Getting your hands on it

One of the core purposes of superannuation, and some say it is the end game, is the provision of benefits in retirement. However, in addition to retirement, there are several other events allowing a person to access their retirement savings. In addition, we need to consider what retirement actually means from a superannuation law perspective. This article considers when an individual can access their super and whether there are any restrictions that might apply.

Access versus tax implications

Firstly, it is important to recognise the rules allowing an individual to access their superannuation are separate from the taxation implications of when super is withdrawn. The ability to access super is contained in the Superannuation Industry (Supervision) (SIS) Act and Regulations, whereas the taxation of superannuation benefits is contained in the Income Tax Assessment Act. Further, there can be similar definitions across both pieces of legislation that have different meanings or requirements. For example, the permanent incapacity condition of release under the SIS Regulations only requires trustee assessment, whereas the requirement for a benefit payment to be taxed as a ‘disability superannuation benefit’ needs assessment by two legally qualified medical practitioners.

Preservation components (see table 1)

The preserved amount of a member’s benefits is their total superannuation benefits, less their unrestricted non-preserved benefits and any restricted nonpreserved benefits. It would be rare for an SMSF member to have restricted non-preserved benefits as they generally relate to employment-related contributions, other than employer contributions, made prior to 1 July 1999.

Unrestricted non-preserved benefits can be cashed, that is, withdrawn, at any time and do not require the member to satisfy another condition of release with a nil-cashing restriction. Further, once benefits become unrestricted non-preserved, they cannot change back to being preserved. However, future contributions and earnings will be subject to the preservation rules and may require the member to satisfy a condition of release to access those benefits.

Case study

Alison is aged 61 and ceases her current employment and starts a new job. She has satisfied the ‘retirement’ condition of release (explained later) and consequently the value of her superannuation at that time, being $685,492, becomes unrestricted non-preserved, meaning she is able to access it. However, she has no need to access her super at this time as she has continued to work and has just changed jobs.

Two years later her super is now worth $986,904 after allowing for net earnings and personal contributions of $250,000. Alison comes to you and says she’d like to pay out her mortgage, which is around $185,000. What amount of super can she access?

The amount is $685,492, the value of her super at the time she met the ‘retirement’ condition of release, being when she changed jobs.

However, did Alison tell her adviser or accountant of her SMSF she had changed jobs so the relevant amount could be determined and recorded as unrestricted

Fortunately, she remembered an article in a newsletter from her adviser about the retirement condition of release and how it works for those aged 60, informed her SMSF’s accountant about this intention, and they calculated and recorded the unrestricted non-preserved amount at the time. She can now withdraw the $185,000 from her SMSF, taxfree, and pay out her mortgage.

Continued on next page

Conditions of release and restrictions

The conditions of release, outlined in Schedule 1 of the SIS Regulations, are those events that permit an individual to access their preserved benefits and any restricted preserved benefits, but may also be subject to cashing restrictions.

Table 2 summarises those conditions of release with no cashing restriction. Once the individual satisfies the condition of release, there is no restriction on their access to their benefits, that is, they have full access to those benefits that are now recorded as unrestricted non-preserved.

What is retirement?

Whether an individual has satisfied the retirement condition of release will depend on their age. First, the individual must have attained their preservation age, which is currently 59. Where the individual has attained their preservation age, but is not yet age 60, the retirement condition of release is satisfied where the individual has ceased an arrangement of gainful employment and the superannuation trustee(s) is reasonably satisfied they never intend to be gainfully employed in the future on either a full-time, meaning working for at least 30 hours a week, or part-time, meaning working for at least 10 hours to under 30 hours a week, basis.

