Table of Contents
Navigating Early Access to Superannuation: A Cautionary Tale for Australians
In Australia, the option to access superannuation early, particularly on compassionate grounds, is becoming increasingly popular. However, individuals like Rose Charles, who withdrew $35,000 from her super to fund cancer treatment, are now urging caution, particularly concerning the associated tax implications.
The Australian superannuation system is structured such that contributions are subject to a 15% tax. While this may seem reasonable, individuals accessing their super early for compassionate reasons encounter a different tax scenario upon withdrawal. Instead of a straightforward 15% tax, the amount drawn is taxed as a superannuation lump sum, which can result in a higher tax rate. The applicable tax will be the lower of either the individual’s marginal tax rate or 22%.
Charles, diagnosed with cancer in 2020, utilised her super for essential treatment but was unaware of the “fair chunk” taken by the Australian Taxation Office (ATO) in taxes before she benefited from the funds. This underlines a significant concern; in 2022 alone, over $1 billion was withdrawn by more than 50,000 Australians for compassionate reasons, highlighting a rising trend.
Peter Hogg, General Manager at Aware Super, indicated that the rate of early super withdrawals has surged by 10% in the last year, reflecting increasing financial hardship among Australians.
When Can You Access Super Early?
The ATO permits early withdrawals of superannuation under certain conditions, which include:
- Medical treatment costs for yourself or a dependant
- Medical transport for yourself or a dependant
- Home or vehicle modifications for severe disabilities
- Palliative care for terminal illnesses affecting you or a dependant
- Funeral and burial expenses for a dependant
- Preventing foreclosure or forced sale of your home
Considerations Before Withdrawal
While accessing super may provide immediate financial relief, individuals must assess the long-term impacts on their retirement income, income protection insurance, and social security benefits. That said, the tax implications of early withdrawals depend on various factors including your age and the preservation age—the minimum age at which super can be accessed.
As noted, accessing super early can count towards assessable income for income tax purposes, necessitating inclusion on annual tax returns. In some circumstances, individuals may be eligible to request a refund for the taxes paid on lump sum withdrawals, particularly if the medical condition was terminal at the time of withdrawal.
Steps to Withdraw Superannuation on Compassionate Grounds
-
Eligibility: Determine your eligibility for early withdrawal. Different criteria apply if the withdrawal is for your expenses or those of someone else.
-
Evidence Collection: Gather the necessary documentation and evidence required by the ATO.
-
Super Fund Approval: Contact your superannuation fund to ensure they will permit a withdrawal on compassionate grounds. They will evaluate whether sufficient funds are available to cover urgent expenses.
- Potential Fees: Be aware that additional fees may apply when accessing super, even under compassionate circumstances.
Conclusion
As more Australians confront financial challenges, understanding the implications of early superannuation withdrawals is crucial. With the risk of undermining future retirement funding, individuals must thoroughly assess the costs and benefits before making such decisions. Accessing superannuation can be a lifeline, but it is essential to be well-informed to avoid unexpected financial burdens down the line.
