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Find out what your peers are asking – based on real-life questions submitted to TechConnect.
By Josh Rundmann, Technical Services Manager
Q: I have a new client who has just been admitted with a terminal illness claim. The client is currently receiving some Centrelink benefits and is expected to pass away within 24 months. The client doesn’t need access to their funds now. Thinking longer term we want to look at minimising the taxable component so their spouse can start a death benefit income stream and minimise tax on the pension payments whilst they are under age 60. What options do they have and what tips and traps do we need to consider?
A: Terminal illness is a somewhat unique condition of release. Under super law, the condition of release for terminal medical condition is continuously met during the ‘certification period’ being the period for which the doctors expect the member to live (up to a maximum of 24 months). In your case, if the doctors have certified that your client is likely to pass away within 24 months then for the next 24 months the client’s super – including additional contributions and earnings – is fully unrestricted non-preserved. This means you can implement a withdrawal and recontribution strategy without having to re-apply to unpreserved the funds if it is completed within the certification window.
As a ‘nil cashing restriction’ condition of release, the funds can be converted to an account-based pension within the same fund but there is no special tax treatment for pensions payments from a terminal illness benefit. Under preservation age the taxable component is taxed at your client’s marginal rate with no offset. If the funds are moved into an income stream, it will also be assessable for Centrelink purposes.
Terminal illness lump sum withdrawals are completely tax-free when paid within that certification window.
Something often missed is that tax law does not treat a super benefit moved from one fund to another as a rollover. To be clear, under super law funds can still transfer the member’s money across, but tax law will treat this as a withdrawal and recontribution rather than as a typical rollover. This can have implications for your client’s non-concessional contributions cap.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.