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Self Managed Super Fund (SMSF) Article
Accessing Super Before Retirement
By Tony Negline.
This article may be out of date.
20th October 2004
How and when you can properly access some or all of your preserved super assets before retirement is not well known.
Right now various government authorities are very concerned about a small number of people illegally removing their super assets from the system before these people retire.
There are some acceptable ways for pre-retirees to access their preserved super assets. These rules may apply to anyone who is either ill and cannot work or is in financial difficulty.
There are at least four different ways preserved super can be accessed before retirement: severe financial hardship, compassionate grounds, temporary incapacity and permanent incapacity.
To access preserved super under the severe financial hardship (SFH) rules a member applies to a super fund’s trustee. There are two different SFH rules – one set of rules apply if a member is at least age 55 and 39 weeks and another set of rules apply if a member is under this age.
The rules for members aged at least 55 and 39 weeks are used infrequently because people who fall into this age bracket are able to access all their preserved super by retiring permanently.
A member aged under 55 and 39 weeks must have been receiving Commonwealth income support payments continuously for 26 weeks. The member must be receiving this payment when they claim to be under SFH and must also have official documentary evidence proving their claims about the type of government payment and the period of time it has been paid.
Additionally members under age 55 and 39 weeks must be able to convince a super fund’s trustee that they cannot meet reasonable and immediate living expenses. There are no rules that tell a trustee how they determine a member’s bona fides in this respect.
A fund may only pay one amount for a 12 month period (which begins on the day the first SFH payment is made) to a member under the SFH rules and may only pay up to $10,000 over that 12 month period.
To access preserved super under compassionate grounds (CG) a member must apply to the Australian Prudential Regulation Authority. The CG rules apply to a member fund member or a member’s dependants. For example, medical treatment (including dental treatment), necessary home or car modifications due to severe disability and mortgage repayments to prevent a forced sale of a home.
APRA will only approve the payment of a benefit under this rule if it can be established that without some or all of a member’s super assets the expense could not be met. For each CG rule APRA has a list of items which have to be included with an application to justify the claim.
For example if mortgage assistance is required then a member must produce official notification from the lender that they are about to begin foreclosing on a loan. Under this rule the maximum that APRA can authorise is three months mortgage repayments and twelve months interest on the outstanding balance.
For all other CG rules APRA will allow an amount of preserved super to be withdrawn after taking into account a member’s financial capacity.
If a member has temporarily stopped work because of a mental or physical illness then a super fund is able to pay out a pension so that the member continues to receive an equivalent pre-illness remuneration. The pension can only be paid while the member cannot do the same work as they were doing prior to becoming ill.
This temporary incapacity benefit is very similar to an income protection insurance and many super fund trustees like to insure this type of benefit. A tax deduction is allowed to trustees for the cost of this insurance but only for the premium which relates to the first two years of temporary incapacity. This doesn’t mean that a trustee can’t buy income insurance with a longer benefit period but the premium may not be tax deductible.
The last way of accessing super before retirement is via permanent invalidity. Under super laws this occurs when a trustee “is reasonably satisfied that the member is unlikely, because of [mental or physical] ill-health, ever again to engage in gainful employment for which the member is reasonably qualified by education, training or experience.” When this occurs all a member’s benefits can be paid out. Notice that it is the trustee alone who decides if a member satisfies this definition.
Any lump sum paid out of a fund because of the above rules will be subject to Eligible Termination Payment tax rules. Pensions paid out because of these above rules will be subject to the income tax rules. Tax concessions are available under permanent invalidity but access to these concessions involve two qualified medical practitioners. Most benefits paid out under these rules would count for Reasonable Benefit Limit purposes.
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