By Mark Bland, Partner
Rather than getting direct wage relief, Australian workers will be seeking relief from their future selves by access $10,000 of their super from mid April 2020 and a further $10,000 from 1 July 2020.
This will undoubtedly cause an influx of enquiries to funds on Monday. In this article I summarise the reforms, the existing early access rules and the implications for trustees including financial advice, Anti-Money Laundering laws and liquidity. I also make suggestions on how the Government and regulators can help trustees deal with the fall-out.
Members will be eligible where they are:
- unemployed; or
- eligible to receive a job seeker payment, youth allowance for jobseekers, parenting payment (which includes the single and partnered payments), special benefit or farm household allowance; or
- on or after 1 January 2020: were made redundant; or working hours were reduced by 20 per cent or more; or if a sole trader — their business was suspended or there was a reduction in their turnover of 20 per cent or more
Withdrawals will be tax-free and will not affect Centrelink or Veteran’s Affair’s payments.
Applications are to be made online through myGov.
Applicants will need to certify they meet the eligibility criteria.
The ATO will process the application and issue a determination which will be provided to the person and the trustee of their superannuation fund.
Members are being advised to ensure their fund has their current details, including bank account details and proof of identity documents.
In a letter to industry bodies the Treasurer has advised that amendments will be made to the SIS regulations to establish this as a new compassionate ground and amending the tax legislation to ensure amounts released are not subject to tax.
The Treasurer states that once an ATO has made a determination, the trustee should release the funds as soon as possible without requiring any additional application.
Current early access laws
Currently, members can access their superannuation benefits early on other grounds that may also apply in these circumstances. The grounds are compassionate, hardship grounds or if they have a terminal medical condition.
A trustee may allow a member to withdraw some of their superannuation if the member:
- has received eligible government income support payments continuously for 26 weeks; and
- is not able to meet reasonable and immediate family living expenses.
Between $1,000 and $10,000 can be withdrawn (or under $1,000 if the balance is less than that amount).
One withdrawal can be made in any 12 month period. Payments are taxed as a superannuation lump sum which is generally between 17% and 22% for those under 60 years old.
Applications are made to the trustee and additional eligibility conditions can vary across funds.
Members can withdraw some super on compassionate grounds for unpaid expenses, where they have no other means of paying for the expense.
Expenses include the following general for members or their dependants:
- medical treatment and medical transport
- making a payment on a home loan or council rates so a member doesn’t lose their home
- modifications to a home or vehicle or buying disability aids to cater for a severe disability
- palliative care
- expenses associated with the death, funeral or burial
Withdrawals are taxed as normal super lump sum which is generally between 17% and 22% for those under 60 years old.
Applications are made to the ATO.
Access due to a terminal medical condition
A person may apply to the trustee to access up to the full amount of their superannuation benefits if they have a terminal medical condition.
A terminal medical condition exists if:
- two registered medical practitioners have certified that the person suffers from an illness or injury that is likely to result in death within 24 months;
- at least one of the medical practitioners specialises in the relevant medical field; and
- the 24 month period has not ended.
Payments are tax free if the member has a terminal medical condition either at the time of payment or within 90 days of receiving the payment.
Impact on Trustees
Trustees have AML/CTF obligations when paying out an interest held by a member. They have to conduct customer due diligence on members before making the payments. This will involve collection and verification of a minimum of their full name and either their residential address or date of birth. Identity theft is a high risk area for early access to super so trustees may have to implement enhanced due diligence measures.
As trustees do not have to conduct customer due diligence processes in most cases when a member joins the fund, the verification process may be a burdensome process and lead to complaints. The ATO may be able to assist trustees with this in the determination process.
Factual information can amount to financial advice and trustees are more likely to be giving personal advice because of a pre-existing relationship with the member.
Trustees can prepare scripts and train their member facing staff to assist them understand questions relating to eligibility and process. However members will have questions such as to whether a member should access their super. Questions may arise as to whether they should change investment options or apply for insurance if recently lost in the recent PMIF reforms.
ASIC could give a no-action position on personal advice conduct and disclosure rules and intra-fund charging rules to enable trustees to help members in this time.
The treasurer estimates that there is likely to be a total of $27billion released across the industry. The treasurer pointed to the “cash” held by funds. But cash isn’t cash. “Cash” assets may invested in term deposits or bonds, including governments bonds. Members seeking access will not necessarily be invested in cash assets. Trustee investment teams will need to consider what assets to liquidate and re-visit their liquidity management plans under SPS 530.
Members whose balances drop under $6,000 as a consequence of market movements will not lose insurance benefits, however members whose insurance was cancelled may be enquiring about re-commencing their insurance in the fund.
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