Written by SMSF Audit Manager James Song.
With the “COVID-19 Early Release of Super” program ending on 31st December 2020, the ATO has advised that they will be paying particular attention to SMSF audits in the current financial year. It’s imperative that SMSF auditors work closely with accounting firms to ensure that client SMSF funds are compliant.
What are the current requirements in relation to withdrawing super before preservation age?
The ATO advises that withdrawing super before you reach your preservation age unless you meet a condition of release is illegal. Generally, you can only withdraw your super when you reach retirement.
There are limited circumstances where you maybe allowed to withdraw some of your super early, such as:
Compassionate grounds include needing money to pay for:
- Medical treatment and medical transport for you or your dependant.
- Making a payment on a home loan or council rates so you don’t lose your home.
- Modifying your home or vehicle or buying disability aids to cater for the severe disability of you or your dependant.
- Palliative care for you or your dependant.
- Expenses associated with the death, funeral or burial of your dependant.
Severe financial hardship
You may be able to withdraw some of your super if you meet both these conditions:
- You have received eligible government income support payments continuously for 26 weeks.
- You are not able to meet reasonable and immediate family living expenses.
If you withdraw super due to severe financial hardship it is taxed as a super lump sum.
There are different rules if you’re over preservation age and haven’t retired. You must meet all of the following:
- Still be out of retirement, which might mean you’re looking for work, studying, working full or part time.
- Have reached your preservation age plus 39 weeks.
- Get an income support payment for at least 39 weeks in total since you reached your preservation age.
If you have reached your preservation age plus 39 weeks and you were not gainfully employed when you apply, there are no cashing restrictions.
What are some ways that illegal early access can occur?
A trustee/member might accidentally cause an illegal early access transaction, or it could be intentional.
Accidental early access may include:
- Payments over 10% from a Transition to Retirement Income Stream (TRIS) that is not in retirement phase.
- Underpayment of minimums from a TRIS that is not in retirement phase or a market linked pension resulting in the pension “failing” for tax purposes that year.
- Withdrawing excess concessional or non-concessional contributions or a Division 293 tax liability before the ATO has issued a “release authority”.
Intentional early access:
- Applying for and obtaining release of benefits under the “release of benefits on compassionate ground – coronavirus” condition of release when the eligibility conditions have not been met.
- Trustee wilfully withdraws an amount from the SMSF bank account (even if they plan to repay it soon after) when a condition of release has not been met.
- Early release super “schemes” where promoters encourage individuals to transfer their super to an SMSF and then withdraw the money rolled over for non-retirement purposes.
If the early access was a genuine administrative error, such as paying bills or transferring money from the wrong account, it’s actually not an illegal early release amount. The trustee should return the funds to the SMSF when they become aware of the mistake.
If a trustee consciously withdrew money from the fund, then later realized that it was illegal, this is not an administrative error. However, returning the money to the fund in any situation where the withdrawal was NOT a genuine administrative error could result in illegal early access, AND a contribution.
What are the consequences of an illegal withdrawal for members and trustees of SMSFs?
You’ll have to pay interest and significant penalties on your super if you have accessed it illegally. You cannot claim a personal deduction for any fee or commission a promoter takes from your super when they help you to roll over your super or set up an SMSF.
If you illegally access your super early, your assessable income includes the withdrawn amount, even if you return the super to the fund later.
If you are an SMSF trustee, you also incur higher taxes and additional penalties that can disqualify you if you allow super to be withdrawn from the fund early. If disqualified, you are unable to operate as a trustee of an SMSF.
As a trustee, if you knowingly allow illegal access to super you may incur penalties of up to $504,000 and jail terms of up to five years, or fines of up to $2.52 million for corporate trustees.
There may be other penalties and fees depending on your involvement in the scheme.
Beware of people promoting early release of super schemes. They might tell you they can help you withdraw your super to pay off credit card debt, buy a house or car, or go on a holiday. These schemes are illegal. Illegal schemes will cost you a lot more than the super you withdraw and will get you into trouble.
National Audits Group and SMSF Audits
National Audits Group currently service thousands of SMSFs and can offer the knowledge, experience and expertise necessary to provide a comprehensive audit service for SMSF advisors, accountants and trustees.
The SMSF Audit team always endeavour to work closely with accountants to serve the best interests of their clients whilst meeting legislative requirements in relation to the use of SMSF funds.
If you are seeking expert on how to handle compliance issues with your clients’ SMSFs, call James Song on 1300 734 707.