9 minute read
Getting at the money
Many legislative and regulatory restrictions apply when SMSF members want to draw down their retirement savings. Tim Miller looks at the different avenues of access and the rules relevant to them.
The payment of benefits from an SMSF represents one of the most important and closely regulated aspects of superannuation law. Trustees are entrusted with ensuring member entitlements are only released in accordance with legislated conditions of release and the form, timing and taxation treatment of those benefits comply with the Superannuation Industry (Supervision) (SIS) Act 1993, the associated regulations and relevant tax law. For members, receiving benefits is often the culmination of decades of contributions and investment growth. For trustees, it is the moment where regulatory discipline is most visible as breaches of benefit payment standards can result in severe penalties, disqualification and adverse tax outcomes. This article explores the framework for paying benefits from an SMSF, combining legislative rules, taxation implications and practical trustee considerations.
Preservation and conditions of release
All contributions and investment earnings in superannuation are preserved until a condition of release is satisfied. This reflects the sole purpose test that dictates superannuation is designed to provide retirement income, not serve as an early-access savings vehicle.
Preservation age
A member’s preservation age depends on their date of birth, phasing from 55 for those born before 1 July 1960 to 60 for those born after 30 June 1964. Attaining preservation age alone does not provide full access to superannuation, it merely allows limited access through a transition-to-retirement income stream (TRIS) until a further condition is met.
Key conditions of release
The most common conditions of release include:
Retirement – with definitions depending on whether the member ceased being gainfully employed before or after they turned 60. If prior to 60, the trustee must be satisfied the member intends never to be gainfully employed again for more than 10 hours a week. If over 60, ceasing a gainful employment arrangement is sufficient, without reference to future intent.
Turning 65 – provides automatic access to benefits regardless of work status.
Permanent incapacity – where trustees are reasonably satisfied the member is unlikely to engage in gainful employment for which they are qualified due to ill health.
Terminal medical condition – certified by two medical practitioners (one a specialist) where ill health is likely to result in death within 24 months.
Death – where benefits must be paid as soon as practicable to dependants or the legal personal representative.
Example — retirement after 60
Mary turned 60 in June 2025. If she ceases her
Continued on next page
Continued from previous page employment with her current employer after her birthday, she can access her benefits under the post-60 retirement definition without needing to declare her future intentions.
Other, less common conditions include compassionate grounds, for example, medical treatment, funeral costs, preventing foreclosure, severe financial hardship and ATO-issued release authorities, such as those relating to excess contributions or Division 293 tax.
Benefit types
Once a member satisfies a condition of release, the trustee must determine the form of benefit payment.
Lump sum payments
A lump sum is a single withdrawal of capital. Multiple lump sums can be made, though if they are structured as periodic payments, they may be deemed an income stream. Lump sums may be paid in cash or in specie, a transfer to the member of fund assets such as shares or property. In-specie payments require accurate valuation and documentation to ensure compliance with both super and tax law and the non-arm’s-length income rules. Lump sums from accumulation are proportioned between tax-free and taxable components immediately before they are paid.
Example
Claire retires and wishes to withdraw $50,000. Rather than selling shares, her SMSF transfers 2000 shares in ABC Ltd at $25 each directly into her personal name. This constitutes an inspecie lump sum payment and $25 represents the value on the day beneficial ownership changes hand, that is, the day the off-market transfer form is fully executed.
Income streams
An income stream, or pension, is a series of periodic payments from a separate member interest. The only pensions currently permitted to be commenced from an SMSF are account- based pensions, including TRIS. When commencing an income stream, trustees must apply the proportioning rule where the taxable and tax-free components of the pension are set at the start and remain fixed. Pension payments and commutations must follow these proportions.
Taxation of benefits
The taxation of benefits depends on the member’s age, the type of benefit, lump sum or pension, and, in death benefit cases, the status of the recipient.
Lump sums – members
Age 60 and over – tax-free.
Under preservation age – taxable component taxed at 20 per cent plus Medicare.
Income streams – members
Age 60 and over – tax-free.
Under 60 – taxable component included in assessable income, however, a 15 per cent tax offset applies if the income stream is a disability superannuation benefit.
Disability superannuation benefit
If a member ceases work due to permanent incapacity and meets strict certification requirements, the tax-free component of their benefit is modified via a statutory formula, often creating significant tax savings.
Understanding the modified tax-free component
When a member is forced to cease work due to permanent incapacity, the Income Tax Assessment Act 1997 (ITAA) allows for a modification of the tax-free component of a superannuation lump sum disability benefit.
Legislative basis
Section 307-145 of the ITAA sets out the formula for calculating the tax-free component of a disability lump sum benefit. The uplift only applies if:
two legally qualified medical practitioners certify that, because of ill health, it is unlikely the member can ever again engage in gainful employment for which they are reasonably qualified by education, training or experience.
The calculation formula
The modified tax-free component = Tax-free component (under normal proportioning) + (Amount of benefit × Days to retirement ÷ (Service days + Days to retirement))
Where:
Amount of benefit = total lump sum paid.
Days to retirement = number of days from the incapacity date until the member’s ‘last retirement day’ (usually age 65).
