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The Coronavirus superannuation-related tax perk: Here’s what you need to know.


If you’re applying for the early release of super funds because of Covid-19, there could be a tax advantage if you’re still able to contribute funds too. Here’s what you need to know.   

By ATB Partners 

When the Government announced it’s range of economic stimulus initiatives in March and early April, one of the options that it made available for all Australians (including temporary residents) with superannuation is the early release of funds.   

Under the directive, it is permissible to withdraw $10,000 from your super this financial year and next. To do so, you need to register your intention with the ATO by June 30, 2020. So there is some time to decide.  

Tax Accounting

The tax loop hole


Given that regulations around contributions to super remain unchanged, then it is entirely possible to voluntarily contribute $10,000 of your pre-tax income into super over the next three months, and also apply to withdraw a $10,000 lump sum from super tax-free at some point before June 30. 

You still end up with $10,000 in your pocket. But if you contribute through a salary sacrifice arrangement with your employer, or contribute to your super as a self-employed sole trader or small business owner and stay within the concessional contributions limits, your voluntary contributions will be taxed at 15% rather than your marginal personal tax rate. 

When you pull out the funds from super, the withdrawal is tax free. And, you will be able to do the same thing again between July 1 and late September.  

Plan with purpose

Who is eligible?


These superannuation arrangements are targeted at those who have been adversely impacted by the coronavirus. Specifically, on or after January 1, 2020 working hours (or turnover for sole traders) has to have fallen by at least 20%. 

The onus is on individuals to assess whether they qualify and apply to the ATO. The ATO will then make a determination that the funds be released by the nominated super fund.  

But there are some important considerations. Firstly, that you need to be fortunate enough to still be employed, or self-employed with the ability to generate a pre-tax income of up to $10,000 over the next several months. The key will be being able to handle the ‘cash flow gap’ – it’s not clear when funds will be released, and you still need to be contributing to super in the meantime.  

Secondly, you have to have enough assets in your super to be able to withdraw these  payments. 

A word of caution


The loophole is perfectly legal for anyone who wants to use it. That said, it is wise to get advice from an accountant or tax advisor so that you understand the finer details. There are some grey areas – if your workplace has cut back your hours or if your trade has slowed significantly, impacting your income, it should be straight forward.  

What’s less clear is whether this will still be applicable in instances where, for example, someone has suddenly had to scale back working hours to look after young and school age children or for someone who has recently returned from working overseas because of the global outbreak. Each individual  situation needs to be assessed carefully.  

What’s more – even though taking a $10,000 lump sum out of superannuation this year and next might seem like a worthwhile way to keep the bills at bay, it’s a significant long-term sacrifice that does need careful contemplation. It’s not a decision to be rushed.  

For someone in their mid-30s $10,000 of super could potentially be worth around $60-65,000 at retirement age, based on the average 5.5 percent return of conservative funds for the past 15 years (including the GFC). 

In a higher-risk-higher-return portfolio rate, which many younger people tend to have, that figure is likely to be more than $100,000, when you consider compound interest. 

Get professional advice


But, if you’re nearing retirement age, perhaps it won’t make too much of a difference to your nest egg.  

It is important to remember too, that in the past few months the investment markets have all suffered pretty severe downturns, so your superannuation balance too, will be affected, and you could be eroding it substantially by talking the money out now.  

 

Cashless Economy

We're here to help during Covid-19


Many of the government’s coronavirus stimulus initiatives were passed swiftly in order to stabilise the economy and by and large, they are very worthwhile, but some of the minutia is only just being clarified and it is important to understand the full impact of any financial decisions of this magnitude before moving ahead. There might be a better strategy for you, rather than dipping into your super,  so get professional advice.

If we can help, contact usOur team has all the resources necessary to work remotely, and making sure you get the right support is our focus at this time. We have a number of resources on our website, including up to date information about the assistance you can apply for.  

 

This is general advice only and should not be treated as personal advice.
Always seek professional advice that consider your personal needs when making financial or investment decisions or changes to your superannuation.