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 $3,800. Will I get the balance back, since I haven’t worked since then?
A: 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 ‘severe financial hardship’ (which has a special definition under the super rules).
Note: If an individual is suffering a terminal illness, then withdrawal of super due to terminal illness receives special tax treatment (see later in the article).
We’re 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, the taxable component of your super benefit is subject to benefits payment tax, while a person accessing super benefits on or after preservation age (but younger than 60) you may not have to pay tax on a lump sum super benefit (for more information, see SuperGuide article Retiring before the age of 60: the tax deal).
Note: Preservation age is age 60 for those born after June 1964, and age 55 for those born before July 1960, and at least 56 years for those born after June 1960, and at least 57 years for those born after June 1961, and at least 58 years for those born after June 1962, and at least 59 years for those born after June 1963. A person aged 30 years is clearly born well after June 1964, so would have a preservation age of 60 years. For more information on preservation age, see SuperGuide articles Accessing super: What is my preservation age? and Accessing super: Preservation age moves to 59 years and Retirement Age Reckoner: Discover your preservation age and Age Pension age.
A person under preservation age, who accesses super benefits early, can expect super benefits to be subject to a benefits tax of 20% plus the Medicare levy of 2% (22%). If your benefit includes a tax-free component, then this part of the benefit is tax-free when paid before preservation age.
Based on a $5,000 benefit claim, and doing a quick calculation, benefits tax is likely to be $1,100 (22.0% of $5,000), including the 2% Medicare Levy charge of $100. This calculation assumes that the benefit was made up of taxable component only (such as compulsory employer contributions – Superannuation Guarantee – plus earnings on those contributions) leaving a final balance of $3,900 less Medicare Levy. We assume the $100 difference from the figure of $3,800 in your question 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.
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. We explain these conditions in the SuperGuide articles Accessing super early: Terminally ill receive tax break and Accessing super early: Terminal illness.
Note that our response cannot be relied upon as advice, and also note that we have calculated the possible tax payable on the super benefits merely for illustrative purposes.
Background: We explain the rules for accessing your super early on the grounds of severe financial hardship in the SuperGuide article Can I access my super early due to financial hardship? and for accessing super early on compassionate grounds in the SuperGuide article Accessing super early on ‘compassionate grounds’.
Important: Note that not all super funds permit early access to super benefits. Readers considering applying for early access to super benefits will need to check if their super fund’s rules permit early access. For more information on accessing super early, see SuperGuide article Accessing super early: 14 legal ways to withdraw your super benefits.
For more information on how super benefits are taxed, see the following SuperGuide articles:
Under 60 years of age:
Over 60 years of age: