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 (ranging from 55 to 60, although a person currently aged 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 $1,075 (21.5% of $5,000) assuming that your benefit was made up of taxable component only (such as compulsory employer contributions – Superannuation Guarantee – plus earnings on those contributions) leaving a balance of $3,925. I assume the $25 difference from your figure of $3,950 is simply due to you providing general figures rather than providing precise numbers.

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: 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.