Australian Government’s economic response to Covid-19 – the impact on superannuation benefits for those suffering reduced incomes

22 Mar 2020
Lyn Formica

Lyn Formica

Head of SMSF Technical & Education Services

On 22 March 2020 the Government announced the second of their stimulus packages to support Australia through the economic consequences of the Covid-19.

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Special access to existing superannuation balances will be available to those who have experienced significant (at least 20%) reductions in their income or are unemployed or who have been retrenched. The rules announced today are explained here.

Temporary Early Access to Superannuation

As a general rule, preserved superannuation benefits may only be accessed in lump sum form once members turn 65 or reach their preservation age and retire (or satisfy some other condition of release such as permanent incapacity, terminal illness etc). However, in times of financial distress, there are some circumstances under which members may be able to bypass these rules and access their super earlier.

Unfortunately the current rules which allow access to those suffering from “severe financial hardship” or qualify on “compassionate grounds” are very narrow and release has only been available under very limited circumstances.

The Government has today announced a quite significant, but temporary, extension to these rules. A copy of their Fact Sheet can be found here.

Who is eligible for the new rules?

A new opportunity for early release will be available to individuals who:

  • are unemployed, or
  • are eligible to receive a Job Seeker Payment (previously known as Newstart Allowance), youth allowance for job seekers, parenting payment, special benefit or Farm Household Allowance, or
  • on or after 1 January 2020:
  1. were made redundant, or
  2. had their working hours reduced by 20% or more, or
  3. for sole traders, their business was suspended or there was a reduction in their turnover of 20% or more.

Further information is needed in relation to how this 20% reduction is to be determined, but it appears it will be by comparing current hours/turnover with the average for the period 1 July 2019 to 31 December 2019.

Importantly, there is no requirement that the individual is already receiving Commonwealth income support payments and there is no waiting period. The payment can be requested immediately once the new rules come into effect (see below).

There are no income or assets tests. Even someone with a very high salary who remains employed and has other assets could access this payment as long as their salary has been reduced by 20% after 1 January 2020. While they might choose not to, many could well do so if their superannuation is more easily accessed in cash than other assets and if their reduced income is not sufficient to meet living costs that cannot be adjusted quickly to reflect their new situation (eg large mortgage payments, rent etc).

How much will be available?

Eligible individuals will be able to access up to $10,000 before 1 July 2020. A further amount of up to $10,000 will be available from 1 July 2020 but only for approximately three months after that time (exact timing to depend on the passage of legislation).

Only one payment will be permitted in each financial year.  

How do individuals apply for the new payment?

To access benefits held in funds other than SMSFs, the process will be as follows:

  1. Individuals will be able to apply directly to the ATO via their myGov account.
  2. Once the ATO has processed the application and confirmed the individual’s eligibility, they will provide both the individual and their superannuation fund with a determination.
  3. On the basis of that determination, the fund will then make payment to the individual.

The Fact Sheet describes this measure as targeting those who have suffered a loss of income due to Covid-19 but there is no indication whether one of the questions that will be asked by the ATO in the relevant application will be whether the reduction in income relates to this specific event.

Individuals do not need to apply directly to their superannuation fund. However, it would be wise to double check that the fund has the right bank account details and proof of identity documents to ensure that the money can be paid quickly.

While we understand the eligibility rules for SMSF members will be the same as for members of non-SMSFs, separate arrangements are being made and there may be a different process to follow when moneys are to be released from an SMSF. Further guidance on the application process for SMSF members is to be made available on the ATO website in due course.

Given the wide ranging impact of this event, it is entirely likely that some SMSF members will need to take advantage of the measure.

When will amounts be available?

Applications will be able to be made from mid-April 2020. However it is not yet clear how long it will take for the ATO to process an application and for the fund to make payment to the individual.

Note that anyone who simply withdraws money from their SMSF now, or even after mid April but does not follow the right process, will be subject to the usual rules. This could be substantial tax and other penalties – it is vital to wait until the new rules are in place.

How will these payments be taxed?

Amounts released under this new ground for early release will be paid tax free and will not affect Centrelink or Veterans’ Affairs payment eligibility.

This is unusual – currently amounts released on compassionate grounds or on the basis of severe financial hardship are taxed which can mean up to 20% + medicare for many people.

Will there be rules on how the amount released must be spent?

At this stage, individuals will be free to spend the monies released in any way they choose.

What if the individual is already receiving income from their superannuation fund from a transition to retirement income stream?

Many people in this position will not need to access the new payment - they could simply increase their transition to retirement income stream payments if they need more income to supplement a reduced salary. However, transition to retirement income streams have an upper limit on pension payments (10% of the pension balance at the previous 1 July). If the individual requires more than the 10% maximum, they could apply to access the new payment but when they do so, the payment amount should be rolled back (commuted) to accumulation phase, and then withdrawn from the individual’s accumulation account as a lump sum payment.  

How can Heffron help?

Heffron SMSF Solutions is supporting individuals in a number of ways including:

  • for members of SMSFs administered by us, we will prepare the fund documentation to evidence the withdrawal of monies under this new condition of release at no cost, and
  • for accountants and advisers needing to document the withdrawal of these monies from SMSFs they administer, we will provide template fund documentation for their use at no cost.

We will be able to do this as soon as the process for SMSFs is finalised between the Government and ATO. 

As more details come to light we'll continue to keep you informed with regular updates.