The legislative requirements contained in the SIS Act and Regulations, provide only very limited circumstances in which superannuation benefits can be accessed before retirement.
Broadly, these include where a member is
- Suffering severe financial hardship, money is being accessed on compassionate grounds,
- Situations where a member has suffered a permanent incapacity which prevents them from working.
Once a member has met this permanent incapacity condition of release, all their benefits become unrestricted non preserved. The SIS Regulations do not impose a cashing restriction on benefits accessed under permanent incapacity.
Therefore, a member will usually have the option to take some or all of their superannuation balance as a:
- Lump sum,
- Superannuation pension, or
- A combination of both.
Depending on their personal circumstances at the time, they may also choose to leave some or all of their benefits in the accumulation phase.
Lump sum disability benefits – Where a member chooses to receive some or all of their superannuation benefit as a lump sum it’s important to be aware of the potential tax that will be payable. The relevant tax rates for lump sum superannuation withdrawals are outlined in the table below.
Table 1: Tax on lump sum superannuation benefits 2022-23
| Age | Tax rate | |
| * Tax-free component | Any | 0% |
| Taxable component (taxed element) | 60 or older | 0% |
| Preservation age < 60 | First $230,000** – 0% Balance – 15% |
|
| Below preservation age | 20% |
For a payment to qualify as a disability superannuation benefit, Section 995.1 of the ITAA 1997 broadly requires that:
- The benefit is paid to an individual because he or she suffers from ill-health (whether physical or mental), and
- Two legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the individual can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.
Disability superannuation pensions
Unlike a lump sum disability superannuation benefit, choosing to receive a benefit as a disability superannuation pension necessarily involves retaining these amounts within the superannuation system – typically by converting the benefit into an account-based pension. There are a number of advantages to using a member’s superannuation benefits to commence a disability superannuation pension.
The tax treatment of pension payments from a disability superannuation pension can broadly be summarised by the table below:
Table 2: Tax treatment of disability superannuation pension payments
| Age at the time a pension payment is received | The taxable portion of pension payments received |
| 60 or older | Tax-free |
| Below age 60 | Taxed at the member’s marginal tax rate, less a 15% tax offset |
Note: Any insurance proceeds received into a member’s accumulation account will initially be added to the member’s taxable component
Conclusion
Accessing superannuation early is only permitted in limited circumstances, meaning familiarity with the options and implications of doing so are not always front of mind. Where early access to super occurs as a result of a member’s permanent incapacity, there are a number of unique tax concessions available depending on the option chosen.
And understanding the operation and benefits of these concessions is critical. However, advice considerations for these members should be broader than simply managing tax – with Centrelink eligibility and impact on estate plans, for example, likely to be a real consideration for impacted members.
