David Busoli, principal of SMSF Alliance, told SMSF Adviser it is possible to enhance the tax uplift from a total and permanent disability (TPD) payout by using a second superannuation fund that, given the likely size of the benefits, could well be an SMSF.
“The tax-free uplift (the calculated increase in the tax-free portion) from a TPD payout is only available if the benefit is taken as a lump sum, but that takes them out of the superannuation environment,” Busoli said.
“If it is taken as a pension, they remain in the superannuation environment but the tax components do not change, though a 15 per cent tax offset is applied to the taxable portion of the pension payment for a taxed recipient (under 60 years of age).”
Busoli explained that there is a third option that combines the best of both worlds, as a rollover is treated similarly to a lump-sum withdrawal.
“If the benefit is rolled over to another superannuation fund before the pension commences, the tax uplift occurs so the tax components change, resulting in a much larger tax-free component without the benefit needing to leave the superannuation environment,” he said.
He added that this will increase the tax-free portion of the pension as well as lower the tax payable to a non-dependant beneficiary (if applicable) on the death of the member.
“As a variation to the above, the tax-free uplift will be enhanced if a non-concessional contribution is made to the account before the payment/rollover occurs,” he said.
Busoli said this scenario is often the catalyst to roll over into an SMSF from an Australian Prudential Regulation Authority (APRA) fund, given the potential for an increased balance due to insurance payouts.
“For example, they may have $200,000 in an APRA fund, and a $1 million life insurance policy, and with the TPD, they would then have $1.2 million in the APRA fund. With the original $200,000, it was not feasible to have an SMSF, but with $1.2 million, it is, and provided they do everything in the right order, they get themselves a tax uplift, which they wouldn’t get if they stayed in the APRA fund,” he said
