Investors blindsided by tax from super withdrawals

By Miranda Brownlee

January 08 2019
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Australians running their own superannuation funds are being hit with surprise taxes due to a lack of understanding regarding what meeting a full condition of release means, a technical expert has warned.

SuperConcepts non-executive director Stuart Forsyth explained that he is coming across a number of SMSF trustees who have decided to pull money out of their super fund and pay it back without realising that the commissioner might consider that to be assessable income.

What often happens in these situations, he explained, is that the member needs a lump sum and so they just decide to take it.

"There can be tax consequences in that which there wouldn’t be for a pension payment, so it’s really a question of paying attention to what you’re doing,” Mr Forsyth said.

SMSF practitioners, he said, need to be careful that their clients don’t become blinded by the regulatory issues and ignore the taxation issues.

“Regulatory issues are important, but tax is important as well,” Mr Forsyth warned.

Often, SMSF trustees will get caught in these situations when they hit age 60, the director said.

“Some trustees think, ‘Well, I’m 60 years old, so I can take my super’. Well, it’s not quite that simple,” Mr Forsyth cautioned.

“If you’re 65, then it’s fine, but at 60, its tax-free if it’s legitimate, but it’s taxable if you haven’t met a full condition of release and you take more than 10 per cent out of a TRIS. So, there are some traps out there and some care is needed.”

The rules

Superannuation members in a taxed super fund can, generally, make lump sum withdrawals passed the age of 60 tax-free.

However, if the member is younger than 65, they must satisfy one of the conditions of release.

According to the ATO website, common conditions of release are if the member reaches preservation age and, importantly, retires; has reached preservation age and begun a transition-to-retirement income stream; stopped employment on or after the age of 60; is 65 years old or has died.

Other special circumstances, such as the termination of gainful employment; permanent or temporary incapacity; severe financial hardship; compassionate grounds or a terminal medical condition could see the member eligible to withdraw at least part of their super benefits.

If you are withdrawing a lump sum from your superannuation before the age of 60, the sum will be taxed at 22 per cent (including Medicare Levy) or your marginal tax rate, whichever is less.

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Retirement