Economic response to the Coronavirus – Impact on superannuation benefits

Lyn Formica

The word unprecedented seems overused – and yet not overused – at the moment.

On 22 March 2020 the Government announced the second of their stimulus packages to support Australia through the economic consequences of the Coronavirus.

Notably, the Prime Minister and the Treasurer were at pains to describe their economic announcements today as a “safety net” package rather than a “stimulus” package. In other words, the tone is all about surviving rather than prospering.

Not surprisingly the key measures were support for businesses and individuals currently bearing the brunt of the economic fallout from Covid-19.

However, there were also some important superannuation announcements that will be highly relevant for SMSF members and clients with their superannuation in a public offer fund.

Firstly, the Government has announced that the minimum pension requirements for 2019/20 and 2020/21 will be re-set to half the normal rates and there will be changes to the deeming rates used to calculate an individual’s income for a range of important government benefits (including the age pension).  We have explained these changes in as much detail as is available at the moment here.

Secondly, special access to existing superannuation balances will be available to those who have experienced significant (at least 20%) reductions in their income or are unemployed or who have been retrenched.  The rules announced today are explained here.

Supporting retirees

Temporary reduction in Minimum Drawdown Requirements

Similar to the approach taken in the 2008/09 Global Financial Crisis, the minimum drawdown requirements for account based pensions and similar products will be temporarily reduced by 50% for the 2019/20 and 2020/21 years.

The revised rates for the 2019/20 and 2020/21 years will be as follows:

At first glance this appears counterintuitive – all other measures in the announcement were about putting more money in people’s hands.  The policy rationale is that one very obvious consequence of the current situation is that investment markets have fallen considerably and continue to do so.  Many superannuation pension recipients will have been concerned about selling assets to make pension payments when their fund (or pension account in a large fund) did not have enough cash to make the payments. This measure will mean that those who don’t need additional income will not be required to take it out of their fund – potentially relieving some pressure to sell assets.

Whilst we are yet to see the amending legislation, we expect this change will work as follows:

What type of pensions will qualify for the reduced drawdown rates?

The Government’s Fact Sheet says that the reduction will apply to account-based pensions and similar products.  We expect the Government means:

• account-based pensions (including transition to retirement income streams),
• allocated pensions (including transition to retirement pensions), and
• market linked pensions (also commonly called term allocated pensions).

We do not expect the relief to apply to lifetime or life expectancy pensions.

Will all superannuation funds (including SMSFs) offer the reduced drawdown rates?

We expect all superannuation funds, including SMSFs, will be able to take advantage of the reduced drawdown rates.  However, there may be some SMSFs with very prescriptive minimum pension rules in their governing rules/trust deed.  Funds in this position would need to amend their trust deed to take advantage of the 50% reduction.

How will the 50% reduction affect pensioners who have already drawn an amount equivalent to their reduced amount before the announcement?

These pensioners will not be required to draw any further pension payments before 30 June 2020.

If a pensioner has already drawn more than their reduced minimum, can they return the surplus pension payments to the fund?

No, there will not be a mechanism to return surplus pension payments.  It may, however, be possible for some clients to recontribute the surplus (if they are eligible to contribute and the amount will be within their contribution caps).

What if a pensioner had say elected to treat all payments from their SMSF as pension payments up to their minimum and then lump sums from their accumulation account?  How would payments taken before today be treated?

In our view, payments should be processed accordingly to the rules which applied at the time of the payment.

For example, before 1 July 2019, Craig instructed his fund to treat any payment he took from the superannuation fund as follows:

• firstly, a pension payment (up to the minimum payment amount) and then
• a lump sum from his accumulation account once the minimum had been met.

Craig’s minimum for the 2019/20 was originally $40,000 (ie $1m x 4%).  He took a payment of $45,000 on 1 March 2020.  His reduced minimum is now $20,000.  How should the $45,000 be treated?

On the basis of the election he made for the 2019/20 year, the first $40,000 will be a pension payment and the remaining $5,000 will be a lump sum from his accumulation account.

What about pensions that start after the announcement?

We expect the temporary reductions will apply to all pensions, not just those in place before the announcement was made.

Is any action required now?

Pensioners who want to minimise the amount they withdraw from superannuation in the current financial year should turn off/adjust any automatic periodic payment arrangements.

We will cover the broader impacts of this change in our upcoming online masterclass – SMSF Strategies.

Changes to Social Security Deeming Rates

The Government will also reduce the pensioner deeming rates for financial investments from 1 May 2020 by 0.75% as follows:

While deeming rates are not explicitly linked to the RBA cash rate, this latest change is largely triggered by the RBA’s decision to announce further interest rate cuts last week.  The policy logic is that pensioners may well see their incomes decline and hence lower income levels from investments should be factored in when calculating their age pension and other social security benefits.

