How to access terminal illness benefits

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If a super fund member is terminally ill, they may be able to receive a tax-free lump sum from their super fund. Many funds also allow a death insurance benefit to be paid early too.

In this article we explain some of the pros and cons of terminal illness benefits.

Early release

A member’s benefit can be released early if the member has a terminal medical condition which meets the following conditions of release:

  • Two registered medical practitioners certify that the member suffers from an illness, or has incurred an injury, that is likely to result in the member’s death within 24 months or less (the Certification Period)
  • At least one of the medical practitioners is a specialist practicing in an area related to the illness or injury
  • The Certification Periods have not ended

Preservation

The member benefits that exist at the time of meeting the condition of release or accrue during the Certification Period become ‘unpreserved’ which means they can be accessed. Any benefits that accrue after the Certification Period ends remain ‘preserved’ and cannot be accessed until the member meets a further condition of release.

Insurance

Many insurance policies allow a member to claim a death insurance amount if they meet the terminal medical condition of release. Generally a member can only claim a death or permanent disability benefit once.

Prior to 1 July 2015, the terminal medical condition certification period was 12 months. Although the condition of release extended the period to 24 months, many insurance policies are only increasing the period in their policy definitions when policies are renewed. This means some members with a 24-month certification period may not be able to claim insurance benefits.

Payments

The tax treatment of a terminal illness benefit depends upon how the benefit is paid.

If a lump sum payment is made during the certification period it is tax free, regardless of the member’s age. Any balance remaining after the Certification Period ends will be taxed as an ordinary member benefit where tax will depend upon the member’s age. If a member previously applied for a benefit under another condition of release and PAYG tax was deducted, the member may provide the trustee with the terminal illness medical certificates. The certificates must state that the member satisfied the terminal medical condition definition at the time the original payment was made or within 90 days from receiving the payment. The trustee may then request a refund of the PAYG tax deducted from the ATO and make an additional payment to the member.

Claiming a tax-free terminal illness benefit can help members who have non-tax dependant adult children as the likely recipients of a death benefit. A death benefit paid to an adult child will be taxed at 17% of the taxable component. An amount paid as a terminal illness benefit can be withdrawn tax free and gifted to the children before death or paid as non-super monies via the estate (and therefore not subject to tax).

If the member chooses to receive a pension benefit, the benefit is taxed as a normal superannuation pension, there are no tax concessions for a terminal illness pension.

Rolling over

Although superannuation law allows a terminal illness benefit to be rolled over to another fund, such rollovers are not rollover superannuation benefits under tax law. This means if a terminal illness benefit is rolled over, the transfer is not treated as a rollover but as a personal member contribution.

The paying fund is treated as having paid a benefit to the member for tax purposes and the member is deemed to have been paid a tax-free lump sum. The receiving fund is then treated as having received a personal contribution from the member.

The amount will therefore count towards the member’s concessional and/or non-concessional contributions cap, depending on whether they may have been eligible to claim a tax deduction for some of the contribution.

Summary

Understanding the requirements to claim a terminal illness benefit may help members with their tax planning and avoid potential pitfalls of rolling over. For more information, please speak with your financial adviser.

 

Julie Steed is Senior Technical Services Manager at Australian Executor Trustees. This article is in the nature of general information and does not consider the circumstances of any individual.

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