Taxation implication of commencing an income stream
On commencement of an income stream, the capital that will be used to support that income stream is determined and used to commence the income stream. There is no change to the assets of the SMSF - the assets (investments) of the SMSF remains. There is no need to dispose of any assets or move assets to another account.
Taxation implication of commencing a retirement phase income stream
When a SMSF is paying a retirement phase income stream, it may be entitled to an exemption from income tax on income and capital gains earned by the SMSF. For a SMSF that is wholly in retirement phase (no accumulation balance), all earnings and capital gains earned by the SMSF are exempt from income tax.
Where the SMSF's assets are not wholly supporting retirement phase income stream (also have accumulation phase balance), the SMSF may be entitled to exempt a portion of the income and capital gains earned by the SMSF from income tax. The portion is reflective of the proportion of the SMSF's assets that are supporting retirement phase income stream. This proportion is determined by an actuary when the SMSF's assets are unsegregated. Superannuation Accounting Services will obtain an Actuarial Certificate to support the exempt current pension income.
There is a limit on the amount you can transfer into retirement phase to support an income stream over the course of your lifetime. This limit is known as the transfer balance cap.
The transfer balance cap is currently set at $1.6 million.
Summary of taxation of retirement phase income stream:
| Age of member when income stream is paid | Taxation on member (taxable income in personal tax return) | Taxation of earnings in SMSF on retirement phase assets |
| Under age 60 | Taxable component - marginal rate less 15%, plus Medicare levy. No tax on tax-free component. |
Earnings (including capital gains) are exempt. |
| Age 60 and above | All amount excluded from taxation. | Earnings (including capital gains) are exempt. |
Taxation implication of a transition to retirement income stream (TRIS)
TRIS is not exempt from income tax on its earnings and capital gains. A TRIS is taxed the same as accumulation assets.
The income stream payments from the SMSF paid to the member may be taxable, depending on the age of the member. Payments made to a member under the age of 60 is taxable. The member is required to report the taxable component of the payment in their personal income tax, and will be taxed at their marginal rate of tax less 15% rebate, plus Medicare levy. Payments made to a member age 60 and over is not taxable, and excluded from their personal income tax.
The taxable and tax-free components of the payment will be proportionate to the TRIS account balance. The member is prevented from choosing which tax components they wish the income stream payment to be constituted.
Summary of taxation of TRIS:
| Age of member when income stream is paid | Taxation on member (taxable income in personal tax return) | Taxation of earnings in SMSF on TRIS capital |
| Under age 60 | Taxable component - marginal rate less 15%, plus Medicare levy. No tax on tax-free component. |
Earnings taxed at normal superannuation rates of taxation. |
| Age 60 and above | All amount excluded from taxation. | Earnings taxed at normal superannuation rates of taxation. |
