Super Strategy Series Part 2 – Superannuation Tax Loophole: right or wrong?

Author: Jason Roccasalvo, Partner, TAG Financial Services

Our clients engage us to uncover strategies to help them grow their wealth, mitigate their tax liability and provide greater levels of certainty, simplicity and asset protection, amongst others. Part of our obligation as advisers is to present options, and outline the advantages and disadvantages, therefore allowing a client to make an informed decision.

By now I’m sure you have heard about the double dip and tax savings available using the COVID-19 “early release” access.

These are essentially two strategies:

Firstly, making a superannuation contribution (and claiming a personal tax deduction). This strategy has become more widely available since the abolishment of the 10% (substantially self-employed) rule a few years ago and provides greater flexibility for individuals to claim a tax deduction. Individuals cannot claim a deduction where it creates a tax loss. Further, individuals should determine the value of the deduction by weighing the personal tax deduction against the 15% contribution tax.

Secondly, the COVID-19 early release is designed to assist those who need access to cash given their employment situation has changed dramatically.

It is accessible under limited circumstances such as:

  • You are unemployed
  • You are eligible for JobSeeker, youth allowance for job seekers and other allowances
  • Since 1 January 2020;
    – You have been made redundant
    – Your hours have been cut by 20% or more
    – Your business was suspended or had turnover reduced by at least 20%

The ATO have provided some guidance of how this can be applied for via CRT Alert 004/2020

In combination, these strategies allow individuals to get a tax deduction for a contribution made personally, then access that cash under the early release rules that exist until 24 September.

In their own right, each strategy is perfectly legal (of course, assuming the eligibility criteria are satisfied).  However, in combining these strategies, it appears to work in contrast to the purpose of the early release scheme, which was designed to provide access to money for those most vulnerable during these times.

As part of the application process, the individual will need to authorise the ATO to provide to the superannuation fund, the ability to release the money and deposit it into the nominated bank account.  The ATO guidelines make it very clear that the member applying for the early release needs to certify that they are eligible, and it highlights there are consequences for making a false application.

Note of Caution: Where an individual is salary sacrificing to superannuation, and also accesses the COVID-19 early release from their superannuation fund, the claim may come under the scrutiny of the ATO who may check the claim of reduced hours and reduction in their income, as reported in their personal tax return.

Advisers should consider their obligation to their client as well as the greater social obligation we are all being asked to contribute to in these times when considering the appropriateness of such a combination of strategies.

View part 1 of the Super Strategies Series

If you have any questions, please contact us on 03 9886 0800 or via email.

Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686).