Aaron Dunn, CEO of Smarter SMSF, said in a recent technical update that there are a number of disability insurance products available in superannuation with different benefits that may come through a Total Permanent Disability claim.
“Conditions of release from a SIS point of view to disability are slightly different, particularly in the permanent incapacity area, to the definition of a disability benefit and the requirements to be able to access the various tax concessions linked to it,” Dunn said.
“You need to have an appreciation when we have disability involved with superannuation of the level of disability. Is something temporary in nature, or is something more permanent in nature? And then from that, what sort of access will that give to superannuation benefits?”
Dunn said that regarding temporary incapacity, it is important to understand that the claim, and therefore the income stream being paid, is a “kind of a look through” payment.
“We need to document the way in which that temporary incapacity income stream will be paid. Ultimately, a part of the premiums are being paid by that individual, a return of monies that will flow from the insurance company into the fund, and then to the individual as an income stream.”
Tim Miller, head of education and technical for Smarter SMSF, said if a member is away from work on a temporary basis due to illness, they should have insurance that will cover that, however, that insurance is paid to the super fund as policy owner.
“The super fund is then effectively on-paying that to the member, but then the likelihood is that when the member returns to work, the insurance will stop being paid and they will return to their normal income.”
Dunn added that with this type of insurance in an SMSF, additional steps need to be taken as it is a formalised income stream, not a superannuation income stream, and as such needs to be paid.
Miller said permanent incapacity is different from temporary incapacity in that it is a condition of release with nil cashing restriction, and gives access to superannuation money in either the form of a disability superannuation income stream, which is like an account-based pension, or a disability superannuation lump sum.
“Both come with varying tax benefits subject to age and, obviously, whether the member chooses a pension or lump sum,” he said.
“What happens with disability, particularly from a lump sum point of view, is if somebody is receiving that payment prior to age 60, even if they’re receiving it after age 60, you get a calculation modification of an individual’s tax-free component.”
He continued there is a process to uplift the tax-free amount of the payment which lessens the tax burden on someone under preservation age.
“When they access their money by a disability claim and in the pension sense, they don’t get that uplift but they get a rebate to save 15 per cent tax on their marginal tax rate,” Miller said.
Dunn added if a member has the right to take an income stream, the process needs to be documented.
“If someone naturally meets the requirements to take that as a lump sum on the basis that the cashing conditions have been met, then we need to look at the age of the individual and the relevant taxing points, including registrations for PAYG withholding,” he said.
Miller said that under the Superannuation Industry (Supervision) Act, the condition of release of permanent incapacity is that the trustee must be satisfied of the incapacity and an inability to work, whereas, to get the tax benefits, not only does the trustee need to be satisfied, but the regulator also needs to be satisfied.
“You need to provide additional medical support, which of course is better to have that in the first instance before a trustee makes a decision in the fund,” he said.
