Expert SMSF insights

15 Apr, 2020

Accessing your super in turbulent times

By Mark Ellem

mark_ellem
Bushfires, floods and now a global pandemic all have the potential to seriously affect our health and financial wellbeing. One important aspect of all of these events is the financial cost to those affected, whether it’s the financial cost of recovery from fire and/or flood, or the loss of income due shutdown and self isolation.

Topical at the moment, is whether a person has access to their superannuation where they are under financial stress or suffering from illness and, with this in mind, we will look at the options for accessing your superannuation. There are specific rules for accessing your super and members/trustees of SMSFs must ensure that they follow the rules, otherwise penalties could apply.

In addition to outlining the existing rules that apply to allow access to superannuation, including early access, we will also look at the temporary early access rule, announced by the Federal Government on Sunday, 22 March 2020, for those affected by the Coronavirus. If further measures are announced, we will keep you informed.

Temporary early access rule for those  affected by the Coronavirus pandemic  (announced on 22 March 2020)

The Government is allowing individuals affected by the Coronavirus to access up to $10,000 of their superannuation in the 2019/20 financial year and a further $10,000 in the 2020/21 financial year. Importantly, individuals will not need to pay tax on amounts released and the money they withdraw will not affect Centrelink or Veterans’ Affairs payments. This early access measure does not replace the current early access rules for financial hardship and compassionate grounds, but is additional to the existing rules.

Affected individuals will be required to apply online via their myGov account to access up to $10,000 of their superannuation before 1 July 2020. They will also be able to access a further $10,000 from 1 July 2020 up until 24 September 2020. Applications can be made from Monday 20 April 2020.

An individual is not required to apply for the maximum $10,000, however, if they apply for a lower amount, they cannot make a second application in the same financial year for any balance up to $10,000. Consequently, when making an application for early release under this new measure careful consideration should be given to the early release application amount.

To be eligible for this early access measure an individual must satisfy any one or more of the following requirements:

  • You are unemployed; or
  • You are eligible to receive a job seeker payment, youth allowance for jobseekers, parenting payment (which includes the single and partnered payments), special benefit or farm household allowance; or
  • On or after 1 January 2020:
    • You were made redundant; or
    • Your working hours were reduced by 20 per cent or more; or
    • If you are a sole trader – your business was suspended or there was a reduction in your turnover of 20 per cent or more.

When applying to access your superannuation under this new condition of release you will be required to certify that you meet the above eligibility criteria. For SMSF members, assuming you are eligible, the ATO will issue you with a determination advising of your eligibility to release an amount. This determination then acts as the authority for the trustee(s) of your SMSF to make the payment.

As an SMSF trustee, you are responsible for your own and your members’ retirement savings. It’s important to ensure you are eligible for early release of super before you release any funds from your SMSF.

For access to the Government’s fact sheet on this new early access measure, click here.

For access to the SuperConcepts’ eBook “Allowing early access to superannuation”, click here.

The following is an outline of the existing rules that allow a person to access their superannuation.

Financial hardship provisions

Where a person is unable to meet reasonable and immediate family living expenses they can apply to their superannuation fund for a release of benefits under the financial hardship provisions.

These provisions require that the applicant either:

  • has received eligible government income support payments continuously for 26 weeks; or
  • in the case where the applicant has already reached their relevant ‘preservation age’ (click here to determine preservation age), plus 39 weeks, has received eligible government income support payments for a cumulative period of at least 39 weeks since attaining preservation age.

The Department of Human Services can provide a letter confirming the payment of income support and the duration to the individual, that must be provided to their superannuation fund within 21 days.

There are cashing restrictions under this provision, with the minimum release amount being $1,000 and the maximum $10,000. Further, there can only be one benefit payment under this provision in any 12-month period. However, where the individual has reached their ‘preservation age’, plus 39 weeks and they were not gainfully employed on a full-time or part-time basis at the time of application, there is no cashing restriction.

