When people talk about the tax benefits of an SMSF in retirement, they often blur two very different things: the tax on the money a member draws out, and the tax on the money the fund earns inside. These are separate layers, governed by separate rules, and understanding both is the key to seeing how a self-managed super fund is actually taxed after age 60. One layer sits with the member and depends heavily on age. The other sits with the fund and depends on whether Assets are supporting a retirement-phase pension. Keeping them distinct removes much of the confusion around “tax-free” super.

 

Two layers of tax, not one

Every SMSF paying a pension involves two taxing points. The first is the pension withdrawal paid to the member — money leaving the fund and landing in the member’s hands. The second is the fund-level earnings — the income and capital gains the fund generates on its investments while that money is still inside the fund.

These two layers are taxed under different rules and can produce different outcomes. A member can receive tax-free withdrawals while the fund still pays tax on some earnings, or the fund can be fully exempt on Earnings while a younger member’s withdrawals remain partly taxable. Age 60 is the pivot point for the first layer; the retirement phase is the pivot point for the second.

 

Layer one: how pension withdrawals are taxed

For a member aged 60 or over, pension payments from a taxed SMSF are tax-free. They are not included in assessable income, and there is no requirement to declare them in a tax return. This is the position most retirees are familiar with, and it applies regardless of how large the pension payment is, provided the fund is a taxed fund.

The picture is different for a member under 60. Where someone accesses a pension before turning 60 — for example under permanent incapacity, or having met another condition of release — the taxable component of the pension is included in assessable income and taxed at the member’s marginal tax rates, but the member is generally entitled to a 15 per cent tax offset. A tax-free component, reflecting contributions on which no deduction was claimed, is not taxed at any age. So the age-60 milestone does not change what the fund does; it changes how the member is taxed on what they receive.

 

Layer two: how fund earnings are taxed

The second layer is about the fund, not the member. In the accumulation phase, an SMSF pays 15 per cent tax on its Investment earnings. Capital gains on assets held for more than 12 months qualify for a one-third CGT discount, giving an effective 10 per cent rate on the discounted gain.

Once assets support a retirement-phase income stream, the earnings on those assets — both income and capital gains — become Exempt Current Pension Income and are taxed at 0 per cent. This is the exemption that makes retirement-phase super so tax-effective at the fund level. For funds holding fully franked shares, the retirement phase can be especially valuable: franking credits offset tax, and because the tax rate is zero, excess franking credits are generally refundable as cash.

 

Why the distinction matters after 60

A member over 60 who has moved their balance into the retirement phase enjoys both layers at their most favourable: tax-free withdrawals and 0 per cent earnings on the supporting assets. But the two layers do not always move together. If part of a member’s balance remains in accumulation — perhaps because it exceeds the transfer balance cap — then that portion’s earnings are still taxed at 15 per cent, even though any pension withdrawals the member takes from their pension account are tax-free.

The general transfer balance cap governs how much can be in the tax-free earnings phase. It was $2 million in 2025–26 and was indexed to $2.1 million from 1 July 2026. Amounts above a member’s personal cap generally stay in accumulation, taxed at 15 per cent on earnings.

 

A hypothetical illustration

For illustration only: Margaret, aged 64 and retired, has $2.4 million in her SMSF. She commences an account-based pension with $2.1 million — the full general cap available to someone starting a retirement-phase pension for the first time from 1 July 2026 — and leaves $300,000 in accumulation. The pension payments she withdraws are tax-free because she is over 60. The earnings on the $2.1 million supporting her pension are exempt (0 per cent), while the earnings on the $300,000 in accumulation are taxed at 15 per cent. This is a general example, not advice, and individual circumstances vary.

 

What SMSF trustees need to know

Trustees managing a fund after 60 need to track both layers. At the member level, they confirm ages and components so payments are treated correctly. At the fund level, they identify which assets support the retirement-phase pension, claim ECPI correctly, and ensure minimum pension payments are met — because a shortfall can cause the pension to be treated as not in retirement phase, restoring the 15 per cent tax on earnings for that year. Transfer balance account reporting keeps the ATO informed of amounts moving into and out of retirement phase.

 

Key Takeaway

An SMSF after 60 is taxed at two levels. Pension withdrawals to a member aged 60 or over from a taxed fund are tax-free, whereas under 60 the taxable component is taxed at marginal rates with a 15 per cent offset. At the fund level, earnings on retirement-phase assets are 0 per cent ECPI, while accumulation earnings are taxed at 15 per cent, with the transfer balance cap ($2.1 million from 1 July 2026) limiting how much can sit in the tax-free phase.