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What is an actuarial certificate?

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An actuarial certificate is a document prepared by an actuary that certifies how much of a self-managed super fund’s earnings are derived from its members’ accumulation phases and how much from retirement phases. This information has tax implications. It is used to claim exempt current pension income (i.e. tax-exempt earnings) in the fund’s annual tax return.

When is an actuarial certificate required?

An actual certificate is required whenever an SMSF member moves into the retirement phase and there are one or more other members of the fund that remain in the accumulation phase.

In addition, an actual certificate will be required each year that there is at least one member in each phase if the actuary is using the proportionate method to calculate the fund’s exempt current pension income. The proportionate method is based on the total value of the fund’s assets each year.

However, if the segregated method is used by an actuary to calculate a fund’s exempt current pension income, no actuarial certificate is required, provided that the retirement phase income streams being paid by the fund are one or more of the following types:

  • an allocated pension,
  • a market-linked pension,
  • an account-based pension.

The segregated method separates assets between the accumulation and retirement phases.

Source: superguide.com.au

Clarification on reporting death benefit rollovers and paying death benefits after a rollover

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On 22 June the Treasury Laws Amendment (2019 Measures No. 3) Act 2020 amended the law retrospectively with effect from 1 July 2017 to ensure any untaxed element determined in accordance with section 307-290 of the Income Tax Assessment Act 1997 (ITAA 1997) is not included in the receiving fund’s assessable income.

A transferring fund is still required to apply section 307-290 of the ITAA 1997 to determine if there is an untaxed element in the lump sum being rolled over where they have claimed, or will claim in relation to the benefit, deductions for premiums for certain types of insurance under section 295-465 or 295-470 of the ITAA 1997.

However, where a dependant beneficiary rolls over a death benefit, it is the Commissioner’s view that there is insufficient connection between any deductions claimed by the transferring fund and any lump sum benefits paid by the receiving fund from the dependant beneficiary’s new pension interest, for section 307-290 of the ITAA 1997 to apply to any of those subsequent payments.

That is, where the receiving fund does not claim any deductions for any death and disability insurance offered to the dependant beneficiary as part of their new pension interest in the receiving fund, section 307-290 will not apply to any lump sums paid from that interest.

In light of this, the Commissioner considers SMSFs completing item 16 of the death benefits rollover statement do not need to include an element untaxed in the fund. Any amount that may be determined under section 307-290 can be reported as a taxable component – element taxed in the fund.


Case Study

Anthony is 57 and a death benefit beneficiary. Anthony’s spouse was 64 when they died, Anthony chooses to rollover the death benefit from their SMSF (a fully taxed fund) to an APRA regulated fund and start a pension in the APRA regulated fund.

The death benefit is $200,000 and has a tax free component of $10,000. As the SMSF had claimed deductions for death and disability insurance; applying section 307-290 of the ITAA 1997, an untaxed element arises of $1,000.

When completing the death benefit rollover form:

  • At Label 11 the trustee will enter code Q
  • At Label 16 the trustee will report:
    • a tax free component of $10,000 and
    • a taxable component – element taxed in the fund of $190,000.


Where the receiving fund claims a deduction for insurance premiums under section 295-465 or 295-470 of the ITAA 1997 in respect of insurance offered to the dependent beneficiary as part of their new interest, the fund will be required to apply section 307-290 of the ITAA 1997 to any subsequent death benefit lump sums paid from that interest.

Source: ato.gov.au

 

Is your SMSF diversified?

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SMSF trustees need to truly understand diversification and better diversify their portfolios.

The benefits of a well-diversified portfolio are numerous but the key ones that SMSF trustees should focus on are the benefits of mitigating volatility and short-term downside investment risks, preserving capital and the long-run benefits of higher overall returns. By spreading an SMSF’s investments across different asset classes and markets offering different risks and returns, SMSFs can better position themselves for a secure retirement.

However, did you know that 82% of SMSF trustees believe that diversification is important but in practice many do not achieve it?

This is because half the SMSF population cite barriers to achieving diversification. The top being that it is not a primary goal for SMSF trustees, and they believe they have a lack of funds to implement it.

