Do tax concessions have to match the condition of release?
A lump sum paid to an SMSF member who has met the permanent incapacity condition of release will be tax-free if that member is considered to have a terminal medical condition, says a technical expert.
Annie Dawson, senior SMSF technical specialist for Heffron, said a lump sum paid to a member who has a terminal medical condition is tax-free. However, a lump sum paid to a member who is permanently incapacitated is taxed in the normal way with an additional tax-free component based on their age and service period.
“A terminal medical condition will exist if two registered medical practitioners have certified that the person suffers from an illness, or has incurred an injury, that is likely to result in the death of the person within the next 24 months,” she said.
“At least one of the registered medical practitioners must be a specialist practising in an area related to the person’s injury or illness.”
According to the ATO, there are no set limits on the amount that can be withdrawn from a fund by a member with a terminal illness, but payments are subject to the rules of a fund.
If a member satisfies this condition of release, any benefits that have accrued up to that point become unrestricted non-preserved benefits. Any additional benefits accrued during the 24-month certification period also become unrestricted non-preserved benefits.
The ATO states these can be accessed as a tax-free lump sum payment if they are withdrawn within 24 months of certification.
Any balances remaining after the certification period ends can be accessed at any time but may not be tax-free and any benefits that accrue after the certification period are not covered by the original terminal medical condition of release.
Ms Dawson gave an example of an SMSF client in their 40s who accessed their superannuation due to being permanently incapacitated and who also had a terminal illness.
“In this case, the tax law does not require that the member’s condition of release – the reason why the trustee was permitted to pay a lump sum benefit to the member – is due to having a terminal medication condition,” she explained.
“What is critical is that the member has genuinely met a condition of release and was eligible to take a lump sum benefit.
“In fact, for tax purposes, the member has up to 90 days after receiving the lump sum benefit to qualify as having a terminal medication condition.”
She added this means that if the individual hasn’t yet obtained the medical certificates at the time the benefit is paid, they will still have a small window in which those certificates can be obtained.
