COVID-19 opens up possible early release condition
Australians who have fallen ill from COVID-19 or any other illness or injury may be able to use a potential avenue of early release to make a claim for income support from their SMSF, highlights a law firm.
In a blog, DBA Lawyers director Daniel Butler said that by releasing super early through the temporary incapacity condition, it is important that a member not only meets the definition of temporary incapacity, but the member can comply with the cashing restrictions.
“Commonly, the key limiting factor is whether any non-minimum benefits such as income replacement insurance, reserves or excess employer contributions are available to fund the NCIS (non-commutable income stream),” Mr Butler said.
“Further, the start and end date of the NCIS can be difficult to ascertain, particularly where a member’s employment arrangements have changed rather than ceased before or after the incapacity, such as reduced working hours from part- to full-time or vice versa.”
Cashing restrictions apply
Mr Butler said the purpose of the temporary incapacity condition of release is to provide income support to a member by replacing the income that they received from their employment before they became ill and had to stop working.
He said this purpose is achieved by allowing a member who meets this definition to access their superannuation to replace their lost income.
However, item 109 of schedule 1 of the SIS Regulations prescribes the form, amount and period that the member can receive their superannuation on the grounds of temporary incapacity for income replacement purposes.
According to Mr Butler, the cashing restriction is as follows:
The member may receive a non-commutable income stream (NCIS), which means that it must be paid in instalments that reflect the gain or reward in whole or in part which the member was receiving before they became ill or injured, Mr Butler said.
“It cannot be funded by any amount that is attributable to the member’s member-financed or mandated employer-financed benefits and the growth from those amounts. Thus, the NCIS can generally only be funded from contributions that exceed the superannuation guarantee threshold, insurance or from reserves maintained in the fund.”
The amount that the member can access cannot exceed the maximum gain or reward which the member was receiving from their employment before they became ill or injured. Accordingly, the NCIS can replace the member’s pre-incapacity income in whole or in part, but cannot exceed that amount.
“Note that income protection insurance policies may only provide, for example, 75 per cent of the pre-injury income stream. Further, such policies may include an offset clause which reduces the insurer’s obligation to the extent other income is derived by the insured member,” Mr Butler said.
“For example, if an insured member receives a 75 per cent monthly income protection insurance payment outside of superannuation, that monthly amount would then be reduced by the monthly NCIS amount paid by their SMSF.”
The member can receive the NCIS until they return to the employment that they held immediately before they became ill or injured.
“Here, we look at temporary incapacity as a timeline starting when the employment income ceases due to the temporary incapacity and ending when the member has returned to their pre-incapacity employment,” Mr Butler said.
Adrian Flores is the deputy editor of SMSF Adviser. Before that, he was the features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.