It will be the trustee of the superannuation fund that will make the decision in relation to a benefit payment under the financial hardship provision. For an SMSF, whilst generally the trustee and member (applicant) are the same person or related, they would still need to ensure that they obtained:

  1. A confirmation letter of income support from the Department of Human Services; and
  2. Evidence of the reasonable and immediate family living expenses for which the benefit would be used to meet. Copies of invoices/bills, including any late or demand notice is an example of such evidence.

Finally, from a personal tax perspective, a superannuation benefit paid under the financial hardship provisions is a lump sum benefit payment and taxed accordingly. The superannuation fund, including an SMSF, would be required to withhold the relevant amount of tax and remit to the ATO, with the net amount being paid to the member. The amount of tax should be taken into consideration when determining the amount needed to meet the immediate family living expenses.

For an individual under their preservation age, the taxable component of the benefit payment will be subject to tax at either their personal marginal tax rate or 20%, whichever is the lower, plus any applicable levies, for example, a 2% Medicare levy.

For an individual who has reached their preservation age, but not yet 60, the taxable component will be tax free up to the low rate cap, $210,000 for 2019/20. No tax is applicable to the taxable component for an individual who is at least age 60 (note there are special tax rules that apply to individuals who receive lump sum benefit payments from ‘untaxed superannuation schemes’).

The main difference between this existing early access measure and the new measure announced by the Government on 22 March 2020, is that:

  • Eligibility criteria is different – the new measure has a wider application;
  • Superannuation payments under the new measure are not taxable, whereas under the existing financial hardship access rule, they are taxable.

Compassionate grounds

An individual’s super can be released prior to retirement on compassionate grounds to pay for certain unpaid expenses. Compassionate grounds includes covering:

  • medical treatment and medical transport for you or a dependant;
  • palliative care for you or a dependant;
  • making a payment on a loan or council rates so you don't lose your home;
  • modifying your home or vehicle, or buying disability aids for you or a dependant because of a severe disability;
  • expenses associated with a death, funeral or burial for a dependant.

The amount of an individual’s super that can be paid on compassionate grounds is limited to what the individual reasonably needs. Further, like a payment under financial hardship, the benefit is a lump sum benefit payment and taxed as described above as outlined for financial hardship.

An application for early release of super under compassionate grounds must be made to the ATO (unless the applicant is a member of an exempt public sector super scheme – apply direct to the fund).

Other points to note about release on compassionate grounds:

    • In seeking release of monies in relation to the specific expense, the expense must be unpaid. The ATO cannot authorise the release of monies in relation to an expense that has already been paid, despite the fact that the individual may have used loan monies or a credit card or a loan from family to make the payment;
    • If applying for an early release of super to meet mortgage payments:
      • The individual applicant must be responsible for the mortgage payments and their name must be on the mortgage documents;
      • The property is the principal place of residence of the individual applicant;
      • The lender is threatening to repossess or sell the individual applicants home. Even though the loan may be in arrears, unless the lender has not advised or threatened foreclosure, the eligibility requirements have not been met;
    • The maximum amount you can request for a mortgage release within a 12-month period is the sum of:
      • three months repayments, plus
      • 12 months interest on the outstanding balance of the loan.

    For further information about eligibility criteria and to make an application to the ATO click here.

    Again, the main difference between this existing early access measure and the new measure announced by the Government on 22 March 2020, is that:

    • Eligibility criteria is different – the new measure has a wider application;
    • Superannuation payments under the new measure are not taxable, whereas under this existing compassionate grounds access rule, they are taxable.

    Transition to retirement income stream (TRIS)

    For a member of an SMSF who has reached their ‘preservation age’ (click here to determine preservation age) they can commence a TRIS, that is, an income stream. Points to note about a TRIS:

    • It is not subject to the transfer balance cap (unless the member meets a full condition of release, which includes turning 65);
    • In addition to the minimum pension payment of 4%, the maximum that can be drawn in a financial year is 10% of the TRIS capital;
    • The share of fund net earnings that is allocated to the TRIS is subject to 15% fund income tax, the same as for an accumulation account;
    • The taxable portion of TRIS payment paid to an individual under age 60 will be taxed at their marginal tax rate, less a 15% tax offset. There will be a requirement for the SMSF to register as a PAYG Withholding and to withhold the required amount, remit and report to the ATO.