Furthermore, 36% of SMSF trustees say they have made a significant (10%) asset allocation change to their SMSF over the last 12 months. This demonstrates that SMSFs may not be actively restructuring their portfolio on an annual basis to respond to changing market conditions.

Another clear problem regarding diversification is the amount of SMSFs with half or more of their SMSF invested in a single investment. SMSF trustees say they primarily invest in shares to achieve diversification in their SMSF, while just a quarter say they invest in at least four asset classes to achieve this.

The bias and significant allocation to domestic SMSF equities conversely may highlight the fact that SMSFs are not adequately diversified, especially across international markets and other asset classes.

So what can you do?

Some of the steps you, with the help of an SMSF Specialist, can take to diversify your retirement savings and control your investments in a disciplined and planned way include:

  • Ensuring there is a clear and demonstrable retirement purposes in the choices you make.
  • Ensuring you have an investment objective and a strategy to achieve that objective in place.
  • Reviewing your portfolio and assessing it against the objectives you have set as often as you feel is necessary.
  • Minimising concentration to any one asset class.
  • Ensuring your Australian share portfolio is sufficiently diversified.
  • Considering the benefits of geographic diversification.
  • Ensuring your cash allocation is appropriate.
  • Considering the benefits of exchange traded funds, listed investment companies and other digital investment platforms that allow low cost access to different markets.

Always remember to document your actions and decisions, as well as your reasons, and keep them as a record in order to demonstrate that you have satisfied your obligations as a trustee.

Given the importance of having an appropriately diversified portfolio and its impacts on quality of life in retirement trustees ought to consider professional assistance in managing this important aspect of an SMSF.

Source: SMSF Association

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Superannuation death benefit limitations

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As an SMSF trustee, you need to take special care when paying death benefits as you are responsible for ensuring that the payment rules are met. Strict rules apply, affecting who can receive a death benefit, the form in which the death benefit can be paid and the timing of such a payment.

Firstly, death benefits can only be paid either to dependants of the deceased member or the estate of the deceased.

Second, the law limits the group of dependants who are eligible to receive a pension on the death of the deceased member.

Finally, trustees must pay a death benefit as soon as possible after the death of the member. Additionally, each death benefit interest can only be paid to each dependant as either:

  • a maximum of two lump sums (an interim and final lump sum), or
  • a pension or pensions in retirement phase, or
  • a combination of both.

It is the limit of a maximum of two death benefit lump sums per dependant that trustees need to keep track of to ensure that the cashing rules are not inadvertently breached, especially where the death benefit is being paid as a pension.

Given the account-based nature of death benefit pensions that can be paid by an SMSF trustee, an SMSF member is generally afforded the flexibility to nominate to convert a death benefit pension into a lump sum payment. This process is generally referred to as the commutation of a pension although may be subject to specific restrictions found in a trust deed.

A partial commutation is where the beneficiary requests to withdraw a lump sum amount less than their total pension entitlement, allowing their death benefit pension to continue. This is common where members withdraw their required minimum drawdown as a pension with any additional income needs met by accessing multiple lump sums from their pension account. This strategy allows the death benefit pension to continue without breaching the superannuation death benefit rules, despite payments in excess of the maximum two lump sum limit.

A full commutation will result in the death benefit pension ceasing at the time the member decides to withdraw their entire pension entitlement as a lump sum. Despite the number of lump sum death benefits previously received, the law allows the beneficiary to roll over the lump sum resulting from a full commutation to another superannuation fund for immediate cashing as a new death benefit pension.

However, where a lump sum resulting from the full commutation of a death benefit pension is paid out of the superannuation system, further clarity is being sought from the ATO to ascertain whether or not this will be treated as an additional lump sum death benefit that would count towards the maximum two lump sum cashing limit. Until further clarity is provided by the ATO, caution needs to be exercised before a death benefit pension is fully commuted and paid to the dependant, especially where the dependant has previously received a lump sum death benefit.  

