Super for beginners, part 12: I claimed my super due to hardship. Why do I have to pay tax?

Q: I’m 30 years old. Last year I claimed $5,000 of my super due to financial hardship – I suffered illness, and was not able to work. I only received $3,950. Will I get the balance back, since I haven’t worked since then?

Unfortunately, when you access your super benefits before the age of 60, you can expect your benefits to be subject to tax notwithstanding you’re accessing those benefits due to financial hardship.

I’m surprised that your superannuation fund did not notify you of this tax when processing your claim. Unlike regular income tax deducted from your pay, which you may be able to claim back when you lodge your tax return if your income for the financial year falls below a certain amount, you cannot claim back the benefits tax payable on your super benefits.

If you access your super benefits before you reach your preservation age (preservation age ranges from 55 to 60, although a person currently 30 has a preservation age of 60), then you can expect your super benefits to be subject to a benefits tax of 20% plus the Medicare levy of 1.5% (21.5%). If your benefit is made up of a tax-free component, then this part of the benefit is tax-free when paid before preservation age.

Based on your $5,000 benefit claim, and doing a quick calculation, benefits tax is likely to be $1,000 (20.0% of $5,000), with an additional $75 of Medicare Levy when you lodge your tax return (if applicable). This calculation assumes that your benefit was made up of taxable component only (such as compulsory employer contributions – Superannuation Guarantee – plus earnings on those contributions) leaving an initial balance of $4,000 less Medicare Levy. I assume the $50 difference from your figure of $3,950 is simply due to you providing general figures rather than providing precise numbers, or perhaps there was a withdrawal fee charged by your super fund.

Note that my response cannot be relied upon as advice, and also note that I have calculated the possible tax payable on the benefits merely for illustrative purposes.

Terminal illness is an exception for tax purposes: The major exception to this tax rule is where an individual withdraws super benefits early on compassionate grounds due to terminal illness. Benefits are then paid free of tax, subject to meeting certain conditions. I explain these conditions in the article Accessing super early: Terminally ill receive tax break.

Background: I explain the rules for accessing your super early on the grounds of severe financial hardship in the article Accessing super early: Unemployed and in financial hardship. Note that not all super funds permit early access to super benefits.

For more information on how super benefits are taxed, see the following SuperGuide articles:

© Copyright Trish Power 2009-2014

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IMPORTANT: SuperGuide does not provide financial advice. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Readers need to seek independent advice about their personal circumstances.

Comments

  1. Hi Trish

    Thanks for the helpful article. I’m actually an accountant in a small country town who finds myself relating to unemployment issues. My question is to your point about the benefits tax not being refundable – I don’t think that is quite right.

    Given tax free thresholds are fairly high and Newstart for example is quite low, when I use Etax and record say a Newstart allowance in Item 5 and then a $10000 super lump sum taxed at $2150 in section 8, I still come up with a refund. Could you clarify if this is the case? The ATO is extremely vague on this point.

    On the face of it, given the shift in the tax free threshold, I would say it is quite possible to get all the tax back, assuming you were really hard up for work and had nothing else coming in besides Newstart to cover arrears. I think it would be helpful if you can clarify this for others who read this site. At first glance your articles point about tax is a little discouraging for people in pretty dire circumstances, when that may not be the case.

    Kind regards

    John

    • Liam Hodgkinson says:

      Hi All, just to clarify the point John was making – on the whole John is mostly right. While tax is taken from the amount exiting the fund to you, in this case 21% overall, at the next June 30 end of financial year the Super fund will issue the account holder a Payment Summary (just like an employer).

      The taxpayer keys in the amount of $5000 gross payment and $1050 tax withheld, and based on the other information in the return (Income, deductions etc) the tax software will calculate what the tax payable on this amount should be at the taxpayers circumstances for the year, and if credits are greater than tax payable the amount will be refunded, or if credits are less than tax payable the amount will tack onto a tax payable liability.

      At the end of the day, all dollars are treated the same way in a lump sum pool and tax is calculated based on the thresholds and marginal rates.

      Glad to help

      Liam

  2. hi trish, im a 57 y/o male with ongoing serious medical probs. I was born in 1956 and am trying to get onto a disability pension. I have not worked since last may 2013 and wondering if I can get my preserved super or part there of? apart from maybe some odd casual work or volunteer wrk, I don’t think I will return to work. could you please advise me of my rights. thank you.

    • Liam Hodgkinson says:

      Hi David,

      The people that you need to speak to here are Department of Human Services regarding the eligibility for disability pension, and your Super Fund which may be able to liaise with the Department of Human Services on your behalf to assess your situation medically & financially.

