The recent bushfires across Australia have affected many thousands of individuals and small businesses and prompted an outpouring of generosity at levels never before seen in this country.
Several commentators have flagged the fact that unfortunately there is no place for altruism when it comes to using the money of an SMSF and trustees cannot realistically use the assets of their fund to help others.
The other question being asked of us most frequently is whether individuals who have been personally affected can access their super at this time.
Of course, anyone who has reached preservation age can potentially do this under normal circumstances either via a transition-to-retirement income stream (TRIS) or, for those who have retired, a normal account-based pension.
But what about those who are not yet able to access what they need this way?
In those cases we turn to the rules governing severe financial hardship and compassionate grounds. Unfortunately, these rules only give early access to superannuation under very limited circumstances that are unlikely to provide any immediate help to people affected by the bushfires.
Severe financial hardship
For superannuation purposes, severe financial hardship is a specifically defined term under regulation 6.1(5) of the Superannuation Industry Supervision (SIS) Regulations.
The regulation dictates members can access at least part of their superannuation as a lump sum if they are:
- currently in receipt of certain government income support payments and have been for at least the past 26 weeks continuously, and
- able to satisfy the trustee of their fund that they are unable to meet their “reasonable and immediate family living expenses”.
It is up to the trustee of the fund to determine the amount which can be paid, taking into account the member’s financial resources and needs, up to a maximum of $10,000 a year before tax. Only one payment is permitted in any 12-month period.
For members who have reached their preservation age plus 39 weeks, there is an additional path. Under the financial hardship rules, they can access their entire benefit as a lump sum or an account-based pension if they:
- are not currently employed for 10 or more hours a week, and
- have received certain government income support payments for a total of at least 39 weeks since reaching preservation age (this does not need to have been continuous).
By contrast, accessing their super under the normal TRIS rules would only give them access to 10 per cent of their super balance each year.
The most common government income support payment that qualifies under the severe financial hardship rules is the Newstart Allowance, but others are also relevant, such as the sickness allowance, parenting allowance and farm household allowance. Certain special payments the government might make in the event of an emergency may also qualify, but if they are only made for a very short time, they won’t be enough, in isolation, to meet the requirements outlined above.
The trustee of the fund is responsible for determining if the member has satisfied the necessary conditions. As a minimum, confirmation of the receipt of income support payments from the Department of Human Services should be obtained. For members under preservation age, trustees should also have sufficient documentation on file to satisfy the fund’s auditor and the ATO of the member’s financial circumstances.
Where members don’t have the financial resources to meet certain types of expenses, they may be able to take money out of their superannuation to cover these costs. The particular types of expenses allowed include those:
- to cover medical treatment for a chronic or life-threatening illness, but only if that treatment is not readily available through the public health system,
- to pay for modifications to their home or vehicle to accommodate a severe disability,
- to cover the palliative care or funeral costs of a dependant, and
- to prevent foreclosure on their home mortgage if their lender has threatened to repossess or sell their home.
Only unpaid expenses are eligible. If members have already paid the expense, for example using their credit card or with the help of family, then those costs will not be eligible.
The ATO is responsible for approving all claims for accessing super on compassionate grounds. If approved, they will tell the fund of the member’s eligibility and members can then apply for benefits from the fund. SMSF members must not draw any money from the fund until the ATO authorises the payment.
Again, the ability to access super on compassionate grounds is unlikely to provide any immediate assistance to those affected by the bushfires.
Normal superannuation tax is payable when benefits are accessed under the severe financial hardship rules or compassionate grounds. Family tax benefits or other concessions may be affected as could any child support payments.
Unfortunately our current laws give little opportunity for those affected by bushfires to draw on their superannuation any earlier than usual, despite the fact the terms severe financial hardship and compassionate grounds might suggest they could. For SMSF clients it is very important they aren’t tempted to withdraw money from the fund before they are legally entitled. The consequences are severe – at the very least, the member will be taxed on the amount taken at their marginal tax rate instead of the concessional rate usually applied to superannuation monies. The trustee could also be fined and/or imprisoned and the fund could be made non-complying, resulting in potentially losing almost half its assets in tax.
Meg Heffron is managing director of Heffron.