As an SMSF trustee, you need to be aware of the restrictions placed on the payment of death benefits to eligible dependants of a deceased member. Trustees who ignore these limitations risk breaching superannuation standards and potentially being liable to be fined by the Regulator.

Source: SMSF Association

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COVID-19: Providing concessions for the LRBA in my SMSF

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The economic impacts of the COVID-19 crisis are causing significant financial distress for many businesses and individuals.

If your SMSF has a related party loan and is impacted due to the financial effects of COVID-19, you may be able to provide your LRBA with relief under an agreed commercial arrangement.

Ordinarily, not paying market interest rates in an SMSF is usually a breach of superannuation laws. However, the ATO have provided guidance which allows SMSFs with an LRBA to negotiate a reduction in or waiver of interest payments because of the financial impacts of the COVID-19.

If the repayment relief reflects similar terms to what commercial banks are currently offering for real estate investment loans as a result of COVID-19, the ATO will accept the parties are dealing at arm’s length and the NALI provisions do not apply.

What do you need to do?

There are some important things you should ensure are in place when you are providing a loan concession, especially when this is a related party.

  • Ensure the relief only applies to the related party loan
    • Any relief offered on the loan can only relate to that loan agreement. The ATO concession does not extend to other loans.
  • Ensure that the concessions are temporary.
    • This means it should have an agreed period of time or agreed date where the concessions are reviewed in light of the economic circumstances.
  • The financial difficulty faced by the SMSF is linked to the financial impacts of COVID-19.
    • Any negotiated concession will need to be measured against the COVID-19 financial impact suffered by your SMSF.
  • Clear arrangements which detail the amount of discount, waiver or deferral of the concession.
    • In evidencing that the concession is reasonable, it would be best practice if it is consistent with an approach taken by an arm’s length loan.
    • For example, terms currently include temporary repayment deferrals for most businesses of up to 6 months, with unpaid interest being capitalised on the loan.
    • It is also expected that there is evidence that interest continues to accrue on the loan and that the SMSF trustee will catch up any outstanding principal and interest repayments as soon as possible.
  • Ensure you have proper documentation which allows your independent auditor to be satisfied that the concession satisfies all of the above.
    • This may take the form of a signed minute, renewed loan agreement or anything deemed appropriate to amend the terms of the loan.
    • The parties to the arrangement must also document the change in terms to the loan agreement and the reasons why those terms have changed.
    • Even if you are both the lessor and lessee, the above should all be documented.

These are extraordinary times and the ATO is providing this guidance to allow SMSF trustees to be flexible and agile.

If trustees act in good faith in implementing a reasonable and measured reduction concession because of the impacts of COVID-19 they should not fall foul of the law.

Source: SMSF Association

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Reduced minimum pension – Planning Opportunity

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As part of the Federal Government’s economic response to COVID-19, the minimum percentage withdrawals from superannuation pension accounts were reduced by 50% as from 24/3/2020 and this is to apply for the 2019-20 and 2020-21 financial years.

This will enable self funded retirees to potentially reduce their pension withdrawals for a period in order to preserve asset values and avoid selling growth assets in a depressed market.

However, there may be cases where the member still requires a higher pension amount and in those cases, consideration should be given to taking the extra amount as a commutation/lump sum. This has the advantage of reducing the member’s Transfer Balance Cap, thus providing space for potential further transfers into pension mode in the future. The advantage of pension mode accounts is that all income and capital gains derived in those accounts will be tax free.

Example:

Mary is aged 68 and currently has a sole member SMSF with a retirement phase pension account balance of $1,550,000. Her Transfer Balance Cap is $1,600,000. Her minimum pension was previously 6% or $93,000 but under the changes, that minimum is reduced to 3% or $46,500. For various reasons, Mary does not wish to reduce her pension withdrawals and therefore will withdraw $93,000 in the current financial year – $46,500 was withdrawn in December and she plans to withdraw a further $46,500 in June 2020. If Mary treats the full $93,000 as a pension, her Transfer Balance Cap will not change and she will have no further ability to transfer additional amounts into pension mode. On the other hand, if Mary decides to take the June payment as a commutation from her pension account and then as a lump sum from the accumulation account, her Transfer Balance Cap will reduce by $46,500 and that amount could be re-contributed in the future and then transferred to pension mode, thus increasing the actual superannuation amount in pension phase.