Service days = number of days in the service period of the benefit (from the start of eligible service to incapacity date).
The result cannot exceed the amount of the benefit.
Example - permanent incapacity
Kate, age 47, suffers a serious injury and can no longer work. Two medical practitioners certify permanent incapacity. Her benefit of $160,000 is recalculated under the disability superannuation benefit formula.
Kate’s circumstances:
Date of birth: 1 July 1975.
Commenced employment: 1 July 2000.
Injured: 3 September 2022, permanently ceases work.
Receives a disability lump sum on 1 March 2023 of $160,000.
Super balance before payment: $400,000, comprised of $100,000 tax-free and $300,000 taxable components.
Step 1 – Proportioning rule
Tax-free % of super interest = $100,000 ÷ $400,000 = 25%.
Tax-free portion of lump sum (under normal rules) = 25% × $160,000 = $40,000.
Step 2 – Modified tax-free uplift
Days to retirement = 6512 (from 3 September 2022 to 1 July 2040).
Service days = 8099 (from 1 July 2000 to 3 September 2022).
Total = 14,611 days.
• Additional tax-free component = $160,000 × (6512 ÷ 14,611) = $71,311.
Step 3 – Total components
Tax-free = $40,000 + $71,311 = $111,311.
Taxable = $160,000 − $111,311 = $48,689.
Step 4 – Tax impact
Normal rules: taxable = $120,000 > tax @ 20% = $24,000.
With uplift: taxable = $48,689 > tax @ 20% = $9737.
Tax saving = $14,263 (plus Medicare levy).
Why this matters
For members, this uplift can mean significant tax savings at a vulnerable time in life. For trustees, obtaining proper medical certification and documenting calculations is critical.
Without it the member loses access to the concession.
From an administrative perspective, trustees should:
retain copies of medical certificates,
record calculations in trustee minutes,
apply the formula consistently, and
ensure correct reporting to the ATO.
Practical considerations
Insurance proceeds: Disability lump sums are often funded via total and permanent disablement insurance held in the SMSF. The modified tax-free uplift applies to the entire lump sum, including insured amounts.
Timing: The ‘service period’ is often aligned with the member’s employment start date. Where uncertain, careful review of trust deed provisions and contribution history is needed.
Audit: Auditors routinely check whether disability superannuation benefits have been properly classified and certified.
Payment of death benefits
The treatment of a death benefit is as follows:
paid to a tax dependant, such as to a spouse or child under 18 – tax-free, and
paid to a non-dependant – taxable component taxed up to 15 per cent (taxed element) or 30 per cent (untaxed element), plus Medicare.
Early access and risks
Early access to superannuation is highly restricted. SMSF trustees who release benefits before a condition of release risk:
administrative penalties – up to $6600 per trustee, at 2025,
disqualification – as an SMSF trustee, and
tax consequences – payments may be included in the member’s assessable income under section 304-10 of the ITAA, overriding normal super tax treatment.
The ATO has discretion not to apply these harsh outcomes if the breach was beyond the member’s control, for example, if caused by a banking error, but deliberate or negligent early releases are rarely excused.
Trustee obligations and documentation
Trustees must ensure:
Trust deed compliance – benefit payments must be permitted by the governing rules.
Evidence of condition of release – for example, retirement declarations, medical certificates.
Accurate calculation of tax components – applying the proportioning rule.
Reporting – transfer balance account reporting where pensions commence or are commuted, pay-as-you-go summaries where required and inclusion in annual returns.
Timing – death benefits must be paid ‘as soon as practicable’ after death; pensions must meet minimum annual drawdown requirements.
Compassionate grounds and financial hardship
Although not as common in SMSFs, trustees may be asked to release benefits under compassionate or hardship grounds, the definitions being:
Compassionate grounds – include and funeral expenses, and are approved by the ATO.
Severe financial hardship – allows limited lump sums if the member has received commonwealth income support for at least 26 continuous weeks and cannot meet immediate expenses.
Trustees must be cautious as approving payments without the correct authorisations exposes them to significant penalties.
Regulatory outlook
The regulation of superannuation benefit payments continues to evolve. The ATO has increased its scrutiny of SMSF benefit payments with a particular focus on illegal early access schemes and compliance with minimum pension standards. Draft rulings such as Draft Taxation Determination 2021/D6 and practice statements like Practice Statement Law Administration 2021/D3, while both still on hold, reinforce the tax commissioner’s discretion under ITAA section 304-10 and highlight the expectation for SMSF trustees to understand and apply the law correctly.
Conclusion
Paying benefits from an SMSF is the ultimate test of trusteeship. While it represents a reward for members’ years of saving and investing, it also poses compliance risks. Understanding preservation rules, conditions of release, the distinction between lump sums and income streams, and the complex taxation landscape is essential.
For trustees, meticulous documentation, adherence to trust deeds and vigilance against early access breaches are non-negotiable. For advisers, guiding clients through the retirement, incapacity or death benefit process requires not only technical expertise but also sensitivity to the financial and emotional significance of these events.
Ultimately, the key message is simple, get it right the first time. The costs of getting it wrong – financial, regulatory and reputational – are too great for SMSFs to ignore.
