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Self Managed Super Fund (SMSF) Article
Using super to pay medical bills

By Tony Negline.

This article may be out of date.

18th June 2008

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Over the years there has been much confusion within superannuation circles about the difference between permanent incapacity, terminal illness benefits, trauma benefits and temporary disablement benefits.

The super laws provide an ability to get money out of super before retirement.  For our purposes now there are three relevant rules – the permanent incapacity rule, the temporary disablement rule and a new terminal illness rule.

A super fund member will be permanently incapacitated if they have ceased gainful employment and the super fund's trustee is reasonably satisfied that the person is unlikely, because of mental or physical ill-health, ever again to engage in gainful employment for which the member is reasonably qualified by education, training or experience.

Once this definition is satisfied any money preserved in the super system can be paid as a lump sum or pension.

Tax concessions will be available on these benefits if two medical practitioners certify that it is unlikely that the person will be employed in a capacity for which they are reasonably qualified because of education, training or experience.  Note that this definition is similar to the one used by the super laws but the tax concessions will only arise if two medical certificates are provided.

The tax concessions for permanent incapacity benefits do not revolve around a super fund member's employment.  Before July 2007 the tax concessions only clicked into action when a fund member stopped employment because of their disability which wasn't very fair on people who were not employed for any reason.

The tax concessions reduce the tax on a permanent incapacity lump sum and also provide a 15% rebate on the income tax payable on any income payments.

A super fund can also potentially pay out a benefit when a member is temporarily incapacitated.  The super laws say that these types of benefits can be paid when a member ceased gainful employment due to mental or physical ill health but doesn't satisfy the permanent incapacity rule.

The super laws don't allow this benefit to include the member's minimum benefit which is the member personal contributions, any compulsory employer contributions and the Government co-contributions plus earnings on these amounts.

Temporary incapacity benefits can only be paid as an income stream because a lump sum is not allowed.  The income paid cannot be greater than the member's income before disablement.  If the member returns to work on a part-time basis then the temporary incapacity income must be reduced to continually ensure that the member's income does not exceed their pre-disablement remuneration.

The super laws allow temporary disablement benefits to be paid for as long as necessary and they do not receive any tax concessions when paid to the member who has to pay full marginal rates on them.

From July 2008 onwards the government wants to allow a new benefit called "terminal medial condition".  All a member's super benefits can be paid out if two registered medical practitioners certify that the member has an illness which will probably cause death within 12 months.  One of the doctors must be a specialist in the illness' related area.

It is intended that all of a member's benefits can be paid out when this definition is satisfied and that the benefits will be tax-free.

It is possible to purchase a life insurance contract that pays a lump sum benefit if a person suffers from a medical trauma such as cancer or heart attack.  Whether the person also satisfies any of the above super access definitions will vary from case to case.  The majority of people diagnosed with cancer or heart complaints these days are able to return to some work.  In the main therefore a super fund member may be off work for a while with a trauma condition and may be eligible for a temporary incapacity income payments but not a lump sum benefit from their super fund.

These rules are the minimum allowed by the super laws.  A super fund's trust deed cannot be less strict that these requirements.  A fund's governing rules can however be stricter.  For example, the fund's deed may not allow for temporary disablement benefits or may have a very strict definition of permanent disablement.  Super fund members should carefully examine the wording of their fund's trust deed to ensure that it will pay them benefits when they want it paid out.

All super fund trustees should ensure that the contract terms of any life insurance policy they buy meets the minimum required by the super law definitions and also meets their fund’s trust deed definitions.  Even professional trustees sometimes don't seem to bother with this requirement.

Some super fund lawyers have suggested that a trust deed should only allow a benefit payment if a life insurer has made an insurance payout to the super fund.  At a practical level this is sensible however it is quite rare to see this type of provision in SMSF trust deeds.

When a super fund has to assess any of these benefits, processes have to be followed.  Facts have to be gathered and assessed.  Medical reports have to be cited in order to get some tax concessions.  Super fund trustees are expected to take the job of assessing these claims properly.  If they do not, they could be accused of failing to take their super law obligations seriously.

Terminal illness insurance vs TPD vs Trauma insurance

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