- What is meant by severe financial hardship?
- Can I access super early to pay off debts?
- What’s the difference between severe financial hardship and compassionate grounds?
- You can also access your super early if you are terminally ill or incapacitated
- How do you apply for early super release due to severe financial hardship?
- Do the rules differ if you’re in an SMSF?
- What are the tax implications?
- The bottom line
Accessing super early due to severe financial hardship is possible under Australian law, provided that you meet strict eligibility conditions and your super fund allows it.
Normally you can only access your super once you’ve reached your preservation age and met a condition of release (such as retiring from the workforce or turning 65). Your preservation age is between 55 and 60, depending on your date of birth.
However, these super release conditions can be waived due to severe financial hardship.
What is meant by severe financial hardship?
If you haven’t reached your preservation age, the Australian Taxation Office (ATO) will consider you to be in severe financial hardship if you meet the following three criteria:
- You have received government welfare payments from the Department of Human Services (DHS) for at least 26 consecutive weeks (with the exception of ABSTUDY, Austudy or Youth Allowance student payments).
- You are still receiving those payments when you apply for the early release.
- You are unable to pay your reasonable and immediate family living expenses.
Living expenses include:
- Overdue mortgage repayments
- Rent arrears
- Outstanding bills
- Car repairs
- Medical expenses.
The minimum amount of your super than can be released early to you under the severe financial hardship provision is $1,000 and the maximum is $10,000. The only exception to this is if you’ve reached your preservation age and have not met a condition of super release. In this situation, there are no restrictions on the amount that can be accessed, provided that you:
- have been receiving DHS payments for at least 39 consecutive weeks, and
- you don’t have a full or part-time job at the time you apply.
Only one early release is available under the severe financial hardship provision in any 12-month period.
It’s important to remember that any super money that you access early will impact on the funds that you have available for your retirement. You should fully explore all of your options before going down this path. For example, it can be worthwhile to try and work out alternative payment arrangements with your lenders if possible, or to contact the National Debt Helpline for advice.
Can I access super early to pay off debts?
Yes, but it’s important to understand that early super payments made under the severe financial hardship provision can only be used to pay your reasonable living expenses. Funds are also only available for payments that are in arrears, not for future repayments or to clear debt.
What’s the difference between severe financial hardship and compassionate grounds?
‘Severe financial hardship’ grounds for accessing super early are different from ‘compassionate grounds’ (which is another potential way that super can be accessed early under Australian law). It’s important to understand the difference between these two categories because there are different terms and conditions for access.
The major difference is that you don’t need to have been receiving DHS payments to be eligible for accessing super early on compassionate grounds (like you do under the severe financial hardship provision). In addition, the compassionate grounds provision only applies to your inability to pay one or more of the following expenses:
- Aour own (or one of your a dependant’s) medical treatment or transport for a life-threatening or mental illness, or one that generates chronic pain.
- A mortgage or council rates payment to prevent you from losing your home.
- Home or vehicle costs to accommodate your own (or a dependant’s) disability.
- Paying for your own (or a dependant’s) palliative care.
- Paying for the death, funeral or burial expenses of a dependant.
You can also access your super early if you are terminally ill or incapacitated
If you’re diagnosed with a terminal medical condition, you can access ALL of your super early under Australian law, not just a maximum annual payment of $10,000.
If you’re diagnosed as being temporarily or permanently incapacitated you can be eligible for insurance benefits through your super fund if you have this coverage. In the case of temporary incapacity, payments can be made while you’re unable to work. If you’re permanently incapacitated, you can receive all your super either as a lump sum or as a regular stream of payments.
How do you apply for early super release due to severe financial hardship?
You can apply to your super fund for an early release payment on severe financial hardship grounds. If your fund doesn’t allow for this type of release, you may be able to transfer your super to one that does.
Different super funds will have different application requirements, but generally you’ll need to show that you meet the eligibility requirements by:
- Explaining the causes of your severe financial hardship, including the arrears you have for your living expenses.
- Explaining how you’ll spend the money if your application is approved.
- Providing evidence of you and your family’s income and expenses to show that you can’t meet your living expenses.
- Providing a financial hardship letter from the DHS or Centrelink showing that you’re currently receiving income support and that you’ve have done so for the required eligibility period (i.e. at least 26 weeks if you haven’t reached your preservation age, or at least 39 weeks if you have and you haven’t met a condition of super release).
Your super fund will assess all of this information in deciding whether or not to approve your application for an early release payment on severe financial hardship grounds.
Do the rules differ if you’re in an SMSF?
No. SMSF trustees are legally obliged to assess any member applications for early super release using the same severe financial hardship grounds eligibility criteria outlined above.
The ATO can impose severe penalties on SMSF trustees for the illegal or unauthorised early release of super funds. These penalties can include very heavy fines (up to $420,000 for individual trustees and up to $1.1 million for corporate trustees), and up to five years imprisonment.
What are the tax implications?
If you’re approved to access some of your super early on compassionate grounds, the amount is paid and taxed as a lump sum. If you’re aged under 60, the amount will be taxed between 17 and 22 per cent.
The actual rate of tax will depend on whether your early withdrawal is a lump sum or an income stream, and whether it’s made up of taxable and non-taxable components.
However, if you’re over 60, the early super funds you receive will be tax-free.
It’s important to understand that any early super payments you receive will usually count towards your taxable income in the year that they’re received. This can also affect your eligibility for government welfare payments.
Jenny is 45 years old and satisfies all of the eligibility criteria for an early access to super under the severe financial hardship provision. She applies to her super fund and is eligible for the maximum payment of $10,000. This amount consists of a taxable component of $7,300 and a non-taxable component of $2,700.
Jenny must include the $7,300 taxable component in her taxable income on her tax return for that financial year. She’ll be taxed between 17 and 22%.
Jenny won’t pay any tax on the $2,700 non-taxable component.
Remember that your super is designed to fund your retirement, so any early withdrawal now will impact the amount you’ll have available when you retire. You’ll also lose the power of compound interest on the withdrawn funds. That power can be substantial over time.
It’s worthwhile to seek independent professional advice about whether an early release of your superannuation is appropriate for your individual circumstances. The information contained in this article is general in nature.