Early release of super due to severe financial hardship

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 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 you:

• Have been receiving DHS payments for at least 39 consecutive weeks
• 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 you withdraw early will impact on the funds you have available for retirement. You should fully explore all your options before going down this path. For example, try and work out alternative payment arrangements with your lenders if possible, or 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). Also, the compassionate grounds provision applies only to your inability to pay one or more of the following expenses:

• Your 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 may 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?

If you wish to seek early release of your super on severe financial hardship grounds, your first port of call is to apply to your super fund.

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 cause of your severe financial hardship, including the arrears you have for 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 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 but don’t meet a normal condition of release).

Your super fund will assess all this information in deciding whether or not to approve your application.

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 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.

The bottom line

While temporary access to super due to the coronavirus, or access under the usual severe financial hardship rules, provides a welcome safety net, it should be regarded as a last resort.

This is especially the case after a major market fall, when withdrawing money from your super will not only crystallise your losses but potentially shortchange your future.

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 worth seeking independent professional advice about whether an early release of your super is appropriate for your individual circumstances. Or indeed if you may be able to access alternative sources of income from Centrelink or government agencies to get you through a tough patch.

The information contained in this article is general in nature. Accessing your super is an important financial decision and it’s best to seek independent professional advice based on your individual financial needs and circumstances.