By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
March 2022

People in their late fifties, early sixties – the age when you may be able to access super – start thinking about retirement and their super to fund the years ahead. Many people look at it as a lump sum to pay off the mortgage, fund renovations, buy an investment property or new car, go on a grand tour … whatever. Some people just want to get their super into an account-based pension (ABP) to reap the tax benefits.

While you are working and accumulating super, fund earnings are taxed at a maximum of 15 per cent, but when you commence a pension and move into retirement phase, it’s all tax-free.

Together with withdrawals – from taxed super funds – from age 60 being tax-free, it’s a huge incentive to get your super into retirement phase as soon as you can.

But there are rules for accessing super. You must meet a ‘condition of release’ (COR) – a life event – before you can commence an income stream, or take your money out.

Whilst super may be accessed before retirement in certain circumstances – such as 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.

Between preservation age (currently 58) and 60, retirement occurs when you cease employment and intend never to work again for 10 or more hours a week.

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. This can happen even under preservation age, say at 55.

Take Ron (59), a beneficiary and employee of a discretionary trust which carries on a business.

Ron ceased employment with the trust and was paid all his unused leave entitlements. The trustee of Ron’s SMSF was satisfied he intended never to work again and commenced paying Ron an ABP.

But what if Ron 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 Ron’s work increases business turnover – resulting in larger trust distributions or a disproportionate increase in dividends – there’s every chance the arrangement under which Ron was employed has not ended as he is still receiving ‘reward’ for his efforts – just not as salary and wages.

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

If you’re 60 to 64, retirement for superannuation purposes occurs when you cease an employment arrangement – even if you intend to work again. Super accrued up to the date you stopped work is accessible.

Any contributions – employer and personal – after this date, including any cashed out and recontributed amounts, are preserved until you meet a COR.

Termination of employment (whether employed or self-employed) 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 his super.

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

Take Dilhan (62) who has a private company of which he is both a director and employee. He ceases working in the company – handing that role over to his son – and is paid out his full entitlements. But, being his company, he remains a director.

Although Dilhan is still a director, he has ceased being an employee of his company and can access his super.

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

Frances wishes to commence an ABP because she wants to move her super into the tax-free retirement phase.

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

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

Ray (63) and Sylvia (61) run an airbnb. Sylvia wishes to access her super, so she ceases to take 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 genuine or just a contrived arrangement.

Then there’s Gill who ceased work at 59 and with no intention of working again, commenced an ABP needing money to live on.

At 60, Gill makes a personal deductible contribution to reduce capital gain tax on an investment property she sold. This contribution (and earnings thereon) is preserved, but as Gill’s circumstances haven’t changed, she can access her benefits as the retirement COR is available to her.

If she accesses this benefit shortly after the contribution was made, it should be as an ABP – not lump sum – otherwise it may be seen as 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.

Assume Gill does not touch this benefit and it remains preserved. Then at age 62 she returns to the workforce working 15 hours a week. Her employer makes SG contributions which are preserved.
Gill cannot access her preserved benefits – including the contribution (and earnings) made at 60 – as she’s left it too long, her circumstances have changed, and she does not satisfy the retirement COR at this time.

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.

*This information is prepared by Fitzpatricks Private Wealth Pty Ltd (Fitzpatricks) ABN 33 093 667 595 AFSL No. 247 429 and, where relevant, its related bodies corporate. The information in this publication is of a general nature only. All information has been prepared without taking into account your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a financial adviser, whether the information is appropriate for you.