Reminder for SMSF trustees: be aware of legal requirements for accessing superannuation early

One of the advantages of administering superannuation via a self-managed superannuation fund is increased flexibility in its management. However, it is important to remember that trustees do not have absolute discretion and that there are strict laws governing when money can be accessed from super funds.

The illegal withdrawal of funds from SMSFs has become an increased area of concern for the ATO which has reported that in the 2020 and 2021 financial years collectively, approximately $635 million was illegally withdrawn from SMSFs in Australia. This increase in withdrawals has been attributed to, at least in part, an increase in the establishment of SMSFs for the sole purpose of illegally accessing funds. However, the increase is also due to greater numbers of SMSF members withdrawing money for personal expenses in breach of superannuation law.

Illegally accessing funds has consequences beyond impacting the balance of a retirement fund: these consequences include tax implications, financial penalties and disqualification from acting as a trustee. Further, disqualified trustees are published online resulting in a permanent online record which could have collateral consequences for individuals.

This article considers the rules surrounding accessing superannuation, the consequences for trustees that do not comply with these requirements, as well as recent trends and reasons for early access of funds.

Stephen Dyason

When can you access your superannuation fund?

The requirements for accessing your superannuation are set out by the ATO. You can withdraw your superannuation fund when you:

  • turn 65, regardless of whether or not you are still working; or
    reach the preservation age (this varies depending on your date of birth) and retire, or transition into a retirement income stream.
  • In limited circumstances you can also legally access your SMSF funds earlier than this. The circumstances where this is possible are specific and have been detailed by the ATO and are discussed below.

Compassionate reasons

You can apply to withdraw your superannuation early on compassionate grounds to pay for expenses for you or a dependent. Circumstances where early withdrawal on compassionate grounds will be considered include:

  • medical treatment or medical transport for you or a dependent;
  • modifying a home or vehicle to accommodate for special needs arising from you or a dependant’s severe disability;
  • paying for palliative care for you or a dependant;
  • death, funeral, or burial expenses for your dependant; or
  • preventing foreclosure or the forced sale of your home.

Severe financial hardship

If you are experiencing severe financial hardship and wish to access funds from your SMSF you can apply to the trustee of your fund. Access on the grounds of severe financial hardship is administered by the fund and does not require prior approval from the ATO. Before granting permission to access funds from an SMSF due to financial hardship a trustee making a decision must be satisfied that that the member requesting access:

  • cannot meet reasonable immediate family living expenses; and
  • has been receiving relevant government income support payments for a continuous period of 26 weeks.

The payment will be provided in a lump sum and cannot be less than $1,000 or more than $10,000.

If a member requesting access has already reached their preservation age the trustee making a decision must be satisfied that:

  • the member had been receiving income support payments for a cumulative period of 39 weeks since reaching their preservation age; and
  • was not gainfully employed on a full-time or part-time basis at the time of applying.

Terminal medical condition

In some circumstances you may be allowed to access your super early if you are diagnosed with a terminal medical condition. A medical condition will be terminal if the following 3 conditions are met:

  • two medical practitioners have certified, jointly or separately, that the illness or injury will likely result in death within 24 months of the certification;
  • at least one of the practitioners is a specialist in the area of the illness or injury; and
  • you apply to the ATO within 24 months of the certification.

If you are eligible to access money from your SMSF in this way there is no limit on the amount that can be withdrawn and the money will become unrestricted non-preserved benefits that will be tax free.

Temporary or permanent incapacity

A member can access their SMSF early on the grounds of permanent incapacity if the member is no longer engaged in gainful employment and the trustee believes that due to poor health they are unlikely to engage in gainful employment which they have the requisite qualifications and experience for again.

In addition, a trustee can release funds to a member if they are satisfied that the member has had to temporarily stop working due to ill health (physical or mental). The benefit must be paid as an income stream and will not generally be considered if a member is able to access to sick benefits. Funds released in this way can only be paid from the insured benefits or voluntary employer-funded benefits.

First home super saver scheme

If you have saved for your first home inside your super fund utilising the first home super saver scheme then you will be able to request a release from the ATO. If the request is successful then the ATO will issue a release authority letter that must be completed within 10 business days, the ATO will withdraw the appropriate amount of tax from the funds once they are withdrawn.

