You can, but. The penalties might be severe.
A self-managed super fund (SMSF) is a super private fund that you manage yourself. SMSFs are different from industry and retail super funds.
When you manage your own super, you put the money you would typically put in a retail or industry super fund into your own SMSF. You choose the investments and the insurance.
Your SMSF can have up to four members, who are friends or family. Most SMSFs have two or more. As a member, you are a trustee of the fund — or you can get a corporate trustee. In either case, you are responsible for the fund.
While having control over your own super can be appealing, it’s a lot of work and comes with risk.
Only set up your own super fund if you’re 100% committed and understand what’s involved.
The risks and responsibilities of SMSFs
All members of an SMSF are responsible for the fund’s decisions and for complying with the law.
These responsibilities come with risks:
As you retire, you will be considering what you want to do with your superannuation in your self-managed superannuation fund (SMSF). Your fund can pay benefits in the form of a lump sum, an income stream, or a combination of both.
The idea of a lump sum in the hundreds of thousands of dollars can seem very attractive, almost like winning the lottery, but most retirees will have the future in mind and concerns around how long this balance will last them.
Such concerns are what lead many Australians to choose a pension or income stream over a lump sum. However, if you are one of the people that do decide to take your superannuation as a lump sum, there are several rules and regulations you need to be aware of. Different tax implications may influence what you do with that lump sum as well.
From time to time, and for a myriad of reasons, you might have personal cash flow problems. If you run your self-managed superannuation fund (SMSF), then using some of its money to solve these problems can be very tempting.
But if you take money out of your super fund other than following the super laws, then severe penalties can apply. These can range from having the withdrawals taxed at the highest marginal rate, to having your fund declared to be non-complying, to facing additional penalties under the ATO’s general tax administration powers.
The only sensible approach is to know that you can’t access your super money early because there is a high probability of getting caught.
Don’t forget that SMSFs need to be externally audited each year. If an auditor finds any illegal early withdrawals from your super fund, then it must be reported to the Australian Taxation Office (ATO).
There are two common myths around withdrawals from accumulation accounts.
The first myth is that you can only withdraw from a pension account but not accumulation. That you must start a pension to withdraw money. Wrong. You can remove from accumulation if you have met a condition of release.
The second myth is that you can only withdraw from pension and accumulation in a certain proportion. Wrong again. You can withdraw from accumulation (if you have met a condition of release) without any regard to what you withdraw from your pension account.
Under certain circumstances, it could be possible to withdraw some of your superannuation balance early. We take a look at what conditions apply and how to do it.
There are a few situations where Australians could apply to withdraw some of their superannuation before retirement. These include:
Generally, you can access your superannuation after you’ve reached your preservation age and you’re retired, but there are instances when you may be able to access super early.
Your super fund plays a big part in your retirement, so understanding how it works and when you can access your super can be very helpful in planning for your future.
Your super is designed to help fund your retirement, so generally, it’s only possible to withdraw your super once you’ve reached a ‘preservation age’ and you’re permanently retired. However, there are some special cases where you may be able to withdraw your super savings early.
Here’s some helpful information about when and how super may be accessible to you.
Your ‘preservation age’ is the earliest age where it’s possible to tap into your super, and it’s calculated based on your date of birth. Given you did not satisfy one of the strict rules that allow you to withdraw money from your super, you will suffer some penalties. The key conditions that allow withdrawals from super are retiring from work after turning 60 or reaching the age of 65, says Daniel Butler, a director of DBA Lawyers in Melbourne.
In any event, you will need to “face the music” and are doing so by entering the ATO’s early engagement and voluntary disclosure program which is specifically designed for these matters.
Under this regime, there are criteria you must satisfy, which the ATO will take into account if you do this voluntarily before it conducts an audit of your fund.
As far as likely penalties are concerned, says Butler, one unlikely outcome is serving a jail term. Superannuation breaches of the nature you have committed tend to be covered by financial penalties.
But first, you need to manage your stress and anxiety despite any penalties that lie ahead. Being stressed and anxious will not change what has happened and what is to follow.
Indeed, it is very important to seek medical and mental support and counselling if you can’t handle the pressure. Beyond Blue and Lifeline specialise in providing such help.
There has been a range of cases over the years where people have sought to use their SMSFs for personal or business loans contrary to the super rules. One such case is Olesen v Eddy  FCA 13, a Federal Court case where a $15,000 penalty and $5000 of court costs were imposed on an SMSF trustee who withdrew a total of $75,600 for personal use.
Interestingly the court gave the trustee, who was also very stressed by the experience, two years of weekly instalments to pay the penalty and costs.
If you are 60 years old or older, any lump sum withdrawal from your SMSF is tax-free.
However, just because you’ve reached 60 doesn’t mean you can automatically receive your superannuation benefits. You also need to meet a condition of release. Those conditions include retiring from an employment or turning 65. (Read our article When can I access my super? All conditions of release explained to learn about all conditions of release).
Retiring, to access your superannuation funds for anyone between their preservation age and age 60 means that you don’t intend to work for more than 10 hours each week in the future. All the trustees of the SMSF need to be satisfied that this will be the case and may ask the trustee to sign a declaration confirming they no longer intend to work such hours.