Where the individual has attained age 60, they can either satisfy the requirement just outlined or they can simply cease an arrangement of gainful employment on or after their 60th birthday. In the previous case study of Alison, she satisfied the retirement condition of release as she ceased an arrangement of employment, and it ceased after she turned 60. So, while she had not retired in her mind, as she continued in her new job, she had met the requirement of the retirement condition of release, making the value of her benefits at that time unrestricted non-preserved. This would also apply where the individual has two jobs and ceased one of them after reaching the age of 60. It is also worthy to note the requirement to first cease an arrangement of gainful employment does not require such an

Continued on next page

Continued from previous page arrangement to have satisfied any minimum hours. The arrangement could have been for one week, one day or one hour. The part-time and full-time basis of gainful employment is only required where the individual relies on the first part of the retirement condition of release, that is, that they intend not to be gainfully employed in the future.

The preservation age has been steadily increasing over time from 55 and will reach 60 on 1 July 2024. Consequently, from 1 July 2024 most individuals can turn their preserved benefits into unrestricted non-preserved by simply ceasing an arrangement of gainful employment after they turn 60.

Other points in respect of the retirement condition of release to note include:

• the cessation of gainful employment could have occurred prior to the individual attaining their preservation age. For example, Alex is 61 and has not been gainfully employed since he ceased his job at age 51. He can satisfy the retirement condition of release provided the trustee of his fund is satisfied he never intends to be gainfully employed on either a full-time or part-time basis. He would also need to be able to substantiate the prior arrangement of gainful employment and its cessation, and

• an individual who has never been gainfully employed can never satisfy the retirement condition of release as they cannot satisfy the requirement to have ceased an arrangement of gainful employment. They will need to wait until they attain age 65 and use that condition of release to access their preserved and restricted non-preserved benefits. With the release of the draft objective of superannuation, many have questioned whether this will rule out early access. There have been further comments that super should be available to purchase a house and to stave off foreclosure by a bank.

Of course, early access, that is prior to retirement, already covers these scenarios albeit with restrictions. Something to ponder is whether an enshrined objective of superannuation rules out any further earlyaccess conditions of release or removes the current ones.

The temporary incapacity condition of release requires the individual to first cease gainful employment, albeit temporarily. There is no reference to full-time or part-time, so all arrangements of gainful employment must cease. A reduction of hours would not meet the requirement.

The form of a temporary incapacity benefit is a non-commutable income stream. This is not a superannuation pension and consequently is not taxed as such. There is no reference to the tax-free and taxable component and no 15 per cent tax offset. Further, it does not matter if the recipient is aged 60 or more. Effectively, the non-commutable income stream is a replacement of salary and wages or other personal exertion income and taxed accordingly. The SMSF will most likely be required to register as a pay-as-you-go (PAYG) withholder and withhold tax in respect of temporary incapacity payments.

The amount of a temporary incapacity benefit is also limited to the amount of earnings the individual was receiving just prior to the temporary incapacity. Documentation should be retained by the SMSF trustee(s) to be able to demonstrate the amount of temporary incapacity benefit paid does not exceed this amount. A temporary incapacity benefit cannot be funded from a member’s ‘minimum benefits’ (refer to Division 5.2 of the SIS Regulations). For this reason, where an SMSF provides a temporary incapacity benefit, it is generally funded from an insurance policy. The SMSF trustee, however, should not simply pay out to the member the amount of the insurance proceeds received as this may not comply with the earnings restriction, previously outlined. Further, there would most likely be a PAYG withholding amount to be retained and remitted to the ATO.

Given these issues with temporary incapacity benefits, they are generally provided outside of superannuation in the form of an income protection policy. Such premiums are usually tax deductible to the individual.

Finally, where the preservation standards are contravened, the whole benefit payment is assessable, with no reference to the benefit’s tax components or the age of the benefit recipient. However, the ATO has discretion not to treat the payment as assessable. The regulator is expected to release the final version of Law Administration Practice Statement PS LA 2021/D3 in mid-2023, which will provide guidelines on the tax commissioner’s discretion where superannuation benefits are received in breach of legislative requirements.

The superannuation access rules and strategies concerning the upcoming indexation of the general transfer balance cap will be covered in detail at SMSF Professionals Day – Strategies for success, which will be held in Brisbane (25 May), Melbourne (1 June), Sydney (8 June) and online (15 June).