Raiding the super larder

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According to industry feedback, there are many superannuants who are unsure about when and how much of their accumulated super benefits they can access and in some circumstances are drawing super prematurely or taking more than they are legally entitled to.

This confusion has been heightened by the introduction of tax-free superannuation benefits for people over 60 and by the introduction of transition to retirement income streams (TRIS) rules.

In a nutshell, the implementation of tax-free benefits means those over 60 and withdrawing a pension no longer have to declare these withdrawals in their personal taxation return, while the introduction of TRIS means fund members between 55 and 64 can take a maximum of 10 per cent of their super balance as a pension each year.

While 55 is the age at which fund members can access preserved superannuation benefits, it is only once they have reached 65 that there are no longer any restrictions on what can be taken from the fund either as a pension or a lump sum benefit.

Many people wrongly believe the introduction of tax-free benefits and TRIS has given people aged 55 to 65 — irrespective of their particular circumstances — the green light to withdraw whatever amount, whenever they want, from their super fund account.

Borrowing from super

On top of this, there are also some fund members who are under the misapprehension that they can ‘borrow’ from their super and then pay the money back later.

This can happen, for example, when people decide to buy a new home before finalising the sale of their existing one. They find they have a shortfall and decide to borrow from their super with the intention of paying the amount back later.

Often the intention is to repay this money without paying interest. Their thinking is: the money’s mine so why not make use of it? After all, it will be a lot easier than applying to the bank for a loan.

It is important that fund members understand they cannot borrow from their super as it is a serious breach of the legislation governing superannuation funds.

Industry feedback also shows that the majority of confusion around accessing super comes from self-managed superannuants, and not members of public offer or industry funds.

This may stem from the fact that self-managed superannuation funds (SMSFs) have bigger fund balances or from the fact that fund members are the trustees, which gives them much greater opportunity to access super benefits.

Trustees of public offer or industry funds generally demand greater proof of meeting conditions of release rules before giving members access to their funds. Australian Tax Office penalties for illegally accessing super are severe and can be imposed on both fund members and fund trustees.

Penalties for fund members could involve being taxed at marginal tax rates for the amount withdrawn from the fund while trustees also face being disqualified from their role and should their fund members have taken benefits prematurely, the SMSF could be wound up or a professional firm appointed as trustee.

As part of the audit process for SMSFs, fund auditors review benefit payments. If a lump sum benefit has been paid to a member who has not met a condition of release or an amount in excess of the maximum pension has been paid to a member with a TRIS, the auditor will be required to take action.

In essence, there has been a breach of the rules governing superannuation funds.

Conditions of release rules

To allay confusion, there are very strict conditions of release rules spelling out precisely when and in what circumstances superannuants can begin drawing on their super.

The rules in detail are:

  • To gain access to super, people aged 55-59 must have retired from gainful employment (working more than 10 hours a week) or have no intention of being gainfully employed again. In some cases, superannuants will have to sign a statutory declaration to that effect. Declaring permanent retirement does not stop superannuants from returning to the workforce at a later stage.

    However, any intentions of declaring permanent retirement, cashing in on super and then returning to gainful employment in the same week should quickly be dispelled.

    This will be seen by regulatory authorities as a ploy to access super benefits and fund members run the risk of having their benefits declared assessable income.

    To avoid problems of this nature, fund trustees should request a statutory declaration from members to confirm permanent retirement.

  • For those aged 60-64 who have left gainful employment, there are no cashing-in restrictions on accumulated super at the date of termination. However, should super members in this age group return to gainful employment and make further contributions to super, the resulting super must be preserved until they terminate employment or turn 65.
  • Those who are 60-64 and self-employed may find it difficult to satisfy a condition of release prior to reaching 65. This stems from the fact that they usually have no intention of commencing other employment or terminating their business until they retire.
  • People 65 or more can withdraw benefits at any time regardless of their employment status.

    Note that superannuants must work more then 10 hours a week to qualify as being gainfully employed. Closure of a partnership or resignation as a director does not constitute termination should the superannuant continue working in the same business for more than 10 hours week (even if in a different capacity).

    Also, terminating work in a family trust does constitute termination of gainful employment if the superannuant was working more than 10 hours a week and receiving a salary.

Martin Murden is director at Partners Superannuation Services.

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