The proportioning rule was introduced on 1 July 2007, and ensures that a benefit to a member is comprised of a taxable and tax-free component, which is in proportion to the taxable and tax-free components of a super interest.

To apply the proportioning rule, the following steps need to be followed:

• Work out the taxable and tax-free proportions of the current super interest in the fund
• Apply these proportions to the benefit that is being paid.

How is the tax-free component of a super interest calculated?

The tax-free component is the portion of a super benefit that is tax-free. Ordinarily this includes non-concessional contributions and certain pre-July 2007 benefits.

How is the taxable component of a super interest calculated?

The taxable component is the taxable portion of a super benefit. An individual pays tax on this component if she receives a benefit under the age of 60 or receives an untaxed benefit.

Applying the proportioning rule when paying a benefit

When a super benefit is paid out the benefit will include both the tax free and taxable components in the relevant proportion. The proportioning rules apply to lump sum payments, rollovers and pensions

Drawdown of super benefits as a lump sum

The apportionment for lump sum drawdowns will be based on the proportions of the total benefit at the time of payment.

Investment earnings will be added to the taxable component.

Example

On 1 September 2012, Ben wants to withdraw $100,000 as a lump sum from his super fund. Prior to the withdrawal, his super account comprised 70% of a taxable component and 30% tax-free component.

Ben’s partial withdrawal would consist of $70,000 taxable component ($100,000 x 70%) and $30,000 tax-free component ($100,000 x 30%).

Drawdown of super benefits as a pension

A pension which first pays income on or after 1 July 2007 will consist of taxable and tax free components in the same proportion that those components made up of the total benefit immediately prior to the commencement of the pension. Likewise the tax free proportion of each income payment will reflect the proportion that the tax free component was of the total purchase price.

Investment earnings generated by assets supporting a pension will be attributed to both the tax free and taxable component based upon the proportion of the total benefit which each component comprised as at the date the pension became payable.

Example

John, aged 56, has a super interest with a value of $400,000. The interest includes a tax free component of $100,000 and a taxable component of $300,000. John uses all his super interest to purchase a pension on 1 August 2012.

The tax free percentage of John’s super interest when the pension commenced would be:

Tax free component = $100,000 = 25%

Value of interest           $400,000

The taxable percentage of John’s super interest would therefore be 75%.

If John receives a pension payment of $2,000 on 1 September 2012 the tax free component of this would be $2,000 x 25% = $500

The taxable component would therefore be $1,500 ($2,000 – $500).

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

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.