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The Federal Government has created a series of superannuation measures to help households and businesses deal with the economic impacts of the COVID-19 crisis.

The measures include:

• Minimum pension limit reduction
• Early release of super
• Temporary rent reduction
• In-house assets and investment strategy

Minimum pension drawdown reduction

There will be a temporary 50% reduction in the minimum pension drawdown applicable to the 2019-20 and 2020-21 financial years for allocated pensions, account-based pensions and market-linked pensions. 

The measure recognises and seeks to assist many retirees who are losing a significant portion of their super account balance as share markets have plunged due to the coronavirus crisis. This rule change aids retirees who do not wish to sell their investment assets while the value of those assets is reduced.

The reduced rates for minimum pension payments are:

How it works

• If a member has already withdrawn a pension above the new minimum limit for the 2019-2020 financial year, the pension payment can be stopped or re-contributed back to super, subject to contribution eligibility and cap limits.
• In some circumstances, a member may have to keep up pension payments to meet living expenses, even though they have exceeded the minimum pension limit. Once the minimum pension amount has been withdrawn, the member will have the option to receive any further payment as a commuted lump sum or pension. Receiving the payment as a reduced lump sum will result in a debit or reduction to the member’s transfer balance account (currently capped at $1.6 M). This measure increases the available cap space for future income streams, subject to proper documentation. All super benefits paid from a taxed fund are tax-free to a member who is aged 60 and above.

Early release of superannuation

A new ‘Coronavirus compassionate ground’ condition of early release is to help individuals who are adversely affected by the economic effects of Coronavirus. Eligible people are permitted to obtain an early release of preserved and restricted non-preserved benefits from their superannuation up to $20,000, in two applications of up to $10,000 for each application period:

• Year ending 30 June 2020
• Year ending 30 June 2021.

The amount of superannuation released under this measure is not subject to tax.

Eligibility criteria

An application to the ATO can be made providing that they satisfy any one of the following requirements:

• The person is unemployed; or
• The person is eligible to receive any of these social security payments:
  • JobSeeker payment;
  • Parenting payment; 
  • Special benefit;
  • Youth Allowance (other than based on undertaking full-time study or is a new apprentice); or
• The person is eligible to receive household allowance; or
• On or after 1 January 2020 the person was made redundant, or their working hours were reduced by 20% or more (including to zero); or
• For a person who is a sole trader – on or after 1 January 2020, the person’s business was suspended or suffered a reduction in turnover of 20% or more.

Test for a reduction in work hours or turnover

The requirements about reductions in a person’s working hours or their turnover as a sole trader are determined by reference to changes that have occurred since 1 January 2020. The test requires a comparison of a person’s working hours or turnover at the time they make the application and their usual hours before 1 January 2020. For example, a person would be eligible to apply for a determination if they had a 20% or more reduction in their usual working hours or turnover relative to the second half of 2019. For applications in the 2020-21 financial year, the same test applies.

Self Assessment

It is expected that individuals will self-assess their eligibility to apply for determination. The requirement about a person’s eligibility to receive the various social security support payments can be satisfied if:

• The person is receiving such payment; or
• If they are eligible to receive such a payment. 

Application

Individuals can only make a single application (of up to $10,000) in 2019-20 and another one in 2020-21. 

A person who requests an amount of less than $10,000 in their application for a financial year cannot make a subsequent application in the same fiscal year to release the difference. A person with multiple accounts who has less than $10,00 in any one of the accounts can nominate more than one account and the amounts to be released from each account.

Application for a determination will be made online through www.my.gov.au using the ATO’s online services.

SMSFs

In the instance of SMSFs, the member applicant would also be a trustee or director of a corporate trustee of their fund. The ATO has issued the following caution:  

“As an SMSF trustee, you are responsible for you and your members’ retirement savings. Please make sure you are eligible for early release of super before you release any funds from your SMSF.”

Read our article on the risks of releasing super early.

Temporary rent reduction rules relating to SMSFs

Under normal circumstances, when an SMSF owns real property that is leased to a related party, the rent must be at the market rate. 

In its SMSF Q&A update, the ATO takes the following position concerning rent reduction:

“Some landlords are providing tenants with a reduction in or waiver of rent because of the financial impacts of the COVID-19. We understand that you may wish to do so as well. Our compliance approach for the 2019-20 and 2020-21 financial years is that we will not take action where an SMSF gives a tenant- who is also a related party - a temporary rent reduction during this period.”

The ATO’s suspension of compliance action in the above regard applies to related-party tenants under both LRBA and direct rental arrangements.

SMSF in-house assets ruling

The downturn in the share market may result in the SMSF not meeting the 5% in-house asset limit at the end of the financial year. In this situation, the ATO will not undertake compliance activity if a rectification plan is in place by 30 June 2021. The ATO stated that:

“If at the end of a financial year, the level of in-house assets of an SMSF exceeds 5% of a fund’s total assets, the trustees must prepare a written plan to reduce the market ratio of in-house assets to 5% or below. This plan must be prepared before the end of the next following year of income. If an SMSF exceeds the 5% threshold as at 30 June 2020, a plan must be prepared and implemented on or before 30 June 2021. However, we will not undertake compliance activity if the rectification plan is unable to be executed because the market has not recovered, or it is unnecessary to implement the plan as the market has recovered.”

SMSF investment strategy ruling

The ATO considers that an SMSF investment strategy must be reviewed regularly at least annually and in the case of significant financial events. Concerning the coronavirus situation, the ATO accepts that short-term variations to the investment approach, including asset allocations do not constitute a variation from the investment strategy. However, action must be taken to adjust the investments.  

The ATO statement reads:

“Where the assets of an SMSF or the level of investment in those assets fall outside of the scope of your investment strategy, you would take action to address the situation, which could involve adjustments to investments or updating your investment strategy. We don’t consider that short term variations to your articulated investment approach, including to specified asset allocations. At the same time, you adjust your investments, constitute a variation from your investment strategy.”

We fully understand that the quantity of information regarding special COVID-19 relief measures can be overwhelming. Particularly so given the overwhelming personal and business nature of the crisis itself.

WLM is here to help. If you have any questions or need support, please contact us.

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