By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
Need your super to make ends meet?
Cost-of-living pressures and financial stress could make dipping into your super tempting, especially where you have ‘control of the cheque book’ of an SMSF.
If you’re thinking about pulling money out of your SMSF, don’t do it – even if you intend on putting it back in.
Superannuation law prohibits a fund from providing financial assistance to members or their relatives under any circumstances, including lending money on arm’s length commercial terms.
However, small loans may be made under strict conditions to your business.
Among other restrictions, the loan can only be made to a company or trust with a corporate trustee – not to a sole trader or partnership – and the amount of the loan must be less than five per cent of total fund assets (based on market value).
But where your business is struggling and requires more than a mere cash injection to survive, it could hardly be argued that it’s being made on an arm’s length basis as no prudent person would lend money to a failing business.
There are rules for accessing super
Accessing super is only allowed where you have satisfied a ‘condition of release’ – defined circumstances like retirement, attaining age 65, permanent incapacity, terminal illness, reaching preservation age and starting a transition-to-retirement (TTR) pension, or death.
Early release of super also exists for severe financial hardship and on compassionate grounds.
If you withdraw your super before meeting a condition of release, then you will have accessed it early and that’s illegal.
Severe financial hardship
Whilst super law permits you to access your super on the grounds of severe financial hardship, there are stringent eligibility rules that must be satisfied which can be difficult to meet.
Also, the payment must be permitted under the fund’s trust deed.
It’s the trustee of the fund – not the Australian Taxation Office (ATO) – who determines whether or not a member is suffering severe financial hardship.
So, with an SMSF, it’s you (as trustee) who’ll make the decision, and it’s you who will be questioned should there be any issue about eligibility.
Get it wrong and the potential consequences range from monetary penalties, disqualification as a trustee, removal of the fund’s complying status, even imprisonment.
In addition, the benefit payment will not be concessionally taxed, and the entire amount will be included in your income and taxed at your marginal rate.
Simply putting the money back in will not solve things – it will be a contribution (subject to the contribution caps).
Government payments essential
Accessing your super on the grounds of severe financial hardship requires certain conditions to be met with regard to social security payments and, generally, this requirement prevents many people from qualifying.
The first hurdle is to provide a letter from Services Australia (Centrelink) to your fund’s trustee, confirming you have received eligible government income support payments for the stipulated timeframe.
Services Australia can advise if the type of benefit you’re receiving is eligible, as not all are, and how long you’ve been getting payments.
If you’re applying to a public-offer fund, like a retail or industry fund, you may find that the fund can get this information directly from Centrelink.
If cannot get this letter because you’re not on government benefits (or the right type of benefit), or haven’t received payments for the required length of time, then you ‘do not pass go’ and you can forget about applying under the hardship provision.
Age is part of the eligibility criteria
You may be able to get some of your super under financial hardship if you have received government income support payments for a continuous period of 26 weeks.
You must be receiving payments when Centrelink issues the letter, and the letter cannot be dated more than three weeks before you apply to the trustee for a benefit.
In addition, the trustee must be satisfied that you’re unable to meet your ‘reasonable and immediate family living expenses’. Living expenses include overdue mortgage repayments, rent arrears, outstanding bills, car repairs and medical expenses.
So, the trustee will want suitable documentary evidence to determine if you qualify.
If you qualify, you can only receive a lump sum benefit of up to $10,000 (before tax) per year.
Only one payment is permitted in any 12-month period.
Aged at least preservation age plus 39 weeks
You may be eligible to access your super if you have reached your preservation age plus 39 weeks and been in receipt of government income support payments for a cumulative period of 39 weeks after reaching that age.
In addition, you cannot be gainfully employed.
Your entire account balance may be released as a lump sum and/or income stream.
At this age you’re eligible to have a TTR pension.
If you do, then meeting this financial hardship provision means the balance may be taken as a lump sum even if you’re looking for work (and thus unable to meet the retirement condition of release).
If don’t have a TTR pension and you’re working – so you’re unable to meet this hardship rule – but need your super to make ends meet, you could commence one. But make sure you do this with the intention of running an income stream – not just to take the maximum 10 per cent drawdown before transferring it back to accumulation phase.
There are limited circumstances where you may apply to the ATO (via myGov) to access your super on compassionate grounds to meet unpaid expenses for you, or financial dependant, for medical treatments or transport, palliative care, death, funeral and burial expenses, or keeping your home.
You must have no other means of paying these expenses.
So, if you’re struggling to service your mortgage with higher interest rates, accessing your super on compassionate grounds may be a safety net as it includes needing money to make home loan repayments (or pay council rates) to prevent foreclosure or the forced sale of your home.
‘Compassionate grounds’ does not extend to meeting general day-to-day expenses in hardship situations.
Accessing super is serious business. So, if you’re looking to your super to relieve financial stress and have an SMSF, know the rules and conditions for paying benefits to ensure it doesn’t turn into illegal early access.