Note that commutations need to be properly documented and reported to the regulator in the appropriate way.

The information provided in this article is general in nature and does not take into account your personal circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, you should consider its appropriateness in relation to your personal situation and seek advice from an appropriately qualified and licensed professional.

BOB LOCKE – CHARTERED ACCOUNTANT & SMSF SPECIALIST

Mr Locke has been an accountant and taxation expert for 35 years. His company, Practical Systems Super, provides an all-in-one SMSF solution with a full administrative service, SMSF management software, and independent, licensed advice, tailoring their package to meet the individual needs of trustees and SMSF professionals.

To find out more about Practical Systems Super, visit www.pssuper.com.au, or call 1800 951 855.

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TIME TO TRANSFER SHARES TO YOUR SMSF?

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TIME TO TRANSFER SHARES TO YOUR SMSF?

One of the few exceptions where personal assets can be transferred “in-specie” to a Self-Managed Superannuation Fund, is listed shares. These, of course, have to be transferred at market value and therefore a potential barrier to these transfers is often the capital gain that may be generated by the individual as a result of the transfer.

With the significant downturn in markets as a result of the COVID-19 crisis, it may be a good time to consider transfers as there may be minimal capital gains tax effect on the transfer. It may also be possible to treat some or all of the in-specie transfer as a concessional contribution and therefore improve the overall tax effectiveness. Obviously, where transfers are to be treated as contributions, it will be necessary to ensure that you take account of relevant contribution caps applying to the member.

The information provided in this article is general in nature and does not take into account your personal circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, you should consider its appropriateness in relation to your personal situation and seek advice from an appropriately qualified and licensed professional.

BOB LOCKE – CHARTERED ACCOUNTANT & SMSF SPECIALIST

Mr Locke has been an accountant and taxation expert for 35 years. His company, Practical Systems Super, provides an all-in-one SMSF solution with a full administrative service, SMSF management software, and independent, licensed advice, tailoring their package to meet the individual needs of trustees and SMSF professionals.

To find out more about Practical Systems Super, visit www.pssuper.com.au, or call 1800 951 855.

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How is your SMSF performing?

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With over 600,000 funds and an average balance of around $1.2 Million, Self-Managed Superannuation Funds (SMSFs) make up for a significant portion of total superannuation assets in Australia.

One of the main reasons that SMSFs are  a popular choice for Australians in their retirement planning, is that individuals feel they have control over their retirement savings. However, with this decision making power comes responsibility. Some SMSF trustees manage all of the fund investments while others use an investment adviser to provide this service. Many also use a combination of both approaches – for example, they may attend to direct property themselves and use an investment adviser to look after the equities portion of the portfolio.

While some Trustees would have a very good knowledge of the investment returns and costs of their fund, many are left to interpret their statutory annual reports for this. These reports are often directed at compliance experts and it can be difficult for Trustees to fully understand how their investments are tracking relative to other indicators such as industry funds or investment benchmarks.

Calculating your SMSF performance

The idea of analysing the statutory report and extracting the performance information may seem daunting but can be quite simple. It’s just a matter of applying a formula to the relevant set of numbers.

Here’s how a Trustee could calculate the investment performance by using the Fund’s annual Operating Statement and Balance Sheet reports.

