No reason for disability insurance to be targeted in super tax: legal expert

“Under the proposed legislation Total and Permanent Disability (TPD) will be excluded in the first year of receipt of the person’s adjusted total superannuation balance (TSB) as a contribution,” he said.

“However, next year it is included in the TSB. While you may not get pinged in the first year, you are taxed in subsequent years on the earnings from the TPD proceeds, including any unrealised gains.

“On the other hand, if a client gets a structured settlement, that client is excluded from the new Division 296, 15 per cent tax regime forever.”

Mr Butler said the SMSFA had been very vocal about its opposition to the current inclusion of disability insurance in the TSB, as had other industry bodies in the accounting, tax and financial sectors.

The SMSFA had previously stated:

The failure to exclude disability insurance benefits from an individual’s TSB in the same manner as compensation payments and the add‐back of amounts withdrawn as disability benefits or under a release authority for the payment of super-related taxes are glaring examples [of unintended consequences].

Mr Butler said the issue was raised with Treasury in previous consultations.

“The industry pointed it out and asked what is the real difference between a structured settlement and a TPD payout given they both involve a serious injury or disability,” Mr Butler continued.

“Insurance companies don’t just write out a cheque. There are a lot of investigations that have to be done. A third-party insurer doesn’t want to hand out money, so TPD and structured settlements should be treated the same.”

Mr Butler said if an individual is paid TPD, they would have to deal with an insurer and qualify under the strict terms and conditions of the policy to prove that they are permanently disabled.

In contrast, clients who qualify for a structured settlement contribution under s 292-95 of the Income Tax Assessment Act 1997 (Cth) are paid compensation for permanently disabling injury.

The compensation for a structured settlement must be paid as a result of a settlement deed or court order for personal injury rather than an insurance policy.

“Further, while structured settlements are difficult to get, there are not a lot of payouts for TPD either, so I’m not sure if there is any logical reason for Treasury to treat them differently under the legislation.”

He added that under superannuation law, an individual can only receive TPD if they cannot get gainful employment in “what they are trained for”.

“However, for example, I am a lawyer with 40 years’ experience, but I started work when I was 16 as a cleaner,” he said.

“So, I would not get TPD if I can go back to work as a cleaner.”

Mr Butler said from a policy perspective there is no real difference between TPD and a structured settlement.

“It’s hard to accept in practice as to why Treasury would treat them differently,” he said.

“Is it because they think insurance companies will hand out money too readily?

“For both TPD and structured settlements, you need the same evidence – from two medical practitioners, one of whom is a specialist.

“I don't really see much of a difference between the two and I don't think there should be any difference in treatment. This different treatment may result in some people transferring their insurance outside of super to avoid this anomaly.”