Robert and Mary have been affected by the devastating bushfires.
They are struggling financially and are wondering whether it is possible to withdraw some of their super early from their SMSF.
A member of an SMSF is generally prohibited from withdrawing their super prior to retirement. Penalties for early access can include jail terms as it’s seen in the same boat as cheating the tax or social security systems.
It’s natural for Robert and Mary to think that having found themselves in a financial bind not of their making, they’d be able to access their super early to help out. The federal government takes a different view.
Fundamentally, it wants their super protected to pay for their retirement regardless of how uncomfortable and impoverished they are leading up to that retirement. They argue that releasing super now will simply mean Robert and Mary have nothing on their retirement and they will then be a greater drain on the social security system.
Early access to super is very strictly controlled and is nowhere near as accessible as Robert and Mary had hoped.
Withdrawing super early is illegal unless a member meets a “condition of release” contained in Schedule 1 of the Superannuation Industry (Supervision) Regulations 1994 (Cth). A member will have met a condition of release if any of the following applies:
- They have reached their preservation age and have retired.
- They have reached their preservation age and have started a transition to retirement income stream while still being employed.
- They have attained the age of 65 (whether employed or retired).
Other special circumstances where a member may access their super early include:
- severe financial hardship
- compassionate grounds
- terminal medical conditions
- temporary incapacity
- permanent incapacity
- super less than $200
- temporary resident departing Australia
To access their super early based on the “severe financial hardship” grounds, Robert and Mary must:
(a) have been in receipt of eligible government income support payments continuously for 26 weeks and be unable to meet reasonable and immediate family living expenses (SIS Reg 6.01[5][a]); or
(b) have attained their preservation age (as defined) plus 39 weeks and must have received Commonwealth income support payments for a cumulative period of 39 weeks after attaining the relevant preservation age and not be gainfully employed on the date of the application (SIS Reg 6.01[b]).
If they come within (a), the minimum amount that each of Robert and Mary can withdraw is $1,000 and the maximum amount is $10,000. They will only be able to make one withdrawal from their super fund because of severe financial hardship in any 12-month period. If they come within (b), there is no limit.
To access their super early based on “compassionate grounds”, they can apply to the ATO for a determination that an amount of their super be released based on one of a very limited list of compassionate grounds. In Robert and Mary’s case, that could only be because they do not have the financial capacity to pay for “medical treatment” (for life-threatening conditions) or make payments to prevent foreclosure by a mortgagee.
In addition to the above, Robert and Mary will also need to review their SMSF’s trust deed to determine whether their trust deed provides restrictive rules around the payment of benefits.
Robert and Mary will also need to consider the tax implications which can arise as a result of a super withdrawal due to severe financial hardship as there are no special tax rates. For a member under 60 years of age, the super withdrawal may be taxed between 17 per cent and 22 per cent, while the withdrawal may be tax-free for members over 60 years.
Robert and Mary may also need to consider whether the lump sum super withdrawal may affect any current payments they may be receiving from Centrelink.
It’s all very well for our politicians to stand in front of the camera telling bushfire-affected communities how much they support them, but when it comes to early access to super, the rules are strict and far from helpful.
On a related issue, if you are a member, a trustee of an SMSF, or your SMSF’s business or postal address is found to be in an identified bushfire-impacted area, the Australian Taxation Office (ATO) has released a statement on its website stating that it will automatically apply deferrals for activity statements, annual return lodgements and associated payments.
Elizabeth Wang, solicitor, Townsends Business & Corporate Lawyers
Perhaps this is one area where the Federal Government MIGHT see their way clear to implement a temporary change to legislation to enable small business owners the capacity to access their own funds for survival. If the financial pressure is too much, some won’t see retirement, so it is vital the government consider this for hardship such as the one outlined above.