• Kyle Frost

Coronavirus early access to super - tax

I haven't written on early access to super due to lack of time and well, because everyone else has!


My summarised thoughts:

  • It's not ideal but if you're in genuine financial distress you shouldn't feel guilty about using super to make ends meet. It's going to beat the alternative in a lot of case, credit cards and the likes!

  • It was announced a week or so prior to the big announcement (and a lifesaver to many) that was Jobkeeper and think in hindsight the 20% reduction in hours was too low of a bar. FYI: I don't like to get too political but it's brought pain (and poor performance) on some union-affiliated industry funds that hurts ALL members and seems like good politics by the Liberals, I guess :(

  • There's been lots of assumptions and projections on how much withdrawing $20k from super costs and the only thing we know is they'll all be wrong. If I had to guess in 30 years it'd be worth $50k - $150k (in today's dollars, e.g. the number will be more but won't buy you as much because a carton of milk will cost $7 (IDK)). In hindsight it was a poor time to sell as well as markets have recovered so strongly.

  • That comparison is only really relevant if you go and spend the money on something that you wouldn't have otherwise as you feel richer, something I suspect many people have done. In reality, many people will either invest it outside of super, spend on something they would have otherwise bought (meaning they'll have more funds in future to invest), pay down debt, put towards a home deposit and invest in property etc. and in which case you're mainly comparing low taxed investment returns within super with higher-taxed returns outside of super. If I had to bet, super will win but there are so many variables and there'd be plenty of scenarios where the opposite could be true.

So... Try not to withdraw, but it's not a hard no and in any case you need to have an eye on your long-term wealth creation/retirement.


Back to my point, tax.


Some people are thinking to be cute with the tax office and withdrawing super (tax free) and "recontributing" it back into super and claiming a tax deduction. And of course crossed my mind for a second when the details came out before concluding it's not ok.


If it worked it'd save the average person around $3,900 in tax.


Many online claim "there's no rule saying you can't do it" etc. and there's not strictly.


But...The ATO has a catch-all called Part IVA which basically is a broad rule that can apply to anything that means if the ATO's workforce of tax nerds think you entered into a scheme for the purpose of avoiding tax, it's not ok and if you get caught you'll have to pay back the tax saved and a penalty.


I'd also think it'd be one of the easiest schemes to catch out as imagine they could filter their data by 1. people that withdrew early from super and 2. people that made additional super contributions and claimed a tax deduction.


If you think you'd feel uncomfortable "on the stand" defending your decisions and having a good reason why you withdrew when possibly not in great financial stress (even if you met the criteria based on 20% cut in hours) and "recontributed" and claimed a tax deduction, you probably shouldn't do it.


To date, the ATO hadn't said too much other than the above semi-cryptic post (LOL) posted by a few ATO workers and a few ATO workers arguing on LinkedIn with people thinking they can do it.


That changed late last week when they put out this note. I'd think this clears up all doubt, but no doubt will be some people clinging onto the hope of tax savings. In which case good luck, the ATO have a reputation for being one of the more ruthless Government departments.

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Kyle Frost is a Director and Authorised Representative of Indie Advice Pty Ltd (AFSL# 511786)

Any financy info on this site is general in nature, of course doesn't consider your circumstances and may not include details that could be significant to your particular circumstances. Seek personal advice (I would say that, but from anyone ;)) if you're not confident before making a decision. 

 

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