Asking about the tax applied when taking a partial PSS lump sum when retiring over aged 60.
- The ATO says “Under the proportioning rule, the tax-free and taxable components of the member's super benefit are taken to be paid in the same proportion as the tax-free and taxable components of the member's interest in the super fund.”
However
- The CSC (both in benefit application form and in I-estimator) has the lump sum component as being first sourced from the tax free and taxable taxed sources meaning after 60 most partial lump sums will be tax free. This however changes the residual pension towards being proportionally from the untaxed source component and therefore increases the tax on the ongoing pension payments.
Apparently a PSS member at retirement over 60 can ask CSC to pay the lump sum from the tax free and taxable taxed components. But its really unclear why this is possible given the ‘proportioning rule’ so would be grateful for pointers on how this is permitted.
Whatever CSC may do, any recent knowledge/experience on the ATO approach to taxing the lump sum?
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ATO Certified Response
Author: NikkiATO(Community Moderator)Community Moderator ATO Certified Response23 Feb 2026
Hi @CotterKotter,
The proportioning rule applies to PSS benefits, but for defined benefit schemes like the PSS, the super interest used to calculate a lump sum is worked out separately from the interest that supports the remaining pension. This means the lump sum doesn’t always use the same tax‑free and taxable proportions as your total PSS entitlement.
PSS members can’t choose components, but when you take a partial lump sum at retirement, CSC must calculate the tax‑free, taxed and untaxed elements for that specific lump‑sum benefit, which can legitimately result in the lump sum being made up mostly of tax‑free and taxed‑element amounts. The proportional mix of the remaining pension then changes accordingly.
If you are over 60, the tax‑free and taxed‑element parts of a lump sum are tax‑free. The untaxed element of a lump sum is taxed at up to 15% (subject to the untaxed‑plan cap).
Your lump sum is taxed according to the components calculated by CSC using these defined‑benefit rules.
