By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
April 2023

Want to grab your super?

Recently, the ATO announced that between 2020–2022, more than $630 million of super was illegally withdrawn by SMSF trustees, noting more funds appear to be at risk of breaching the access rules.

Whilst trustees of existing SMSFs inappropriately accessed super by breaching the payment standards, much of this was done by newly established funds – people setting up SMSFs having no genuine intent to run them but with the motivation to raid their retirement savings, often facilitated by promoters charging large fees.

Unsurprisingly, illegal early access of super is the ATO’s greatest concern in its oversight of the sector. So, it’s stepped-up compliance action to ensure SMSFs aren’t used for this purpose.

The message is clear – it’s imperative to understand the requirements for accessing super and to be cautious of schemes promising early access unsanctioned by law.

People may want their super to pay off the mortgage, fund renovations, buy an investment property or new car, go on a grand tour … whatever. Others may just want to move their super into an account-based pension (ABP) to reap the tax benefits.

In accumulation phase, fund earnings are taxed at a maximum of 15 per cent, but in retirement phase, they’re tax-free.
Together with pension payments from taxed super funds being tax-free from age 60, it’s a huge incentive to move super into retirement phase as soon as possible.

But there are rules for accessing super.

When can I access my super, legally?

You must meet a ‘condition of release’ (COR) – a life event – before you can take your money out or commence an income stream.

Whilst super may be accessed before retirement in certain circumstances – like permanent incapacity, terminal illness, reaching preservation age and starting a transition-to-retirement income stream (TRIS) – most people need to meet a retirement COR before accessing their benefits.

You can get your super at 65 even if you are still working.

‘Genuine’ retirement

Under superannuation law, retirement is more than stopping work – it occurs when you reach preservation age, cease employment (which can happen even under preservation age) and intend never to work again for 10 or more hours a week.

Preservation age is 60 for anyone born from 1 July 1964.

Reducing work hours to less than 10 a week doesn’t cut it as there must be a full and effective termination of employment – where all entitlements, including accrued unused leave, are paid out.

Take Tom who is a beneficiary and employee of a discretionary trust which carries on a business. At age 59, he stops working for the trust and is paid out his entitlements.

On turning 60 – 15 July – the trustee of Tom’s SMSF is satisfied he intends never to work again and commences paying him an ABP.

But what if Tom continues to perform substantive duties for the trust – much the same as when he was an employee – and receives trust distributions?

Passive income – like trust distributions and dividends – doesn’t normally affect retirement under super law as this income is not a direct result of personal exertion. But where a business is operated via a family trust or private company, and someone is performing substantive duties for that trust or company, there may well be an on-going relationship.

If Tom’s work increases business turnover resulting in larger trust distributions, there’s every chance the arrangement under which Tom was employed has not ended as he’s still receiving ‘reward’ for his efforts – just not as wages.

The fact that Tom continues to assist the trust by performing essentially the same duties he did as an employee means he did not satisfy the retirement COR.

But let’s say Tom does no further work for the trust.

At 61, he makes a personal deductible contribution to reduce capital gain tax on an investment property he sold. This contribution (with earnings) is preserved, but as Tom’s circumstances haven’t changed, he can access his benefits under the retirement COR.

If he accesses this benefit shortly after making the contribution, it should be as an ABP – not lump sum – otherwise it could be considered an arrangement done purely for tax reasons and the deduction may well be denied as the contribution was clearly not for the purpose of providing for superannuation benefits.

Tom doesn’t touch this benefit and it remains preserved. Then at age 62 he returns to the workforce working 15 hours a week – his employer making Superannuation Guarantee contributions which are preserved.

Tom cannot access his preserved benefits – including the contribution (and earnings) made at 61 – as he’s left it too long, his circumstances have changed, and he doesn’t satisfy the retirement COR at this time.

‘Deemed’ retirement

If you’re 60 to 64, retirement for superannuation purposes occurs when you cease an employment arrangement – even where you intend to work again.

Super accrued up to the date you ceased employment is accessible but any contributions – employer and personal – after this date, including any cashed out and recontributed amounts, are preserved.

Termination of employment, including self-employment, must be on a genuine basis – it cannot be a contrived arrangement or sham just to access your super. For example, orchestrating a ‘Friday arvo, Monday morning arrangement’ purely to access super is not on.

With an SMSF, you need to be extra diligent when assessing whether you’ve satisfied a COR as you have a vested interest in accessing your own benefits.

Take Rani (62) who has a private company – she is both a director and employee.

Rani ceases working in the company – handing that role over to her son – and is paid out her full entitlements but, being her company, remains a director.

Although Rani is still a director, she has ceased being an employee and can access her super.

Then there’s Bob – a consultant who contracts his skills to companies. A 12-month contract comes to an end when he’s 61 and he’s hoping to pick up another contract.

Bob wishes to commence an ABP because he wants to move his super into the tax-free retirement phase.

Whilst this particular contract has ended, the arrangement under which he is gainfully employed has not – Bob is and remains a contractor. Thus, Bob does not satisfy the retirement COR and cannot commence an ABP.

Liken this to a tradie who finishes a job for a customer – they’re still gainfully employed as a tradesperson.

Bob needs to sell his business or wind it up, cancel his ABN and receive no more income.

Ray (63) and Sylvia (61) run an Airbnb. Sylvia wants to access her super, so she stops taking an active role in running the Airbnb and directs all income to Ray. Accordingly, the retirement COR is available to Sylvia.

Should Sylvia resume participating in running the Airbnb – performing substantive duties – the ATO may question whether her ‘retirement’ was bona fide or just a contrived arrangement.

If you wish to access your super once you reach preservation age but still work, a TRIS may be for you – however be mindful, if you commence a TRIS make sure you’re doing it with the intention of running an income stream.