Accessing your super early could be risky
More than a quarter of people who accessed superannuation under the early release scheme made their decision within a day, a survey by a major fund suggests.
According to the ATO and up until 2 September 2020, nearly 2.8 million people had been approved to withdraw more than $34 billion from their retirement savings under the COVID-19 early access program.
Construction industry super fund CBUS in May and June surveyed about 3,000 members who had used the scheme, and the findings have been analysed by university researchers.
- About half of the respondents spent a week or less deciding if they would apply, including 28 per cent who decided immediately or within a day;
- About a third were unsure about the impact on their retirement balances "or had not thought about that or did not care"; and
- 17 per cent correctly predicted the impact withdrawing would have on their super balance at retirement.
"There was a fair bit of evidence in the survey responses that … people were quite confused and uncertain about the long-term impact of their withdrawal on their retirement balance," researcher Susan Thorp from the University of Sydney Business School commented.
The impacts are quite substantial, particularly when you're looking at long lifetimes of earnings.
Under the proposed new early release rules, eligible individuals affected by COVID-19 will be able to access up to $20,000 of their superannuation; up to $10,000 in the 2019-20 financial year and up to another $10,000 in the 2020-21 financial year.
The amounts accessed will be treated as non-assessable non-exempt income and therefore are tax free. These payments will not impact any Centrelink or Veterans’ Affairs payments or any other income or means testing. This stands in contrast to existing rules regarding the early release of superannuation.
To be eligible, a person must demonstrate at the time they apply for early release, that they are:
- unemployed; or
- eligible to receive any of the following under the Social Security Act 1991:
- jobseeker payment;
- parenting payment;
- special benefit; or
- eligible to receive youth allowance under the Social Security Act 1991 (other than on the basis that the person is undertaking full‑time study or is a new apprentice); or
- eligible to receive farm household allowance under the Farm Household Support Act 2014; or
- on or after 1 January 2020 they were made redundant, or their working hours were reduced by 20% or more (including to zero); or
- for a person who is a sole trader—on or after 1 January 2020 their business was suspended or suffered a reduction in turnover of 20% or more.
Not meeting these rerquirements will attract the ATO’s attention and may include further investigations and hefty fines. For example, the ATO’s website states the following about the early access to super;
Our compliance approach is based on ensuring that people have not exploited the COVID-19 measures. Where we have concerns that claims are not genuine we will review them.
Behaviours that attract our attention include:
- Applying when there is no change to your regular salary and wage or employment information;
- Artificially arranging your affairs to meet the eligibility criteria;
- Making false statements or fraudulent attempts to meet the eligibility criteria;
- Temporary resident applicants attempting to apply as a permanent resident or citizen after 1 July 2020; and
- Withdrawing and recontributing super for a tax advantage.
Applying when you are not eligible
You need to check the eligibility criteria carefully before you apply for COVID-19 early release of super and keep records that demonstrate your eligibility. If you apply and you're not eligible at the time of submitting your application, we will take action.
If you are unable to demonstrate your eligibility when we ask for evidence, we may revoke the determination issued for your application. This means the amount paid to you under COVID-19 early release of super will:
- Become assessable income;
- Need to be included in your tax return and you will pay tax on the released amount; and
- If you provide false or misleading information you could face penalties of more than $12,000 for each false and misleading statement.
Withdrawing and recontributing your super
You should make sure you are fully informed and consider whether you need financial advice before you apply to access your super early.
Withdrawing your super early and then recontributing that amount back into your super fund and claiming a personal super contribution deduction, can result in a range of tax outcomes.
Depending on your individual circumstances, this practice could also result in tax and superannuation implications including:
- Excess contributions tax – you may need to pay additional tax if you exceed your concessional or non-concessional contributions cap;
- Contributions tax – concessional contributions made to your super fund are taxed at the 15% rate by your fund;
- Impacting your eligibility for a super co-contribution; and
- Division 293 tax – you may need to pay additional tax due to your income and personal super contributions.
To be eligible to withdraw an amount under the COVID-19 early release of super, the money released must be to assist you to deal with the adverse economic effects of COVID-19. If you withdraw an amount for the main purpose of recontributing the released amount as a personal super contribution to claim a tax deduction, you may no longer be eligible and be subject to tax consequences.
Finally, when you decide whether or not you want to access your super early make sure that you are eligible and you fully meet the criteria so you dint get in trouble for doing the wrong thing. If you feel that you have accessed your superannuation and not too sure if you were eligible at the time make sure that you seek professional advice to help resolve this.
Any advice in this article is provided by Linked Financial Services Pty Ltd ABN 27 164 559 951 and is general in nature only. It does not consider your personal goals, financial situation or needs. It is important that you consider the appropriateness of any advice and the relevant product disclosure statement or terms and conditions before deciding what’s right for you. You can read our Financial Services Guide online for information about our services, including the fees and other benefits that Linked Financial Services Pty Ltd and their representatives may receive in relation to products and services it provides.