From the Operating Statement:

A. Calculate Gross investment income – be sure to leave out member contributions and any amounts rolled into the fund

B. Calculate investment related expenses – leave out member withdrawals, life insurance premiums and general administration expenses such as audit & accountancy fees

C. Net investment return (before tax) = A – B

D. Calculate the income tax expense (or refund) that relates to the net investment income – exclude the tax (15%) applicable to any concessional contributions

E. Investment return after tax = C – D

From the Balance Sheet:

F. Calculate average assets for the year – this will usually be the opening and closing net assets divided by 2 but a more sophisticated approach would be to use say a monthly weighted average of net assets to recognize significantly contributions/withdrawals during the year

The after-tax return % = E divided by F x 100

The practical application of this relatively simple process can be illustrated in the following example

Applying the formula to the above example, the components are:

A (investment income) = $20,000 + $15,000 +$30,000 = $65,000

B (investment expenses) = $10,000

C (net investment return) = $65,000 – $10,000 = $55,000

D (tax related to investment return) = $4,225 credit ($7,500 relates to concessional contributions less $4,225 = $3,275)

E (investment return after tax) = $55,000 + $4,225 (tax credit) = $59,225

F (average assets) = ($1,186,725 + $990,000) / 2 = $1,088,363

E (investment return after tax) = ($59,225 / $1,088,363) x 100 = 5.44%

Another important ratio that trustees may be interested in, is administration expenses as a percentage of average assets. Using the above sample data this would be calculated as:

  • Administration expenses = $2,500 divided by average assets $1,088,363 x 100 = 23 %

Having calculated these ratios, the obvious question is; “how do these compare to other superannuation funds or alternatives?”. There are several “benchmarks” that a fund could choose to look at for comparison purposes. The Australian Taxation Office does provide some data, but this is limited and tends to be quite dated by the time it is released.

Some other possible benchmarks might include:

  • All Ordinaries Accumulation Index: this provides the return from a theoretical basket of investments representing the All Ordinaries Index on the Australian Share Market including growth in value and dividends (grossed up by franking credits). It is, therefore, a useful benchmark for portfolios of listed Australian Shares. As an example, this index rose by 11.03% for the year ended 30th June 2019.
  • Indices relating to specific investment sectors such as property, fixed interest, etc.
  • Returns from the large Industry Funds: these are published and available for various member-selected investment mix options. As an example, the return for the “balanced fund” option of Australian Super for the year ended 30th June 2019 was 8.67%
  • Returns compiled by investment research firms such as Chant West or MSCI
  • Returns achieved by various index funds and Exchange Traded Funds

When comparing SMSF returns and costs to benchmarks and other alternatives it is important to take account of unique and particular issues that may affect the data in the different sectors. Some examples of these issues include:

  • SMSFs would rarely revalue direct property investments every year
  • An SMSF fully in pension mode with a significant share portfolio paying franked dividends would be expected to have a higher after-tax return than if the same fund was in accumulated phase.
  • Some administration cost of industry or retail funds may be “hidden” in net investment returns.

To get a quick comparison of the administration cost structure for your SMSF, complete the form below and a Practical Systems Super representative will be in touch.

The information provided in this article is general in nature and does not take into account your personal circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, you should consider its appropriateness in relation to your personal situation and seek advice from an appropriately qualified and licensed professional.

BOB LOCKE – CHARTERED ACCOUNTANT & SMSF SPECIALIST

Mr Locke has been an accountant and taxation expert for 35 years. His company, Practical Systems Super, provides an all-in-one SMSF solution with a full administrative service, SMSF management software, and independent, licensed advice, tailoring their package to meet the individual needs of trustees and SMSF professionals.

To find out more about Practical Systems Super, visit www.pssuper.com.au, or call 1800 951 855.

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Transition to retirement pensions – are they still effective?

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As people age, the everyday grind of full-time work can become increasingly tiresome. At the same time, many still enjoy the interest and challenges of the workplace. One way to help with this “work-life balance” at this stage of life is a Transition to Retirement (TTR) strategy.

Transition to retirement strategy explained

If you have reached your preservation age, (between age 55 and age 60 depending on your date of birth) this strategy allows you to reduce working hours and at the same time, commence a special type of pension withdrawal arrangement from your superannuation fund.

This means your take-home pay does not have to be reduced (and potentially increased) but allows more time away from work to experience other aspects of life whilst you’re still active and healthy.

Sometimes these arrangements are coupled with a “re-contribution strategy” where concessional contributions into the fund are maximised using a combination of pension withdrawals and tax savings to cover any shortfall in disposable income.

