For many individuals, financial hardship is the result of unexpected or unforeseen events. A change in employment circumstances, relationship breakdowns and/or illness are just some of the common occurrences. The very nature of financial hardship is a cashflow crisis, leading to an inability to meet otherwise normal debt repayments (the likes of home loan repayments, credit card commitments and utility bills), as well as newly created debt obligations that may or may not have arisen from the relevant unexpected or unforeseen event.
For some debtors, the temporary or one-off indulgence of family or friends is a measure of good fortune available to alleviate such a crisis. For those same debtors, it can however create a heavier and more sustained burden (both financial and social) in the event the request for indulgence becomes repeated or the debtor fails to hold up the terms of such an indulgence.
But what if there are no family or friends, or if those family and/or friends are not in a financial position themselves to provide any or sufficient indulgence? For many, alternative lenders are not a viable option and bankruptcy is unfortunately, the final stop on the road to financial despair. But does it have to be?
For many Australians, the largest (and often, only) pool of funds of any significance they have accumulated in their lives, is in the form of Superannuation deposits. Whilst this compulsory system of quarantined income is designed to support their financial needs into retirement, there are limited circumstances when an individual can access their Super early. Two of those conditions are:
- Compassionate Grounds; and
- Severe Financial Hardship.
Compassionate Grounds
Compassionate grounds include (amongst other things) making a payment on a loan so you don’t lose your home (such as a mortgage repayment to prevent repossession or foreclosure by your home loan lender or payment of a council rates installment – but only if the council has commenced the process of seeking possession and/or sale of your property).
The amount of super you can withdraw is limited, based on what is considered “reasonable” to meet the relevant expense. It is paid and taxed as a normal super lump sum. An application for early release of Super on compassionate grounds is made to the Australian Taxation Office (ATO). The ATO will assess an application against strict eligibility criteria (that assessment made within 14 days of receiving the application), including:
- not having paid for the expense – the ATO can only approve compassionate release of Super to help with unpaid expenses;
- not being able to afford to pay the expenses without being able to access Super;
- being a citizen or permanent resident of Australia or New Zealand; and
- providing all required supporting evidence and invoices/quotes.
In the case of compassionate release of Super to pay for mortgage arrears and prevent repossession/foreclosure, the following additional criteria/restrictions apply:
- the subject property must be the debtor’s principal place of residence;
- the debtor must be legally responsible for the mortgage repayments;
- The maximum amount that can be released within a 12 month period is the sum of:
- three months scheduled mortgage repayments; and
- 12 months interest on the outstanding balance of the loan.
For example, if the debtor’s monthly mortgage repayments are $2,500 and 12 months interest on the loan balance is $15,000, the maximum a debtor can request is 3 × $2,500 (i.e. $7,500) + $15,000 = a total of $22,500.
Severe Financial Hardship
A debtor may be able to withdraw some of their Super if they have received eligible government income support payments continuously for 26 weeks and/or are unable to meet reasonable and immediate family living expenses. A Super withdrawal due to severe financial hardship is paid and taxed as a super lump sum.
The minimum amount that can be paid is $1,000 (unless the super balance is less than $1,000) and the maximum amount is $10,000. A debtor can only make one withdrawal from their super fund because of severe financial hardship in any 12-month period.
The outcome of any compassionate and/or severe financial hardship release applications is communicated to the debtor and their Super fund(s) in writing. Thereafter, if successful, it is the debtor’s responsibility to contact their fund in order to arrange the release of their Super.
Use of the compassionate release/severe financial hardship super release provisions is a function of individual circumstances and for this reason, debtors are encouraged to seek tailored advice prior to making any decision in this regard.
In reality, the team at SV Partners see many bankruptcy administrations that (if having invoked the use of early access to super options) may have been avoided, or (if exercised post-bankruptcy) may have been quickly and efficiently annulled at a significantly reduced cost to the debtor, including the shortening of the period of the bankruptcy and avoidance of the need to sell the debtor’s property. Further indirect benefits accrue for debtors on account of positive mental health effects and the avoidance of the financial and social risks associated with borrowing from family and friends.
SV Partners are experts in personal insolvency. For a confidential discussion on how you may benefit from our tailored advice, contact your local SV Partners office today.
Article written by Fabian Micheletto, Director, SV Partners Melbourne
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