Only withdraw the minimum from pension.
Since the transfer balance cap now limits transfers into your pension account, it usually makes sense only to withdraw the minimum amount from your pension account and take the rest out of accumulation.
The transfer balance cap now limits what you can transfer into your pension account. So once you take it out, you can’t pay it back in if you have hit your transfer balance cap (TBC). Pension payments don’t give you a debit to your transfer balance account. So why take something out and waste that portion of the cap when you can also take it out of accumulation?
Generally speaking, superannuation rules state you can’t take your super until retirement (as outlined earlier), apart from the First Home Super Saver Scheme, which was introduced on 1 July 2017 to help eligible Australians save a deposit for their first home.
The Federal Government is also allowing people affected by the COVID-19 coronavirus outbreak to apply for early release of their superannuation. If you’re eligible, you can access up to $10,000 of your super between 1 July and 31 December 2020.
There are other cases where legally accessing super early is possible, such as if you have a severe financial hardship, or have certain medical conditions. In each instance, you’d need to meet the eligibility criteria.
If you access your superannuation early, even if you have reached your superannuation preservation age and meet a condition of release, you will need to calculate your taxable and tax-free proportions when you withdraw a lump sum. You will only pay tax on the taxable proportion of your lump sum. Your tax-free component is the total of all the non-concessional contributions you have made to your superannuation fund over the years.
For the taxable portion, you can withdraw up to the low rate cap, which will also be tax-free. This is currently $205,000 but will increase to $210,000 next financial year. This amount is indexed in line with movements in Average Weekly Ordinary Time Earnings (AWOTE) in increments of $5,000 and is rounded down.
Any amounts above the low-rate threshold will be taxed at 17 per cent, or your marginal tax rate, whichever is lower. The 17 per cent includes the Medicare levy.
More considerable superannuation funds keep track of your taxable and tax-free components, and many of the SMSF administration platform providers also track this amount on their platforms.
Life can be unpredictable. Because of this, there are some instances where you may be allowed to withdraw a certain amount of money from your super on compassionate grounds if you can’t meet certain expenses.
These can include:
If you’re under your preservation age, have been receiving financial support payments from the government for 26 consecutive weeks and can’t meet reasonable and immediate family living expenses, you can apply to withdraw between $1,000 and $10,000 from your super. This can only be done once in 12 months.
There are no cashing restrictions under severe financial hardship if you have reached your preservation age plus 39 weeks, received government income support payments for a cumulative period of 39 weeks and you were not gainfully employed on a full-time or part-time basis at the time of application.
Suppose you’re permanently or temporarily unable to work due to a physical or mental medical condition. In that case, you may be able to access super as a lump sum or via regular payments over some time.
If you’ve been appropriately diagnosed with a terminal illness that’s likely to result in your death within two years, you could apply for early access to your super. In this case, there are no set limits on the amount you can withdraw.
If you switch employers and the balance of your super account is less than $200, you can apply to withdraw this amount. Likewise, if you have less than $200 of lost super or less than $200 of super that’s being held by the Australian Taxation Office (ATO), you may be able to withdraw this money.
Your Super Benefit is made up of two components, namely a Tax-Free Component and a Taxable Component. The Tax-Free Component typically comes from after-tax personal non-concessional contributions made by you over time. The Taxable Component naturally comes from concessional contributions made by you over time which include employer contributions and salary sacrifice contributions. Any Lump Sum withdrawals must be paid in the same proportion as the Tax-Free and Taxable Components of the Member’s interest in the SMSF. This requirement is known as the “Proportioning Rule”.
Under the “Proportioning Rule” and where the Member is aged between preservation age and 59, the “Tax-Free Component of the Lump Sum withdrawal is tax-free. The “Taxable”
Component of the Lump Sum withdrawal is taxed as follows:
While the financial penalty for lending money or providing financial assistance to a member or relative is $12,600, this could be imposed for each instance of lending or financial aid as the ATO could hit you automatically with the maximum. Applying for relief against this is usually a lengthy process. You may also be taxed on the withdrawal at your personal tax rate for not complying with the condition that allows you to access your super.
One thing you haven’t mentioned is the role of the adviser who may have contributed to your problems. If one was involved in any way, there is the prospect of remission in part of any penalty.
But you will need to mount a case against the adviser based on what he or she was asked to do and what advice was provided.
If you can show the advice was inadequate or negligent, you may have a legal claim against an adviser for some of the damages that relate to negligent or inadequate advice. You would need to seek legal advice in this regard. However, this could itself prove costly, stressful and time-consuming.
As far as your SMSF is concerned, it is likely the ATO will be wanting you to close it as soon as possible and bring any compliance matters up to date.
It is likely also to want you to rectify any contravention if at all possible by repaying the money withdrawn from your SMSF together with interest. Still, given your circumstances, this would generally be paid to an industry fund (as opposed to an SMSF) to enable you to wind up your SMSF more quickly.
What all these highlights are being aware of the super rules before embarking on any strategy you may be offered and where you are not aware seek advice that you can rely on.
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