The table below outlines the preservation age applying to an individual:

Date of Birth Preservation age
Before 1/7/1960
55
1/7/1960 to 30/6/1961
56
1/7/1961 to 30/6/1962
57
1/7/1962 to 30/6/1963
58
1/7/1963 to 30/6/1964
59
After 30/6/1964
60

Transition to retirement strategy options

  1. Cut your hours, not income

This strategy focuses on using income from your transition to retirement pension so you can reduce your work hours, enjoy the same level of after-tax income and still maintain your lifestyle. The downside? Your super savings may decrease earlier than expected.

2. Ramp up your super

Choosing this option means you can continue to work full time, make additional super contributions via salary sacrifice and draw an income from your TTR pension to help fund your living expenses.

Remember that your salary sacrifice super contributions are taxed at 15% provided your concessional contributions fall within the applicable super contribution caps, while an additional 15% tax may be applicable for higher-income earners.

While still working full time, the 15% tax rate may potentially be lower than your marginal tax rate had you received this money as salary – this can help to reduce your tax bill and give your retirement savings a boost.

In a nutshell, this transition to retirement strategy allows you to contribute more to super than you draw as an income stream, while keeping your after-tax income the same.

Transition to retirement strategy – is it still relevant?

In the past, one of the significant advantages of a so-called “Transition to Retirement Income Stream” (TRIS) was that the income and capital gains derived in the superannuation fund from assets supporting the TRIS were exempt from tax in the fund.

This concession was removed with the raft of changes that applied to all superannuation funds from 1st July 2017. Note that the receipt of a TRIS by a member over the age of 59 is exempt from income tax and partially exempt for members between preservation age and 59. This aspect has not changed.

A question often asked is, “are transition to retirement strategies still relevant?”. The answer is clearly yes but it also depends on individual circumstances!

The following table summarises Peter’s position regarding annual net salary and annual net increase in his superannuation in three different scenarios.

(a) Current position working full time

(b) Reducing to 3 days a week and not altering existing superannuation arrangements

(c) Reducing to 3 days a week, paying additional concessional super contributions (to max $25,000) and using a transition to retirement strategy to fund these changes and ensure net disposable income remains unchanged..

We can see in (a) that Peter’s current disposable income is $97,903 pa and his annual super balance increase would be expected to be $53,805 – an overall total of $151,708. If he reduces to 3 days per week as in scenario (b), his disposable income reduces by around 35% to $64,553 and his combined total reduces by $37,822 and this would be the effective “cost” (in the first year) of reducing work hours from full time to 3 days per week. On the other hand, scenario (c) illustrates that if Peter implemented a TRIS and withdrew $44,498 from his superannuation to cover the reduction in income and maximize concessional contributions, he could maintain his current disposable income and reduce the overall “cost” from $37,822 to $34,553.

The above example illustrates how a Transition to Retirement Strategy can be used to maintain disposable income where work hours are significantly reduced. Other strategies can revolve around objectives such as paying down debt as a member is approaching retirement, equalizing superannuation balances between partners, reducing the relative taxable component of the total superannuation balance and others.

The clear takeout from the above is that although the after-tax effectiveness of a Transition to Retirement Strategy has been reduced by the changes applying from 1/7/2017, there are still potential financial benefits. These benefits are of course, in addition to other non-financial benefits that can flow from such strategies.

Things to consider

Keep in mind there are some technical issues around Transition to Retirement Strategies that should be fully considered in the light of the personal circumstances of the individual including:

  • Member age: Not everyone can access a TTR pension – it is only accessible when you reach preservation age, which for most is the age of 60.
  • Withdrawal cap: The amount that you withdraw each year is capped at 10% of the balance of the pension. This means you may need to top up this account through contributions in the years prior so that you have smooth cash flow.
  • Total superannuation balance: Accessing a TTR pension can mean that you exhaust your retirement savings earlier. Your savings may need to last for up to 30 years and withdrawing these funds early may have a significant impact in later years. Plan carefully and calculate the funds available to you today and how this may impact your retirement savings.
  • Income level: A TTR pension is not a ‘set and forget’ strategy. An annual review of your plan should be done so that income streams and contributions can be fine-tuned to fit your situation.

