempt from tax. The low rate cap of $225,000 is reduced by any amount previously applied to the low rate threshold.