Supporting those suffering reduced incomes

Temporary Early Access to Superannuation

As a general rule, preserved superannuation benefits may only be accessed in lump sum form once members turn 65 or reach their preservation age and retire (or satisfy some other condition of release such as permanent incapacity, terminal illness etc). However, in times of financial distress, there are some circumstances under which members may be able to bypass these rules and access their super earlier.

Unfortunately the current rules which allow access to those suffering from “severe financial hardship” or qualify on “compassionate grounds” are very narrow and release has only been available under very limited circumstances.

The Government has announced a quite significant, but temporary, extension to these rules.  A copy of their Fact Sheet can be found here

Who is eligible for the new rules?

A new opportunity for early release will be available to individuals who:

• are unemployed, or
• are eligible to receive a Job Seeker Payment (previously known as Newstart Allowance), youth allowance for job seekers, parenting payment, special benefit or Farm Household Allowance, or
• on or after 1 January 2020:
  • were made redundant, or
  • had their working hours reduced by 20% or more, or
  • for sole traders, their business was suspended or there was a reduction in their turnover of 20% or more.

Further information is needed in relation to how this 20% reduction is to be determined, but it appears it will be by comparing current hours/turnover with the average for the period 1 July 2019 to 31 December 2019.

Importantly, there is no requirement that the individual is already receiving Commonwealth income support payments and there is no waiting period.  The payment can be requested immediately once the new rules come into effect (see below).

There are no income or assets tests.  Even someone with a very high salary who remains employed and has other assets could access this payment as long as their salary has been reduced by 20% after 1 January 2020.  While they might choose not to, many could well do so if their superannuation is more easily accessed in cash than other assets and if their reduced income is not sufficient to meet living costs that cannot be adjusted quickly to reflect their new situation (eg large mortgage payments, rent etc).

How much will be available?

Eligible individuals will be able to access up to $10,000 before 1 July 2020.  A further amount of up to $10,000 will be available from 1 July 2020 but only for approximately three months after that time (exact timing to depend on the passage of legislation).

Only one payment will be permitted in each financial year.

How do individuals apply for the new payment?

To access benefits held in funds other than SMSFs, the process will be as follows:

1. Individuals will be able to apply directly to the ATO via their myGov account.
2. Once the ATO has processed the application and confirmed the individual’s eligibility, they will provide both the individual and their superannuation fund with a determination.
3. On the basis of that determination, the fund will then make payment to the individual.

The Fact Sheet describes this measure as targeting those who have suffered a loss of income due to Covid-19 but there is no indication whether one of the questions that will be asked by the ATO in the relevant application will be whether the reduction in income relates to this specific event.

Individuals do not need to apply directly to their superannuation fund.  However, it would be wise to double check that the fund has the right bank account details and proof of identity documents to ensure that the money can be paid quickly.

While we understand the eligibility rules for SMSF members will be the same as for members of non-SMSFs, separate arrangements are being made and there may be a different process to follow when moneys are to be released from an SMSF.  Further guidance on the application process for SMSF members is to be made available on the ATO website in due course.

Given the wide ranging impact of this event, it is entirely likely that some SMSF members will need to take advantage of the measure.

When will amounts be available?

Applications will be able to be made from mid-April 2020.  However it is not yet clear how long it will take for the ATO to process an application and for the fund to make payment to the individual.

Note that anyone who simply withdraws money from their SMSF now, or even after mid April but does not follow the right process, will be subject to the usual rules.  This could be substantial tax and other penalties – it is vital to wait until the new rules are in place.

How will these payments be taxed?

Amounts released under this new ground for early release will be paid tax free and will not affect Centrelink or Veterans’ Affairs payment eligibility.

This is unusual – currently amounts released on compassionate grounds or on the basis of severe financial hardship are taxed which can mean up to 20% + medicare for many people.

Will there be rules on how the amount released must be spent?

At this stage, individuals will be free to spend the monies released in any way they choose.

What if the individual is already receiving income from their superannuation fund from a transition to retirement income stream?

Many people in this position will not need to access the new payment – they will simply increase their transition to retirement income stream payments if they need more income to supplement a reduced salary.  However, transition to retirement income streams have an upper limit on pension payments (10% of the pension balance at the previous 1 July).  Someone needing more than this amount who meets the criteria above could apply for one of these payments.

How can Heffron help?

Heffron SMSF Solutions is supporting individuals in a number of ways including:

• for members of SMSFs administered by us, we will prepare the fund documentation to evidence the withdrawal of monies under this new condition of release at no cost, and
• for accountants and advisers needing to document the withdrawal of these monies from SMSFs they administer, we will provide template fund documentation for their use at no cost.

We will be able to do this as soon as the process for SMSFs is finalised between the Government and ATO.

By Lyn Formica, Head of SMSF & Technical Services