Don't. The penalties might be severe.
From time to time, and for a myriad of reasons, you might have personal cash flow problems. If you run your own self-managed superannuation fund (SMSF), then using some of its money to solve these problems can be very tempting.
But if you take money out of your super fund other than in accordance with the super laws, then severe penalties can apply. These can range from having the withdrawals taxed at the highest marginal rate, to having your fund declared to be non-complying, to facing additional penalties under the ATO’s general tax administration powers.
The only sensible approach is to know that you can’t access your super money early because there is a high probability of getting caught.
Don’t forget that SMSFs need to be externally audited each year, and if an auditor finds any illegal early withdrawals from your super fund, then it must be reported to the Australian Taxation Office (ATO).
Make everyone signatories
Hubris sometimes comes into play when you and other members know that your super monies can’t be used for personal purposes, such as fixing your personal or business cash flow dramas, and you all assume no one will misuse the super fund’s money. However, deciding to only require one trustee signatory on your fund’s bank account can be folly.
The best approach is to make all trustees, if individual trustees, or all directors, if you use a corporate trustee, signatories to the fund’s bank account.
This doesn’t prevent all trustees agreeing to access money early and it doesn’t prevent the forging of signatures. However, it shows that you have done all you can to stop one trustee doing something wrong.
If one trustee does the wrong thing and the ATO imposes tax penalties, you can ask for some leniency, but if you take it further to the Administrative Appeals Tribunal
(AAT), they may not see it your way.
Applying for leniency
You can apply for some leniency from the ATO if you have had penalties enforced against you and there are special circumstances. One recent case saw the base penalty rate reduced by 80 per cent because of voluntary disclosure. The taxpayer got into difficulties, however, when he started to push for the entire fine to be thrown out.
Stephen Huckle is a well-paid mining specialist in Perth who withdrew about $193,000 from his superannuation fund to prop up a gambling problem during the 2011 and 2012 financial years.
Once the ATO became aware of these super law breaches, it imposed tax penalties of over $93,000, plus $4300 in additional administrative penalties.
But the taxpayer did manage to get the base penalty rate reduced after his accountant approached the ATO on his behalf, voluntarily disclosing the illegal withdrawal of his super benefits and his gambling addiction (which it also said was being treated).
For the 2013 financial year, the taxpayer received a refund of over $24,000 and this was used to reduce his ATO debt.
But this wasn't enough and he pleaded for further leniency from the Taxation Office for the remaining $70,000 owing. After two knockbacks from the ATO, he took matters to the AAT.
Huckle and the Commissioner of Taxation
In its decision, the AAT noted that the taxpayer had more than $660,000 in debts. Ten per cent of this amount was for a Holden car he had purchased in 2012 for $70,000 but at the time of the AAT hearing, had an approximate market value of $50,000.
He owed almost $70,000 in credit card debts and had an investment property loan of $445,000. The remaining debts (almost $80,000) were personal loans.
He was paid fortnightly and 50 per cent of his income was spent on interest and capital payments for these debts.
Why was his personal financial situation important?
Because based on his expense budget presented to the Tribunal he still had about $500 per fortnight more than his overall expenses.
Under the ATO’s general powers of tax administration, leniency can only be applied when it can be shown that someone will suffer severe financial hardship and the circumstances don’t justify the penalties that have been imposed.
The Tribunal denied the taxpayer’s application. It said that by demanding he pay the ATO the amount owing, he would still be able to afford “the basic necessities of life” even if these repayments might temporarily reduce his standard of living.
This case offers a warning of what the ATO can and can’t do when it comes to granting leniency with regards to illegal early access of your superannuation benefits.
Of course, best practice is to only use your SMSF for your retirement and never be tempted under any circumstances.