The ins and outs of lump sum payments

What SMSFs should know around retirement.

There can be many reasons why an SMSF needs to make a lump sum payment. It could be as a part of a re-contribution strategy, or it could be that a member it requires one large amount for such things as a new car or an big overseas holiday.

When a lump sum payment is required by a member there needs to be correspondence and resolutions to support the payment. In addition a member must have met a condition of release so that they can have non-preserved benefits in their account paid as a lump sum payment .

Lump sum payments can be made from a member's account that is in accumulation phase and also from a member's account that is in pension phase. If a member is in pension phase, unless they are receiving a transition to retirement pension, they should have already met a condition of release and this would not need to be addressed when requesting a lump sum.

Care needs to be taken with lump sum payments from a superannuation fund to a member who is under 60. Payments up to the lump sum threshold, which is increased annually each year in line with increases in AWOTE in $5,000 increments, are tax-free and any excess is taxed at 16.5%.

The steps that need to be taken and documentation required for each of these lump sum payments are as follows:

Lump Sum Payment In Accumulation Phase

  1. A letter from the member stating that they have met a condition of release and they wish to withdraw or a lump sum payment.
  2. Resolution needs to be passed by the trustees acknowledging receipt of the lump sum request and authorising the payment.
  3. A letter from the trustees to the member acknowledging receipt of the request and confirming the payment will be made.
  4. Payment made to the member's bank account.

Lump Sum Payment In Pension Phase

  1. A letter from the member stating that they require a lump sum payment as part of their pension.
  2. A letter from the trustees acknowledging receipt of the request and confirming the payment will be made.
  3. Payment made to the member's bank account.

Lump-sum superannuation payments can only be made if a member meets a condition of release, (See). The taxation of those payments differs depending on what type it is and the age of the person receiving it. Where applicable the Medicare levy is also payable.

Retirement benefits

Under 55
For those under 55 the maximum rate of tax on lump-sum taxable super benefits received is 21.5%.

Aged 55 to 59
The tax payable in the 55 to 59 age bracket is split into two components. The first is tax free up to the low-rate lump-sum limit, while the excess is taxed at a maximum of 16.5%. The tax-free threshold is a lifetime limit that increases in line with increases in AWOTE, in $5,000 increments. The limit for 2013-2014 year was $180,000, $185,000 for the 2014-2015, and for the 2015-2016  year it is $195,000.

As this tax-free limit applies to a person for life, it is calculated by adding up all lump-sum taxable super payouts a person receives. Once an individual exceeds the limit tax is payable in the year the payment is received.

This can mean if the lump sum is large enough tax can be paid the first time a person receives a lump sum, or if relatively small lump-sum amounts are taken over several years no tax can be payable to the low-rate lump sum limit increasing .

As the lump-sum threshold increase yearly, depending on increases in AWOTE, a person can pay tax on the first large lump-sum payout and, when the next payout is received some years later they don't pay tax on some or all of a later lump-sum payout. For example the threshold in 2007-2008 was $140,000 and is now $180,000.

Aged 60 and over
For those aged 60 and over lump-sum payouts are tax free and do not even have to be included on a person's tax return.

Permanent disability payouts

For people eligible to receive permanent disability payouts the amount received is exempt from tax and is therefore tax free.

Temporary disability payouts

Temporary disability payments are classed as replacement income and taxed at the member's applicable marginal tax rate.

Death benefits

Death benefits are tax free when received by dependants, but tax is payable at 15% plus the medicare levy when received by non-dependants.

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