ATO / Professionals / SMSF / SMSF Compliance / Trustee education

Releasing benefits only under the right condition

A recent case of Mason and the Commissioner of Taxation has highlighted the importance of how and when a member can access their superannuation benefits.

Benefits since 1 July 1999 are typically preserved (not accessible) until a member meets a condition of release.  Where the trustee(s) are satisfied that a member has met a condition of release with a nil cashing restriction, the member’s preserved benefits and restricted non-preserved benefits in the fund become unpreserved (accessible).

Conditions of release are the events that a member needs to satisfy to withdraw benefits from their super fund.  The conditions of release are also subject to the governing rules of the fund.  It may be possible that a benefit may be payable under the super laws, but can’t be paid under the rules of your SMSF.

Examples of conditions of release with a ‘nil’ cashing restriction:

  • Retirement on or after preservation age
  • Attaining age 65
  • Death
  • Permanent incapacity
  • Termination of gainful employment (restricted non-preserved benefits)
  • Terminal medical condition
  • Termination of gainful employment with a standard employer-sponsor of the regulated super fund on or after 1 July 1997 where the member’s preserved amounts in the fund at the time of the termination are less than $200; and
  • Being a lost member who is found, and the value of whose benefit in the fund when released, is less than $200

It is important to note that transition to retirement (TRIS) once a member has reached preservation age (currently 55), is a condition of release.  However, it still imposes a ‘cashing restriction’ and therefore the member’s superannuation components will remain unchanged (e.g. stay preserved).

Mason Case

The Mason case outlines the fund member (Mr. Mason) being of the belief that attaining age 55 was a condition of release that allowed him to access his super to withdraw lump sum amounts.  Whilst age 55 can be a condition of release when a member starts a Transition to Retirement Income Stream (TRIS), it still has imposed cashing restrictions until such a time as Mr. Mason had retired.  This was not the case at the time of either of these lump sum withdrawals, as he continued to work within his bookkeeping business.  He did however declare the amounts as lump sums within his personal tax return against his low rate cap amount.  The Commissioner after conducting an audit of the fund (after the auditor issued an Auditor Contravention Report) was found that the two lump sum amounts withdrawn during the 2008/09 and 2009/10 financial years were in fact illegal early access amounts.

The tribunal in its findings stated that Mr Mason …should have been aware that “retirement” was a “condition of release” if the MTSF was to pay superannuation benefits in a lump sum or sums and, further, that “cashing restrictions” would apply to the “attaining the preservation age” condition of release;

As a result the Tribunal affirmed the Commissioner’s decision to include the amount in question as assessable income within his personal tax return to be taxed at his marginal tax rates (not as a lump sum against his low rate cap amount).  It was fortunate for Mr Mason that the Commissioner used his discretion under section 42A of SISA to allow the fund to remain a complying fund.

With preservation progressively raising to age 60 for those born after 1 July 1964, it is an important to understand the rules and regulations about when you can access superannuation benefits.  The courts have shown that as a trustee/member, you are responsible for the actions taken in the fund and the penalties that will apply for non-compliance.

Comments

comments

2 thoughts on “Releasing benefits only under the right condition

  1. I will turn 55 in April next year and wish to withdraw 225K with 50K tax free and balance of 175K taxable component with a retail superfund by the bank. I expect my taxable income to be 50K. What are the tax implications if any of the proposed withdrawal ?a) if I continue to work b) I recontribute as a non- concessional 150K amount to my SMSF by 30/6/13 to increase my tax free component an dkeep balance outside super

  2. You were born before the introduction of the new preservation age rules and can retire for super purposes at age 55 yrs old. In 2012-13 tax year, the low cap rate is 175K in your lifetime. There is a tax of 15% for lump sum withdrawals above that amount and nil tax below it provided you meet the condition of release ie retire as an example. However, since you plan to continue to work, the entire lump sum withdrawal amount will be added to your expected 50K taxable income subject to normal tax. This move is highly tax disadvantaged. You can re-contribute as a non-concessional to increase your tax free component in your SMSF but first, you need to overcome the tax disadvantage position. This can be done be officially retiring from your current position to meet the condition of release.

Leave a Reply