Strategy considerations flagged with accessing super benefits

Ms Denham reminded SMSF professionals that there are two key conditions that must be met before a member’s benefits can be released under the provision for terminal medical conditions.

“Two registered medical practitioners must certify that the member suffers from an illness, or has incurred an injury, that is likely to result in the member’s death with 24 months of the date of the certification,” she explained.

“At least one of those doctors must be a specialist practising in the field of medicine relating to the member’s illness.”

The certification lasts 24 months, she said, and when it is supplied to the member as trustee of the fund, the members’ benefits can be reclassified as unrestricted non-preserved and amounts paid out to them are tax-free.

“The member does not have to withdraw their entire balance; it’s just that they can. Once benefits are classified unrestricted non-preserved, they stay that way,” she said.

If, after 24 months, the member still has a balance and has not passed away, the benefits — and any additional benefits accrued in that period — are still unrestricted non-preserved.

However, tax may apply on withdrawals depending on their age. The member may supply a new certification to start the 24-month period again, she said.

For SMSF advisers with clients in this situation, there are some important strategy considerations, Ms Denham said.

For example, members whose only beneficiaries of their super are their adult, non-dependent children, there can be tax advantages to withdrawing the money under this condition prior to passing away, she explained.

“Non-dependent beneficiaries are subject to tax on the taxable component of death benefit payments at 15 per cent plus Medicare. Whereas payments under this condition are, as mentioned, tax-free whilst the member is alive,” she said.

“Once the money is out of the super fund and paid to a member, it will form part of their estate on their death, and will be distributed in accordance with their will.”

Trustees and members should be also aware, she said, that once the medical certificates have been obtained, benefits accessed under this condition of release cannot be rolled over between super funds.

“They can be transferred to another super fund; however, the payment from the original fund will be treated as a lump sum, and the amount paid into the new fund will be considered a personal contribution from the member and will count towards their concessional or non-concessional cap,” she noted.

“SMSF trustees should also be aware that once a trustee knows that a terminal medical condition exists in relation to a member, they cannot treat a transfer of that member’s benefit to another super fund as a rollover.”

Any life insurance policies held in the super fund by the member should also be considered, and SMSF professionals should ensure that the client doesn’t inadvertently cancel their cover by withdrawing their entire balance.

“Many death cover policies allow for a terminal illness claim.”

If Centrelink payments are a priority, and the member is under pension age, the client may want to consider leaving the money in super in accumulation phase, as it will be hidden from the income and assets test, she explained.

“Once the member withdraws it as a lump sum or commences a pension, it will start to be included in Centrelink’s means testing,” she said.