The great super release

I received a panicked phone call from a Eureka Report reader last week. He said he was in a spot of trouble with no less than the Tax Office, and was desperate for some advice.

He admitted that he’d been a bit foolish. Tax returns for his SMSF had not been put in for several financial years. He’s spoken to the ATO and they had given him a deadline of a few weeks to get many years’ tax returns in.

“But my real concern is that I’m sure I breached the 10% rule for a transition to retirement pension. I took out considerably more than the 10% over the last few years, way more.

“Then I had an issue with my accountant and one thing led to another and ... well, I haven’t put in my tax returns for the super fund for several financial years.

“All I want to do is to try to get things right with the Tax Office, get everything up to date and then get things done properly moving forward,” he said.

On the surface, this did not sound good. The trustee said he was on a transition to retirement pension. Under the TTR rules, a member is strictly limited to taking between 4% and 10% of the fund’s value in an income stream. Going over your maximum pension limit can bring in some stiff fines against the SMSF.

But then came the good news. He told me he was 68-years-old. Phew!

Why is that good news? Because now I knew for certain that for at least the last few years, he had not broken the 10% rule for TTR pensions. Because anyone who has turned 65 cannot be on a TTR pension.

But it was a good reminder to write the following guide to when you can access your super.

Turning 65 – the ultimate “condition of release”

Turning 65 is a full condition of release of itself. The day you turn 65 is the day you can withdraw every single cent you have in superannuation, if you wish.

No questions asked, no restrictions. There is no “maximum” that you can withdraw as a pension from your super fund once you turn 65.

Most people would be silly to take it all out, as they would then be taxed on what that money earned outside of super. They would be far better to keep it in super, have it in a pension and draw from there and pay no tax. Ever. (Under the current rules, at least.)

But you can withdraw it all, if you wish. So, at least our reader was looking okay there.

(That didn’t quite put him in the clear. He had received pension payments before turning 65 in the years in question. However, upon investigation, they were under the 10% maximum and he turned 65 later in that financial year. His mind had now been put to rest over that issue. But he still had a lot of work ahead of him to get his tax returns in on time.)

So our trustee didn’t have to worry about the maximum. He did have a minimum to concern himself with – the minimum pension rises to 5% of the fund’s value when aged between 65 and 74. (Hitting the minimum was not his concern, clearly.)

Attaining preservation age

TTR pensions are designed to be an early pension scheme for those who have hit their preservation age, but are still in the workforce. Between those ages, you must take out a minimum of 4% and a maximum of 10% of the value of your pension fund.

In order to qualify for a TTR, you first need to hit your preservation age, which is determined by when you were born. See the following table.

Table 1: Hitting your preservation age

These income streams can only be taken as a non-commutable income stream.

Retiring after hitting preservation age

There are two main qualifications to this.

The first is that you can hit your preservation age and the trustees are convinced (that is they are “reasonably satisfied”) that the member will never work more than 10 hours a week again.

The second is that if, after you turn 60, you change jobs, you have also generally satisfied a condition of release.

In both of those events, there are no cashing restrictions for the members and they could withdraw their superannuation monies.

Whether they would want to is a different matter. If you start to take a pension from super before you turn 60, there is potentially tax to be paid on the income stream (less a 15% tax rebate). And the same principle apply in regards to having to pay tax on the money that is earned outside of super.

Non-standard conditions of release

They are the three main ones that most people will consider in their working lifetimes and the ones that most people spend some time planning for.

There are other conditions of release that few plan for, but some people need to end up relying on.

Death: There is no cashing restriction on death, as death is a compulsory cashing event. In any case, your super isn’t coming to you and is instead being paid out to your beneficiaries or your estate.

Permanent incapacity: If the member is suffering from physical or mental ill-heath to the point where they are unlikely to ever be able to work again in an industry for which they are reasonably qualified, then there is no cashing restriction.

Temporary incapacity: Again, physical or mental ill-heath has meant that the member is unable to work on a temporary basis. This is usually in regards to an income protection or salary continuance claim.

Terminal medical illness: Essentially, if two doctors agree that the member is likely to die within 12 months, then the super benefit can be paid out.

There are other minor conditions of access, including “severe financial hardship”, “compassionate grounds”, the permanent departure from Australia of temporary residents or small amounts, usually less than $200, in lost super.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au

• As younger people become more engaged with superannuation they will be increasingly attracted to self-managed superannuation funds (SMSFs), according to David Hasib, director of financial planning for Chan & Naylor. “Younger generations are taking a closer look at their fund, taking a closer look at the fund manager, at the superannuation administration provider,” he reportedly said. “But they’re also questioning what sort of options they have when they want to allocate their money to a specific type of investment, and it’s at that point that SMSFs become appealing.”
• The perception of poor investment performance and fees is driving the migration to SMSFs, according to the latest research from Roy Morgan Research. The migration from retail and industry superannuation funds to SMSFs is being driven by perceptions of poor investment performance and fees, according to the latest research released by Roy Morgan Research. “Our research shows that the major reason that people are switching to SMSFs are associated with poor investment performance and the level of fees and charges and, as a result, their funds are moving from retail and, to a lesser extent, industry funds into SMSFs,” said Roy Morgan industry communications director Norman Morris.
• The SMSF Professionals’ Association of Australia (SPAA) says there is a considerable amount of misunderstanding about how franking credits work in an SMSF. “There is a common misconception, which some advisors and accountants promote, that a franking credit is like a gift from the government that reduces the amount of tax payable by the fund,” says Graeme Colley, SPAA Director, Technical and Professional Standards. “A franking credit alters the timing of paying tax payable by the SMSF. This occurs at the time the company pays income tax which may end up as a franking credit on dividends paid to the fund and included in the fund’s income.”