Common compliance breaches and early access to super
9 April 2024
Why you should not access your benefits too early
When it comes to Self-Managed Super Funds’, one of the greatest concerns of the ATO is illegal early access to superannuation benefits. As this remains a major focus, a new program is being introduced to enable the ATO to estimate the size, scale and trajectory of the risk of early access. This will allow the ATO to allocate resources and implement strategies to reduce the risks.
During the financial years 2019/20 and 2020/21 it is estimated that over $637 million of super benefits were accessed illegally. In addition to this, a further $425 million was accessed via prohibited loans from SMSFs. Of these loans, approximately 75% have been repaid.
Through their reviews of newly established funds, the ATO predicts that they were able to protect approximately $294 million from being accessed illegally over the same period. The latest statistical information from the ATO shows approximately 19.7% of all contraventions reported by Auditors are for SMSFs providing loans and/or financial assistance to members or relatives.
Some of the drivers leading to early access and contravention reports being issued may include:
A lack of, or misunderstanding of, the rules
Attitude towards super and a commonly held view that ‘it is my money, I can do what I want with it’
Financial stress and difficulties
Personal issues
The top five compliance breaches reported by Auditors are:
Illegal early access
In house assets
Separation of assets
Sole purposes test
Arm’s length transactions
Interactions with related parties of the members and trustees of the fund is present in many of these reported breaches, highlighting the need to take precautions when dealing with related parties.
Because early access to super remains one of the greatest concerns for the ATO, they are enforcing compliance with superannuation law. The number of individuals the ATO has disqualified from being an SMSF trustee has increased over the years:
FY 2020/21 - 191 disqualified trustees
FY 2021/22 - 252 disqualified trustees
FY 2022/23- 751 disqualified trustees
FY 2023/24 (year to date to 1 February 2024) - 447 disqualified trustees
A large portion of these disqualifications relate to the accessing of super benefits illegally.
It is important to understand that superannuation benefits must be preserved until retirement and should not be accessed earlier, without meeting a condition of release. There can be serious consequences for individuals who are disqualified as trustees, as well as for other members of the SMSF as it may require the SMSF to be wound up.
Circumstances to access super benefits early
Despite the warnings listed above, there may be circumstances where an individual may access their super benefits early, without breaching the rules, as in severe financial hardship and compassionate ground.
Note that there are strict requirements that must be met to access benefits under financial hardship or compassionate ground provisions, and individuals should not self-assess any potential entitlements.
Severe financial hardship
The basic conditions to accessing benefits via severe financial hardship include:
Where the individual member is under preservation age (currently age 59, but increasing to 60 on 1 July 2024), they must receive a form of Commonwealth income support payment for a continuous period of 26 weeks.
Where the individual member has reached their preservation age, they must have been in receipt of Commonwealth income support payments for a cumulative period of 39 weeks, after reaching their preservation age.
In either case, the trustees must be supplied with written evidence, that is no more than 21 days old, from the relevant Commonwealth department that the individual is in receipt of benefits for at least the required time.
Along with the written evidence, the trustees must then be satisfied that the individual is unable to meet reasonable and immediate family living expenses.
Benefit payments must be paid as a single lump sum payment and will be restricted to between $1,000 and $10,000 per 12-month period:
Measured from date of payment, not based on a calendar or financial year,
Where a member’s total preserved and/or restricted benefits is below the lower limit of $1,000, they may be able to access that lower value (subject to meeting all other criteria).
Payments to an individual under the age of 60 may be subject to tax withholding.
Compassionate grounds
Applications to access benefits under compassionate grounds must be lodged with the ATO. However, there are limited circumstances that will be considered for access under this measure, including:
To pay for medical treatment or medical transport for the person or a dependent
To enable the person to make a payment on a loan, to prevent:
foreclosure of a mortgage on the person's principal place of residence; or
exercise by the mortgagee of an express, or statutory, power of sale over the person's principal place of residence
To modify the person's principal place of residence, or vehicle, to accommodate the special needs of the person, or a dependent, arising from severe disability
To pay for expenses associated with the person's palliative care, in the case of impending death
To pay for expenses associated with a dependent’s:
palliative care, in the case of impending death; or
death; or funeral; or burial
To meet expenses in other cases where the release is consistent with a ground mentioned in the above points, as the Regulator determines.
As part of the application process, evidence in support of the claim will be required by the ATO. This may include but is not limited to:
- letters from medical practitioners in the case of medical related expenses;
statement from the mortgagee (lender) in relation to potential foreclosure.
As with severe financial hardship, payments are restricted to single lump sum payments and may be subject to tax withholding.
Unfortunately, the numbers provided above in relation to illegal early access will include instances where individuals with SMSFs have determined for themselves they should be able to access benefits under either the severe financial hardship or compassionate grounds conditions of release, without following the proper procedures.
Key takeaways
In a recent update to their website, the ATO have noted an increase in calls from super fund members enquiring about the compassionate grounds’ provisions after they have been unsuccessful in being able to access their benefits under the severe financial hardship provisions.
In many cases, the individual does not satisfy the requirements to access their preserved benefits under the compassionate ground provisions either.
If you are struggling and are contemplating accessing your super benefits to help alleviate financial concerns outside of your super fund, please contact your advisor before acting or taking any payments to prevent any penalties from the ATO.
Our team of experts at Unison SMSF can help clarify any further queries. Get in touch with a member of our team today.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the thought or position of Unison SMSF.
This document contains general information and is not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.
By Chris Campbell
Unison ABN 31 315 285 606 © Findex 2024
Some of the Unison SMSF Audit personnel involved in providing services may be members of a professional scheme approved under Professional Standards Legislation such that their occupational liability is limited under that Legislation. To the extent that applies, the following disclaimer applies to them. If you have any questions about the applicability of Professional Standards Legislation to Unison SMSF Audit’s personnel involved in providing services please speak to your Unison SMSF Audit adviser.
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