Paying member benefits

Founder and Publisher of the Switzer Report
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Your SMSF can begin to pay benefits once you or another member meets a ‘condition of release’, which for most people is when you reach retirement age and permanently retire from the workforce. Most benefits are paid voluntarily. However, in the event of a member’s death, a compulsory payment must be made as soon as possible.

Three types of member benefits

Preserved Benefits: Since July 1, 1999, all contributions made to a fund by or on behalf of a member and all investment earnings derived by a fund in the accumulation phase are preserved benefits. These benefits can only be accessed (cashed out through a lump sum or payment of a pension) when a condition of release is satisfied.

Restricted non-preserved benefits: These types of benefits were most often created by a member making a contribution to an employer sponsored super fund prior to 1 July 1999. These benefits can be withdrawn in the same circumstances as preserved  benefits (that is, when a condition of release is met), but they can also be withdrawn when the member terminates their employment with the employer, which can be before preservation age.

Unrestricted non-preserved benefits: When a member has met a condition of release and elects to keep all or part of the benefits in the fund, these benefits are classified as unrestricted non-preserved benefits. Investment earnings while in the pension phase are allocated to this category. As the member has previously met a condition of release, these benefits can be paid to the member on demand.

When processing a rollover from another fund to your SMSF, the preservation status of the benefits is maintained.

Conditions of release

To access your SMSF’s preserved benefits or restricted non-preserved benefits, a member must meet at least one of the conditions of release. These are:

  • Retires (SIS definition) and has reached preservation age
  • Reaches age 65
  • Terminates employment on or after age 60, irrespective of future work intentions
  • Commences a ‘transition to retirement pension’
  • Suffers a terminal medical condition
  • Suffers permanent incapacity
  • Suffers temporary incapacity
  • Faces severe financial hardship
  • Has compassionate grounds
  • Is a temporary resident who is permanently departing Australia

Age and retirement

Retirement depends on a member’s age, and for member’s under 60, their future employment intents. A retired member cannot access their preserved benefits before they reach their preservation age. Your preservation age depends on when you were born:

Date of birthPreservation Age
Before 1 July 196055 years
1 July 1960 – 30 June 196156 years
1 July 1961 – 30 June 196257 years
1 July 1962 – 30 June 196358 years
1 July 1962 – 30 June 196359 years
After 30 June 196460 years

Under Age 60

If a member has reached their preservation age and is under age 60, ‘retirement’ occurs when an arrangement under which they were gainfully employed has come to an end (this can have occurred at any time, including prior to their preservation age). As the trustee, you must also be reasonably satisfied that the member does not intend to be gainfully employed in the future for more than 10 hours a week. A signed statement from the member confirming their “intent” not to be gainfully employed should be obtained and retained by the trustee.

After Age 60

When a member has reached 60, ‘retirement’ can occur when the member ceases an employment arrangement, irrespective of their intention to continue working. This means that from age 60, a member simply needs to leave a job to gain access to the accumulated superannuation benefit.

If a member aged 60 or older gives up one employment arrangement but takes up another, the member may cash all preserved and restricted non-preserved benefits up until the end of the former employment arrangement. Benefits relating to the new job remain preserved until a further condition of release is satisfied.

Reaching Age 65

When a member reaches 65 years old, they may cash their benefits at any time. There are no restrictions and all benefits are automatically converted to unrestricted non-preserved benefits.

Using a transition to retirement pension

A member who is aged under 65 and who has reached their preservation age can access their super benefits through a transition to retirement pension without having to retire from the workforce. Transition to retirement pensions are account based pensions and subject to the following rules:

  • No more than 10% of the account balance at the start of the year can be taken out as a pension; and
  • Benefits cannot be commuted (converted to a lump sum) unless another condition of release (eg. retirement) is satisfied.

The non-commutation rule above does not apply if the pension was commenced with unrestricted non-preserved benefits, or if it is needed to meet a family law payment split or to pay an excess contributions tax liability.

Terminal medical condition

A member may access benefits as a lump sum if two doctors certify that the member is suffering from a medical condition that will likely result in death in within 12 months.

Terminating gainful employment

When a member of your SMSF terminates paid employment with a standard employer of the fund, they can access their super benefits in certain circumstances. These are:

  • If the member’s preserved benefits are less than $200 in total (no cashing restrictions); or
  • The member can access their restricted non-preserved benefits; or
  • The member can access their preserved benefits but only if taken as a non-commutable lifetime pension or annuity; or
  • They retire (see above).

Permanent incapacity

Permanent incapacity means that the member is unlikely, because of ill-health (whether physical or mental), to ever engage in gainful employment of the type for which the member is reasonably qualified by education, training or experience. At least two medical practitioners will need to certify this.

This definition was changed on 1 July 2007 to remove the requirement that the member ‘cease to be gainfully employed’, thereby allowing non-working members who suffer illness to potentially access this condition of release.

Temporary incapacity

Subject to the governing rules of the fund, a member may access their benefits where you are satisfied that the member has temporarily ceased work due to physical or mental ill-health that does not constitute permanent incapacity. The benefit can only be accessed by the member as a non-commutable income stream for the period of the incapacity.

Severe financial hardship

Subject to the governing rules of the fund, benefits may be released on the grounds of severe financial hardship. Different conditions apply depending on the age of the member. If the member is under their preservation age plus 39 weeks (eg. less than 55 years and 39 weeks old), the member could potentially access a single lump sum payment of up to $10,000 in a financial year. The member would have to have received government income support payments for a continuous period of 26 weeks, and the trustee would need to be satisfied that the member is unable to meet reasonable and immediate family living expenses.

If the member is over their preservation age by at least 39 weeks, the member could potentially access all their benefits. The member would have to have been in receipt of government income support payments for a cumulative period of at least 39 weeks since reaching their preservation age and additionally was not gainfully employed (for at least 10 hours per week) on the date of the application.

Applications to receive benefits on severe financial hardship grounds must be made directly to the trustees. You as the trustee should ensure that the member has documentary evidence such as bank statements and bills to support their claim that they are unable to meet immediate family living expenses.

Compassionate grounds

In very limited circumstances,  benefits may be released on specified compassionate grounds when the member does not have the financial capacity to meet an expense, such as to pay for medical treatment for a life threatening illness, or to make a payment on a loan to prevent foreclosure of the member’s family home. Applications for approval of release on compassionate grounds must be made directly to the Department of Human Services. Your fund cannot release any benefits without the approval of the Department.

Temporary residents permanently departing Australia

Individuals who have entered Australia on an eligible temporary resident’s visa and who permanently depart Australia can be paid any superannuation they have accumulated. Any payment will be subject to a special withholding tax, which the trustee must withhold, issuing a payment summary to the member and reporting the details to the Australian Tax Office.

This condition of release does not apply to all possible non-residents, and nor does it apply to Australian citizens and permanent residents.

PAYG tax on benefits

When a member takes a benefit, you  may be required to withhold tax from the payment under the PAYG system. Typically, this will occur when the member is under 60 years old and receiving a pension. You will need to register for PAYG and remain registered until either the pension payment stops or the member turns 60 (at which point PAYG reporting is not required). If a member under 60 takes a one-off lump sum benefit, trustees can register for PAYG and pay the benefit, and then de-register to avoid the ongoing PAYG reporting obligations.

Trustees may be liable if preservation rules are breached

One final note of caution: there are severe penalties can be applied if you allow a member to improperly access their super benefits in contravention of the preservation standards. Trustees may be fined up to 100 penalty units ($17,000) and the fund could lose its complying status.

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