SMSFs are often a target for early release schemes and the Government’s recent announcement to allow individuals financially impacted by COVID-19 access to superannuation benefits should trigger red flags. When you take on the responsibility as trustee of your own fund, you take on the consequence of not doing the right thing. As a rule the ATO doesn’t accept “I didn’t know the rules” as an excuse.
With so much attention given to accessing superannuation as part of the Government’s financial assistance package, it’s important to understand how some of the restrictive pre-retirement conditions of release work.
Sole Purpose Test
Subsection 62(1) of the Superannuation Industry (Supervision) Act 1993 states the purpose for which a fund is maintained. It breaks the purpose down into core and ancillary purposes.
Let’s look at these one by one:
1. The Core Purpose
The core purposes are to provide benefits to members after they retire or to provide benefits to members after they attain an age specified in the regulations. That age is 65.
Further, the law makes provisions in the event that a member dies before they retire or turn 65. In those instances, the core purpose must be to pay a benefit to the member’s legal personal representative (LPR), any or all of the member’s dependants, or both.
2. The Ancillary Purpose
Provisions are made to allow ancillary benefits in addition to the core purposes. In effect, the ancillary purposes represent most of the conditions of release other than retirement or turning 65. These conditions include:
- attaining preservation age
- permanent incapacity
- temporary incapacity
- terminal medical condition
- compassionate grounds
- severe financial hardship; and
- fulfilling ATO – release authority obligations.
Of significant interest in the current environment are compassionate grounds and severe financial hardship, so let’s look at these:
1. Compassionate grounds
To apply for funds under compassionate grounds, a member is required to make an application via the ATO. The ATO will then determine whether or not, based on the supporting evidence provided, there is sufficient grounds to authorise the release. The ATO has the power to authorise the release of benefits under the following conditions:
- to pay for medical treatment or medical transport for the member or their dependant; or
- to enable the member to make a payment on a loan, to prevent foreclosure on the member’s principal place of residence; or
- to modify the member’s principal place of residence, or vehicle, to accommodate the special needs of the member, or a dependant, arising from severe disability; or
- to pay for expenses associated with the member’s palliative care, in the case of impending death; or
- to pay for expenses associated with a dependant’s:
- palliative care, in the case of impending death; or
- death; funeral; or burial; or
- to meet expenses in other cases where the release is consistent with a ground mentioned above, as the ATO determines
- to assist the person to deal with the adverse economic effects of the coronavirus known as COVID‑19.
Under compassionate grounds, the ATO will advise the precise amount allowable to be withdrawn from a fund. As a rule, benefits taken under compassionate grounds are taxed as ordinary superannuation lump sum benefits. Benefits taken as a result of coronavirus are TAX FREE.
Coronavirus conditions
The terms of releasing a benefit due to coronavirus dictate that a member may apply for an amount up to $10,000 in the 2019/20 Financial Year and $10,000 in the 2020/21 Financial Year. To be eligible, a member must satisfy the following criteria:
- They must be unemployed; or
- They must be eligible to receive a job seeker payment, youth allowance for jobseekers, parenting payment (which includes the single and partnered payments), special benefit or farm household allowance; or
- on or after 1 January 2020:
- they were made redundant; or
- their working hours were reduced by 20% or more; or
- if they are a sole trader — their business was suspended or there was a reduction in their turnover of 20% or more.
When can you apply?
Eligible SMSF Members, like all members, will be able to apply from mid-April.
How do you apply?
You must apply via my.gov.au [1], or a manual process developed by the ATO. For SMSFs the ATO will send a determination to the member/trustee.
Applications for the 2019/20 financial year must be made by 30 June i.e. the payment can be made after that date but NOT the application. Members who apply by 30 June will then be eligible to apply for a second payment between 1 July 2020 and 24 September 2020.
Only one application per year is allowed, so if a member doesn’t apply for the full $10,000 or has multiple funds, they must nominate all funds in the one application up to the amount they wish to take.
IMPORTANT
Under no circumstances can the trustees of an SMSF make a self-assessment to pay a benefit to a member under compassionate grounds
2. Financial hardship
An individual who is in receipt of Commonwealth income support, excluding ABSTUDY, Austudy or Youth Allowance, can access between $1,000 and $10,000 under the financial hardship provisions.
The rules require the member to have been in receipt of the income support for 26 continuous weeks and be unable to pay reasonable and immediate family living costs. There is a limit on applying once every 12 months.
SMSF trustees will need to obtain official proof that the member has been in receipt of the income support and proof that the member is unable to pay their immediate family living costs.
Different rules apply to those who have reached preservation age. Once a member has reached preservation age, then they can apply, without a dollar limit, as long as they have received Commonwealth income support for at least 39 weeks after attaining preservation age. There is no requirement for it to be continuous.
It’s your money just not yet!
Knowing when you can and cannot access super is critical, particularly in an SMSF where the penalties can range from annoying to crippling. The ATO provides a great resource www.ato.gov.au [2] that has in depth analysis on all conditions of release as they apply to SMSFs. Best to be on top of the rules than to act inappropriately and ask for forgiveness afterwards.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.