In a monthly column to assist trustees, specialist Meg Heffron explores major issues on managing your SMSF.
Many people spooked by the proposed new tax on super balances over $3 million are contemplating withdrawing large amounts in the next few years before the tax takes effect (2025/26).
My modelling suggests this is actually not a great idea for most people. But the fact remains that some will do it if they are able to (ie they’re over 65 or they’re still between 60 and 65 but have freed up their super by retiring).
Sometimes their SMSFs will sell assets and pay out cash. Other times it will just transfer the actual assets to the members. Either way, capital gains tax comes into play and the tax paid by the fund on these capital gains can be profoundly impacted by how and when the withdrawal happens.
An example
Consider Tarik who is the only member of an SMSF. Throughout 2024/25 his super fund balance is around $7 million ($2 million in pension phase, $5 million in accumulation phase). In June 2025, enough assets are sold to pay out a $4 million benefit to Tarik. In the process, the Fund realises a very large capital gain – to keep the numbers simple, imagine that capital gain is $1 million.
Because Tarik’s SMSF is paying a pension, some of its investment income during 2024/25, including this capital gain, is exempt from tax. His accountant will get a certificate from an actuary to specify the percentage of all the fund’s income in 2024/25 that is exempt from tax. (This percentage is often called the actuarial percentage).
In the normal course of events the actuarial percentage for Tarik’s fund would be around 29% for 2024/25. This is worked out using averages – on average, what proportion of the fund relates to his pension account? In this case, it’s $2 million out of a total balance of $7 million. That’s around 29%. That means only 71% of the capital gain gets taxed.
So when the fund’s accountant works out how much tax should be paid on the $1 million capital gain, the sums look like this:
$1 million capital gain x 2/3 (super funds only pay tax on 2/3rds of the capital gain as long as they’ve held the asset for more than 12 months) x 71% x 15% (the tax rate for a super fund) = $71,000
(As an aside, this is actually one of the reasons it’s often a bad idea to respond to the new tax by taking money out of super. It forces the Fund to realise, and pay tax on, capital gains 'now' rather than in the future. It’s often far better to just leave the assets in super and cop the new tax. But I digress.)
An alternative method
Let’s assume Tarik is committed to taking this money out of super. Would there be a better way of doing it?
Actually there is.
Tarik could wait until July 2025, then sell / transfer the asset(s) very early in the new financial year (2025/26). That would mean the capital gain is taxed in 2025/26 rather than 2024/25.
The reason this is a good thing is that as long as the $4 million Tarik wants to take out of super is withdrawn very early in the year (say July 2025), the actuarial percentage for Tarik’s fund will be much higher in the new financial year.
Again, it’s because actuarial certificates work on averages. The actuary for Tarik’s fund will see that for most of the year, his fund only had $3 million (of which $2 million, or around 67%, was a pension account). That means 67% of all the investment income during 2025/26 will be exempt from tax.
It doesn’t matter that the fund earned a lot of its income right at the start of the year when the proportion of the fund that related to Tarik’s pension was much lower. When it comes to the fund’s tax return, all that matters is the average percentage over the whole year. This will be close to 67% (meaning only 33% of the capital gain gets taxed).
Tarik’s SMSF would therefore pay much less tax on the capital gain:
$1 million x 2/3 x 33% x 15% = $33,000
(a $38,000 saving)
The key is that the money needs to be taken out of the fund quickly once the new year starts – the longer Tarik’s $4 million stays in the fund, the longer the fund will have a very high “accumulation” balance. That will drag down the actuarial percentage and increase the tax bill.
In fact, this isn’t even an 'all or nothing' thing. Let’s imagine Tarik’s fund has some cash available already. While the SMSF needs to sell some assets to pay out the full $4 million, some of it could be paid out earlier. There’s nothing to stop Tarik withdrawing “as much as possible” in late 2024/25 and only delaying the final payment (which requires asset sales) until the new year.
But won’t waiting until July 2025 expose Tarik to the new tax he’s so desperate to avoid?
Not if it’s introduced as currently announced by Treasury. The formula used to work out how much tax Tarik pays depends on what proportion of his balance is over $3 million at 30 June 2026 (not 30 June 2025). If his balance is only $3 million or less at that critical date, there’s no tax to pay. Even if it’s over $3 million but not by much, the amount of tax would be small.
Certainly it’s well worth doing these sums before taking money out of the fund.
Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.
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