Lastly, not all super funds offer TTR pensions, so speak to an adviser and seek appropriate personal advice before making any decisions.

The information provided in this article is general in nature and does not consider your circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, you should consider its appropriateness concerning your personal situation and seek advice from an appropriately qualified and licensed professional.

BOB LOCKE – CHARTERED ACCOUNTANT & SMSF SPECIALIST

Bob Locke has been an accountant and taxation expert for 35 years. His company, Practical Systems Super, provides an all-in-one SMSF solution with a full administrative service, SMSF management software, and independent, licensed advice, tailoring their package to meet the individual needs of trustees and SMSF professionals.

To find out more about Practical Systems Super, visit www.pssuper.com.au, or call 1800 951 855.

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Early access to your super when the going gets tough

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With the prolonged drought and bushfires affecting many farmers and rural businesses across the country, questions are often raised about accessing existing superannuation to ease their financial stress.

When going through difficult times, it may be frustrating that you aren’t able to access your superannuation account, especially when you need it the most. If you are experiencing severe financial hardship or have a medical disability you just can’t afford, you may have the right to apply to have some of your superannuation released before you retire.

Eligibility for early release of benefits

Superannuation is meant to be a long-term investment to provide benefits in retirement (or death benefits). To qualify for all the tax and associated benefits, a superannuation fund must have this as its “sole purpose”.

Once a person reaches the age of 65 (or dies), access to their superannuation is unrestricted. Prior to that time, one may be able to access the money before retirement if the person meets an alternative “condition of release,” often in dire situations such as a total and permanent disability or terminal illness.

However, the superannuation legislation also recognises that there can be other legitimate situations where the release of monies before the intended time may be appropriate, these include:

  • Compassionate grounds – to cover items such as; medical expenses, home modifications to cater for disability, housing loan payments to prevent foreclosure and funeral expenses of dependents
  • Severe financial hardship – for amounts up to $10,000 in any year
  • Transition to retirement – provided the person has reached their “preservation age”

Applying due to severe financial hardship

If you’ve spoken to a financial adviser/counsellor and are confident that early access to superannuation is the right course of action, you can apply for early release based on severe financial hardship. The rules for accessing super on the grounds of financial hardship are quite specific, limited in their application and are often misunderstood.

You are eligible for access under financial hardship if you:

  • Are unable to meet reasonable and immediate living expenses such as mortgage payments, rent arrears, medical expenses etc.
  • Are receiving an income support payment
  • Have been receiving income support payments for at least 26 weeks in a row

A super withdrawal due to severe financial hardship is paid and taxed as a super lump sum. If the condition is met, you will be limited to withdrawing a maximum of $10,000 within a 12-month period.

The eligibility rules are different if you’re over “preservation age” and haven’t retired. You must:

  • have reached your preservation age plus 39 weeks
  • not be gainfully employed
  • have received the income support payments for at least 39 weeks since reaching preservation age

How to apply

Applications for release of superannuation on compassionate grounds must be made to the Australian Taxation Office. Applicants need to provide appropriate documentary evidence to prove the intended use of the funds and demonstrate that the expenses could not be met from alternative sources. Importantly, the relevant expenses must not have already been paid. If approved, the Taxation Office will issue an authority to the fund concerned for a release of the funds.

Applications based on severe financial hardship are made to the trustee of the fund concerned. The general requirement is that the applicant must have been on some form of government support payment for a minimum of 26 weeks and can demonstrate financial hardship. In the case of self- managed superannuation funds, the trust deed of the fund should be checked to ensure that it allows for such payments.

Example – financial hardship:

Fred and Lucy are farmers in their early fifties whose financial situation has been severely impacted by the continuing drought. Their cash reserves have been exhausted by continuing feed bills for their remaining livestock. They have been receiving Farm Household Allowance for the past nine months and are struggling to pay for basic living expenses including food and school expenses for the children. They have a self-managed superannuation fund with balances of $350,000 each.