What are the consequences for early access which is not permitted by law?

Where superannuation is withdrawn from an SMSF early other than as permitted by law (such as for the reasons set out above) this can result in serious consequences for SMSF trustees.

For example, an SMSF member who is acting as a trustee in their individual capacity (or as director of a corporate trustee) may be disqualified from acting as a SMSF trustee due to illegal access by members. Disqualification as a trustee will appear on a public record which could have additional implications, especially if you are, or would like to be, a trustee or a director of another organisation now or in the future.

Additional tax, penalties and interest may also be payable as any illegally accessed funds will be included in taxable income, regardless of whether the amount is later repaid into the fund. Trustees and directors of corporate trustees will be personally liable to pay the penalties associated with any breaches and penalties must be paid personally not from the assets of the fund. By way of example, lending to members or relatives of the SMSF (which is a common mechanism used for an illegal withdrawal of funds) carries a penalty of 60 units. A penalty unit is currently valued at $313.00[1] making the monetary penalty associated with this breach $18,780.00. Penalties for other offences can be found on the ATO’s website.
Alternatively, the ATO may issue a rectification direction or accept an undertaking from the SMSF. If the ATO makes a rectification direction, the SMSF will be required to undertake a specified action aimed at remedying the breach and will need to provide evidence that it has complied with the direction. If the SMSF gives an undertaking which is accepted by the ATO, this undertaking acts as a legally enforceable agreement that the fund and its managers will commit to certain actions.

Aside from any penalties or fines that may be imposed for breaching the law, reducing the balance of your superannuation fund is not advised unless absolutely necessary. Superannuation funds make money through compound interest and the intention is that assets continually increase in value. For example, between 2021 and 2022 the ATO reported that the value of SMSF assets grew by 3%. Whilst an amount which is proposed to be withdrawn may seem negligible at the time, over a longer period these withdrawals could result in a substantial loss of savings which could significantly impact on retirement savings.

Recent trends in SMSF early access

In the 2022 financial year auditors reports indicated that around 13,000 SMSF’s had contravened the SMSF rules over 40,000 times: his amounted to being almost double the amount of contraventions reported the previous year. Approximately 34% of these contravention reports related to illegally accessing funds. Early access via a loan to a member was the most common contravention.

The trend in illegally withdrawing money from super has attracted regulatory attention. At the SMSF Association conference in February 2024, Deputy Commissioner Emma Rosenzweig indicated that an estimated $635 million was illegally withdrawn from SMSF’s in the 2020 and 2021 financial years combined. The ATO’s analysis also found that over $200 million in illegal loans between related parties were entered into each year during that period.

SMSF members should also be aware of an increase in illegal early withdrawal schemes which are dedicated to encouraging and assisting people with illegally withdrawing their super balance. These schemes are often targeted at individuals with managed super funds, they encourage individuals to move their assets to a SMSF and state that assets can be accessed to assist with expenses such as buying a car or home, or going on a holiday.

Key takeaways for SMSF trustees and members

It is of utmost importance that SMSF members and trustees ensure that they are aware of the circumstances in which they are legally permitted to withdraw superannuation early and exercise caution in any circumstance where such withdrawal is proposed to occur. Legal advice should be sought if there is any uncertainty as to the legality of a proposed withdrawal.

If a trustee or member believes that SMSF funds may have been accessed early illegally, inadvertently or otherwise, the ATO’s early engagement and voluntary disclosure service can be used to report non-compliance. The ATO have made clear that voluntary disclosure will be considered favourably when determining if a penalty for non-compliance will be imposed.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

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[1]Until 30 June 2024.


Lawyer in Profile

Stephen Dyason
Stephen Dyason
+61 3 9258 3247

Qualifications: LLB, Deakin University

Stephen is a member of Maddocks Commercial team. He is a corporate and commercial lawyer, who assists clients across a diverse range of industries including financial services, consumer markets and manufacturing in a wide variety of legal matters.

His experience includes:

  • mergers and acquisitions,
  • corporate reorganisations, and
  • general commercial law work.

He focusses on drafting, advising on and negotiating contracts, transactions and agreements for clients and also assists with providing general corporate advice.

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