      But your first point of call is to Department of Human Services and at least get that up and running

      Liam

  3. Antony Dean says:

    Hi Trish

    Is it possible under the financial hardship ruling to withdraw at the same time $10,000 from two different fund managers. knowing the max amount is $10,000 but is this amount for each individual fund all multiple funds? thankyou

  4. Sharon Mathieson says:

    I am 59 years old and believe I qualify to be able to withdraw my super, which is not much anyway. My questions are; how do I go about applying to withdraw my super, and is there any possibility of me reclaiming any tax I pay on withdrawal?

    • Liam Hodgkinson says:

      Hi Sharon,

      To go about claiming your Super, contact your Super fund. They’ll likely point you in the right direction / send you out the forms to fill in and provided all is well with age and eligibility they’ll process this for you.

      The tax will work out in the wash upon lodgement of end of financial year tax return – all income sources and tax credits are treated similarly and once reported can be calculated to what is the correct amount to pay

  5. I recieved a early super payout do I get the tax back and I am on a single parenting payment do I need to lodge a tax return

    • Liam Hodgkinson says:

      Hi Leah,

      If you have had tax amounts withheld during the year and wish to claim them back, then yes, a tax return will have to be lodged.

      Single Parenting Payments have a significant tax offset accompanying them, so if this is your only source of income it is unlikely that you’ll need to pay tax.

      Liam.

  6. In a recent conversation, i was told that there was a change in superannuation legislation that would allow us to access our superannuation to pay off our home mortgage, We have both reached our preservation age, my husband continues to work full-time and I am retired. Does any one know of these changes?

  7. Here is the thing, we have this superannuation, but can’t access it until we reach retirement age, but hey here we are stuck at the age of say 37 with debt that is going to take 7 years to pay off while there is sufficient money in our super accounts to pay these debts out. It annoys me that I can’t access my money when I want to, and by the time i have reached retirement age, I have wasted a lot of money on interest and fee’s not only on the debts, but on the super account. We are being ripped off and we are being told what we can are can’t do with out money. Its my money, I want it, so give it.

    • Liam Hodgkinson says:

      Hi Dale,

      Can see where you’re coming from. But being in my 30′s myself there is only one way I can access my super – severe financial hardship, and that will probably leave an even worse wound than interest & fees.

      Have a sit down with others who may be involved with this, plus a savvy financial person to see if there are ways to reel in what may be unnecessary expenses that can then be put to better use. If you can, increase your income and put it to tax effective use.

      If you just want it gone immediately, there are Debt Consolidation Loans: The interest might be less and allow you to chip away more of the principal each month, but be careful if there are fees and penalties if you pay it out early. Also once the balance on your card have been transferred to the loan, cancel it. Do not go and re-use the card for purchases because you’ll get into worse trouble having a loan AND a credit card.

      Hope this all works out for you. Be disciplined and work hard and you’ll beat it

      Liam

  8. Rosita Cairns says:

    Hello Trish – I was wondering if you could answer a couple of questions I have – firstly if I am able to access my super due to being totally and permanently disabled is there tax on the amount paid – and if I draw out all of my intitlements including the super portion – can I at a later stage open another superannuation account – I am currently 54 and will be 55 in April next year.

    Many Thanks –
    Rosita

    • when you go to bank and deposit 100 billion cash, the bank will take the money and deposit it for you without asking you to show them your licence or name . they take it very easy
      but when you request one dollars from the bank then the bank want’s to see many of your documents in order to release your fund.

    • Liam Hodgkinson says:

      Rosita Cairns;

      It might be tempting to draw all your Super out when totally and permanently disabled – it might be tempting to have fun again after a traumatic time, but unfortunately yes, tax comes out. The rates are, at the end of the day, dependant upon the taxable income amount for the year, and in a progressive tax system, those percentages can get quite substantial indeed for large amounts.

      Best to speak with your Super funds Financial Advisors in regard to age and tax because they are up with any tax-free rules as they stand at the time. If you’re 55 next year, there may be a 5+ year wait for tax-free super.

  9. Priscilla Whare says:

    Hi I’m not sure if dental assistance is included in financial hardship but as a single mother of a teenager, I’ve been out of work for over four months & no longer get assistance from centrelink as my daughter is now over 16. I have absolutely no income coming in. I’m in desperate need of dental treatment which I know is very costly. My mouth is always numb, teeth need pulling out & my front tooth needs replacing as it fell out recently. It depresses me that my confidence has fallen so low, I can’t look at people when I talk. If I can even get some of my teeth done I’d be pushing people out of job interviews. My super is my last option, is there any way I can obtain part of it.

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