Under the super laws if you cease gainful employment before age 60, you can receive some or all of your super monies as a lump sum if you’re aged over 55 and your fund’s trustee is reasonably satisfied that you’ll never again be gainfully employed for more than 10 hours per week.
In an official document telling large funds how to comply with the super laws, the Australian Prudential Regulation Authority (APRA) has told these large funds that they need to get evidence of a fund member’s intentions before releasing benefits under this rule. APRA and the ATO – the two superannuation regulators – have a written agreement which says neither will issue a document that the other super regulator disagrees with so it’s reasonable to assume the ATO agrees with this view.
In most cases large super fund trustees satisfy their obligation to determine your intentions by accepting a declaration that you signed stating that you’re not working and you don’t intend to work again. Many SMSF trustees follow a similar rule.
Given a recent Administrative Appeals Tribunal case you might want to rethink this requirement because tax penalties might apply. This case actually contains another common situation that we’ll also look at.
The Case
In 1999 Mr Trevor Peach set up a SMSF. In 2003 he used $120,000 in his super fund to renovate his house. This was classed as a loan and after it was discovered he was told to repay it.
Unfortunately he kept on taking money out of the super fund and in total more than $150,000 of the SMSF’s money was used. He repaid $80,000 which meant that more than $70,000 remained unpaid.
The Tax Office decided that it should apply tax penalties to this $70,000 unpaid amount. Mr Peach took the Tax Office to the AAT because he disagreed and represented himself before the Tribunal.
In September 2008, Mr Peach lost his job. His accountant prepared a letter for him, dated 1 February 2009 to the super fund which declared he was fully retired from the workforce and had no intention of working again.
As mentioned above presumably the purpose of this letter was to provide evidence that he was permanently retired and could access his super monies. Under cross-examination Mr Peach “agreed he did not sign the document on 1 February ‘09. It was signed much later, although it is not clear when”. He also agreed that as he needed income to live, he couldn’t afford to retire. As if to prove this point in May ’09 he commenced a consulting role and received a regular retainer for this work.
The AAT said that his February ’09 letter wasn’t enough for the super fund trustees to determine if he was permanently retired.
The Tribunal determined that Peach wasn’t entitled to access his super benefits under either the financial hardship rules or compassionate grounds that allow access to super monies before retirement in hardship cases.
Mr Peach had illegally withdrawn his super monies before retirement. In these situations the Tax Office can include the amount taken out in a taxpayer’s income tax return, meaning that the benefit withdrawn wouldn’t get concessional tax treatment but would be taxed at marginal rates.
What to do
So what should you do if you want to receive a lump sum from your super fund after turning age 55 (if you’re born before 1 July 1960)? Perhaps a signed statutory declaration might be sensible as signing these documents in error is a criminal offence. It might seem a bit of overkill but in a small number of cases your circumstances might be examined like Mr Peach.
You can also see that Mr Peach got caught for signing documents after the event. You need to avoid this as much as possible.
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 regards to your circumstances.
Also in the Switzer Super Report:
- Peter Switzer: Could stocks be up 40% in 2013? [1]
- Margaret Lomas: Investing in mining town properties risky business [2]
- Paul Rickard: Our higher income stock portfolio for 2013 [3]