Linda Bruce, senior technical services manager from Colonial First State, says trustees and advisers must be very careful when rolling over a lump sum where the client has met the terminal medical condition of release as it can attract tax consequences.
“Sometimes we see people that have notified the fund that they’re suffering a terminal medical condition. This may also happen because the client has claimed a terminal illness benefit under the life insurance policy sitting within the super fund. The client then wants to roll over their benefit to a new fund,” she says.
“In those kinds of situations, if the client wants a pension but the fund doesn’t pay pensions, the client may need to roll over their super benefit to a different fund. But you have to be super careful here because the super benefit can be rolled over for Super law purposes but not for tax law purposes. If the rollover occurred within the certification period, is not actually a rollover for tax law purposes. Instead, it is regarded as a withdrawal and a contribution.”
Ms Bruce said that the paying fund is regarded as if the fund has paid a lump sum to the client and that lump sum can be tax-free because it’s paid within the certification period, but it is regarded as if the amount has come out of a superannuation system and has landed in the client’s hands, and then the receiving funds is treated as having received a personal contribution from the client.
“Most likely the client will not claim a deduction for that personal contribution, because in their mind, they might have seen it as a super rollover. Then the rollover amount which is regarded as a personal contribution in the new fund will count towards the non-concessional contribution cap,” she says.
“It might be part of the adviser’s strategy for the client to implement a withdraw and re-contribution strategy for estate planning purposes but the adviser may want to do it in the way that has been planned, rather than getting a surprise that the rollover amount is included in the client’s non-concessional contributions cap.”
There are strategies that can alleviate this problem, Ms Bruce says depending on the situation.
“There might be a situation where the client has no insurance in the fund, and they only have accumulated member benefits and the intention is to roll it over to a different fund so that the client can commence a pension,” she says.
“In that scenario, just simply do not notify the current fund (about the terminal medical condition) before the rollover, so that the normal rollover rules apply. The client can then notify the receiving fund (about the terminal medical condition) after the rollover is completed.
“Often, people become aware of these rules after they’ve already notified the fund to claim a terminal illness benefit from the insurer. What can we do then?
“It then depends on the fund’ governing rules. What we have seen in some funds, is that as soon as the terminal illness insurance payout is paid to the fund after the member successfully claimed the terminal illness insurance benefit, the fund will automatically make everything unrestricted non-preserved by applying the terminal medical condition of release to the member benefit.”
“You have to be careful because in this scenario. If you are doing a rollover within the certification period, the receiving fund will need to report the rollover amount as a non-concessional contribution, so you have to be really mindful of the contributions caps.”
“On the other hand, some funds may not automatically apply the terminal medical condition to the member benefit just because the fund received the terminal illness insurance payout. If this is the case, the client can still rollover the preserved benefit to a different fund and that will be a normal rollover for tax law purposes. Adviser just need to check with the paying fund to make sure the fund uses the normal rollover benefit statement for rollover so that the receiving fund will treat it a s rollover rather than a personal contribution.”