    So, for a member of an SMSF, aged 59, not yet retired with benefits of $400,000, the maximum they could draw, for a financial year, would be $40,000 (note the net amount would be less, due to tax).

    Do you have ‘unrestricted non-preserved benefits’?

    Plain English translation – “you can get at it”. Unrestricted non-preserved benefits are the benefits that can be withdrawn immediately from the fund. Check your annual member statement, which will state the amount of unrestricted non-preserved benefits. There may be tax consequences for withdrawals of benefits for SMSF members aged under 60.

    Age 65+?

    Once an individual attains age 65 their benefits held in most superannuation funds automatically become ‘unrestricted non-preserved’. Just make sure you check with your superannuation fund that this is the case as some non SMSFs, or SMSFs with very old deeds, may have restrictions on withdrawing super, even past age 65, but this is rare.

    Termination of employment from age 60

    Have you ceased an arrangement of gainful employment since age 60? That is, have you ceased one job to commence another since age 60, or simply stopped working in a job since age 60? This would include those who have unfortunately lost their job due to the COVID-19 pandemic. If so, your benefits may actually be ‘unrestricted non-preserved’ and can be withdrawn from your superannuation fund, but your superannuation fund or your SMSF accountant needs to be advised of this to correct the classification of your benefits. Generally, superannuation benefits paid to a member who is at least age 60 are tax free.

    Retirement

    If an individual has reached their preservation age and ceases work, with the intention of never being employed for at least 10 hours a week in the future, then they have ‘retired’. This changes their superannuation benefits to ‘unrestricted non-preserved’ and are therefore accessible.

    Temporary incapacity

    A superannuation fund can pay a temporary incapacity benefit in the form of a non-commutable income stream for the purpose of continuing, in whole or in part, the level of income the member was receiving just before the temporary incapacity. The period the non-commutable income stream can be paid cannot exceed the actual period of incapacity. This type of benefit is generally funded from an insurance policy as it cannot be paid from a member’s ‘minimum benefits’. Such benefits include member contributions and employer mandated contributions, e.g. SG contributions.

    Temporary incapacity, under the access rules, means a member who has ceased to be gainfully employed due to ill-health, whether physical or mental, but who is not permanently incapacitated. The inability to work must be due to ill-health and cannot simply be due to being required to self-isolate, particularly in you are able to continue working from home. Whilst temporary incapacity can be determined by the SMSF trustee(s), given that in most cases the affected member, will also be a trustee, it would be best practice to obtain the relevant medical certificate.

    Fact Sheet: Accessing benefits – conditions of release

    You can access our fact sheet on the topic of accessing superannuation benefits from our website. Simply click here, complete some details and the fact sheet will be downloaded for your reference. Contact your Client Services Manager with any questions you may have about this fact sheet. Please note that this fact sheet does not take into account the new early access measure announced by the Government on 22 March 2020, please refer to the Government fact sheet or our eBook (links provided above).

    SuperConcepts Bushfire Recovery Assistance

    SuperConcepts has announced a range of measures to support employees, clients, advisers and the community affected by bushfires around Australia. This includes technical assistance with fund compliance matters including accessing funds due to financial hardship or on compassionate grounds and accessing or obtaining funds to repair or rebuild damaged or destroyed SMSF assets.

    For further information on this topic and other ways of how SuperConcepts can assist, please visit our Bushfire Recovery Assistance webpage.

    Supporting our customers during COVID-19

    SuperConcepts has implemented a Business Continuity Plan to deal with the evolving situation surrounding COVID-19. Our Business Continuity Plan framework aims to ensure:

    • The safety of our people and visitors to our office;
    • Support ongoing service levels subject to the evolving nature of the situation, and we do expect updated operational changes in response to changing information;
    • Continued discussions with the ATO to understand the impacts on this year’s lodgement program.

    To read more please refer to our website and click on the Insights & Support menu and then News & media or click here.


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