Fred and Lucy could apply to the trustee on the basis of severe financial hardship for the release of up to $10,000 each. This would need to be properly documented and their position verified with appropriate evidence.

Note that as Fred and Lucy are under their “preservation age”, any financial hardship payments would be treated as taxable lump sums – the final amount of tax applicable will vary depending on the taxable/tax-free components of their balances and their other taxable income – it could range from 0% to 22%.

Transition to retirement

Transition to retirement strategies can provide a legitimate means of accessing superannuation benefits before normal retirement. The important qualifier here is that the person must have reached their preservation age which will range from 55 to 60 depending on the year of birth. The following table illustrates this:

Date of Birth Preservation age
Before 1/7/1960
55
1/7/1960 to 30/6/1961
56
1/7/1961 to 30/6/1962
57
1/7/1962 to 30/6/1963
58
1/7/1963 to 30/6/1964
59
After 30/6/1964
60

Example – transition to retirement strategy

John and Noelene are cattle graziers who have planned well for recurring drought conditions. In good years they have invested in additional superannuation contributions to their self-managed fund and both have accumulated Farm Management Deposits. The current severe drought conditions have placed considerable strain on the family budget. They are keen to maintain their breeding stock and plan to progressively draw down the FMDs to fund fodder and supplements. This will ensure that when the drought breaks, they will be well placed to quickly rebuild and generate solid cashflows. In the meantime, they estimate they will require up to $100,000 per annum to assist with living expenses and pay the fees for their twin boys who are in their final two of years at boarding school.

John is 60 and has $1 million in superannuation and Noelene is 54 and has $700,000 in her superannuation account. After taking appropriate advice, John decides to commence a transition to retirement pension with the full balance of his accumulation account. He will be required to withdraw the minimum amount of 4% ($40,000) and can draw up to the maximum of 10% per annum – that will allow for the withdrawal of up to $100,000 per annum. Note that Noelene could not follow this strategy as she has not yet reached her preservation age and therefore has not satisfied a condition of release. As John has turned 60, the receipt of the pension amounts from the fund will be tax-free in his hands.

Once the drought breaks and normal cashflows return, they plan to commute the transition to retirement pension back to accumulation phase and top-up contributions as their financial position improves

Risks of accessing your super early

While accessing your superannuation may seem like an easy solution when going through a financial crisis, it is important to consider all the associated risks and consequences. Individual circumstances vary and these can include:

  1. Tax may apply to withdrawals

If you are below preservation age, you may be required to pay tax on any money you get from your superannuation. The tax varies depending on your circumstances and the taxable/tax free components of your superannuation balance.

  1. Fees & charges

You may need to pay your super fund a fee to have your super released early.

  1. Reduced retirement benefits

Early withdrawals can have compounding effects on the future balance of your superannuation with consequential impacts on your retirement plans.

  1. Impacts on other government benefits

Changes to your income due to superannuation benefits received may affect your eligibility for other benefits such as Family Tax Benefit, childcare allowance, etc.

  1. Watch out for scams

In recent years there have been a number of so-called “early access” schemes that have been promoted to facilitate the illegal early release of monies from superannuation accounts. Appropriately, the regulators have acted promptly against these schemes and there are severe penalties for promoters and trustees who engage in this unlawful conduct.

The information provided in this article is general in nature and does not consider your circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, you should consider its appropriateness concerning your personal situation and seek advice from an appropriately qualified and licensed professional.

BOB LOCKE – CHARTERED ACCOUNTANT & SMSF SPECIALIST

Bob Locke has been an accountant and taxation expert for 35 years. His company, Practical Systems Super, provides an all-in-one SMSF solution with a full administrative service, SMSF management software, and independent, licensed advice, tailoring their package to meet the individual needs of trustees and SMSF professionals.

To find out more about Practical Systems Super, visit www.pssuper.com.au, or call 1800 951 855.

The information provided in this article is general in nature and does not take into account your personal circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, you should consider its appropriateness in relation to your personal situation and seek advice from an appropriately qualified and licensed professional.

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