As part of the stimulus package to deal with the economic impacts of COVID-19, the Federal Government created a scheme to access your super early.

The scheme allowed people who have suffered financially to access their super in two hits – one of up to $10,000 by 30 June 2020, and another of up to $10,000 between 1 July and 31 December 2020. Eligibility factors include loss of earnings, unemployment, redundancy and access to welfare.

APRA have recently released figures showing that 2.3 million applications have been approved so far and around $17.1 billion has been withdrawn.

The scheme is intended for those under real financial stress, and in my view should be accessed as a very last resort. There’s two reasons:

Firstly, the long-term cost of the withdrawal will be huge. The younger you are, the bigger that cost will be by the time you get to retirement. At a 5% future earnings rate, a 30 year old that withdraws $10,000 now will forego around $63,000 at retirement. Those withdrawing the entire balance of their super fund may also lose valuable life insurance cover. If you’re considering the second tranche, please give it some serious thought first.

Secondly, the Tax Office is keeping a very close eye on this scheme. They are looking hard at eligibility and warning of penalties of up to $12,000 for making false and misleading statements.

They are also convinced that nobody should intentionally get a tax benefit out of this.

As long as you’re eligible, it’s ok to apply for the early access whether you truly need the money or not. Not a great idea, but legal. And in theory, if you withdraw money under the early access scheme, have a change of circumstances and no longer need it, you could re-contribute some or all of that money back into super.

The problem is that for most people that will create a tax benefit, because the money will have come out tax-free under the scheme, and will likely create a tax deduction when it goes back in. There’s a nasty little provision in the Tax Act known as Part IVA (part four A). It’s a complex section, so my more simplistic interpretation is “if the main reason for doing something is to get a tax benefit then don’t do it, or else”. Part IVA comes with big penalties, and it’s one of those guilty until proven innocent type rules.

The Tax Office are making a lot of noise about this scheme, so tread carefully if you need access to your super, but think hard about whether you really do.

Related blog:
How can you access your super?


Author: Mark Douglas