Can I use my super to pay a tax debt?

The early release rules and where tax debt fits

Super is locked until you meet a condition of release. Before then there are only a few doors, and none of them is designed for tax debt:

• Compassionate grounds (decided by the ATO). The eligible expenses are medical treatment and transport, home or vehicle modifications for a disability, palliative care, funeral costs for a dependant, and preventing foreclosure or forced sale of your home by your mortgage lender. A tax debt is not on the list. An ATO garnishee is not a mortgage foreclosure.
• Severe financial hardship (decided by your super fund, not the ATO). If you have received eligible Commonwealth income support for a continuous 26 weeks and cannot meet reasonable and immediate family living expenses, your fund can release between $1,000 and $10,000, once in any 12 month period. Once released, the money is yours and could be used for a tax debt, but the amounts are small.
• Preservation age plus 39 weeks. If you have reached preservation age, received income support for a cumulative 39 weeks since then and are not working, there is no cap on the amount.
• Balance under $200, terminal illness, and permanent or temporary incapacity are the remaining grounds.

Once you retire after preservation age, or turn 65, you can draw on super freely and paying a tax debt from it becomes a normal financial decision rather than a legal question.

Questions to ask before using super, even if you can

If you can access it, using super to clear a tax debt trades a protected, tax-advantaged asset for a debt that has its own relief options. Things that usually matter:

• Withdrawals before 60 are generally taxed at between 17% and 22%. From 60 they are usually tax free unless the lump sum includes an untaxed element.
• The ATO cannot take your super while it stays in the fund, and super is generally protected in bankruptcy. Once withdrawn to your bank account, it is ordinary money.
• The interest and penalty part of the debt may be remittable, so check GIC remission before you pay it with retirement savings.
• A long payment plan at 11.43% GIC may still cost less than losing decades of compounding in super, or it may not. Someone who can run the numbers for your age and balance should do so.

This is a regulated financial decision. A financial counsellor or licensed adviser can help; this site does not give personal financial advice.

Do not fall for illegal early release

Stressed people with a tax debt are exactly who these schemes target. If someone approaches you promising early super to fix an ATO problem, report it to the ATO and talk to the ATO about a plan or hardship options instead. See also where to start when you cannot face it.

What to do next

1. Check your age against preservation age and whether you have retired, because that decides whether super is available at all.
2. If you are on income support, ask your super fund about severe financial hardship release and what evidence it needs.
3. Before withdrawing anything, request remission of interest and penalties so you are only paying the original tax.
4. Talk to a financial counsellor or licensed adviser about whether paying from super is better than a payment plan for your situation.

More questions: 11 Forgiveness, hardship and negotiation questions answered · Full guide: ATO debt forgiveness