Practitioners working with terminally ill clients should carefully consider how they choose to withdraw their superannuation entitlements as the chosen method could have significant tax implications for the fund, according to an SMSF technical expert.
When asked whether a terminally ill client who met all the required conditions of release should start a pension or take their entitlements as a lump sum, Heffron SMSF specialist Sean Johnston noted the answer largely depended on the age and personal circumstances of the trustee, although he suggested the latter option was often the safest approach.
“A terminal medical condition is a full condition of release. That means any of the benefits you hold in super at the point of assessment basically become unrestricted non-preserved and you can effectively do what you [want to] do with those benefits,” Johnston noted during an online briefing held by his firm today.
“If you are over 65, they are fully accessible. You can take lump sums, you can start a pension, you can do a little bit of both if that’s what appeals to you. However, for most people acting under a terminal medical condition, you’re probably going to want to take lump sums.
“The reason you want to take a lump sum is most people with a terminal medical condition of release are going to be under the age of 60, so there’s probably going to be some tax involved with their benefits.
“If you’re withdrawing them under the terminal medical condition of release, there is no tax on those benefits if they’re taken as a lump sum. It doesn’t mean you can’t take them as a pension, but there’s probably going to be limited circumstances where you would want to do so.”
He clarified if the trustee accesses their benefits through an income stream and they are under the age of 60, they will pay marginal tax rates on the pension payments and forfeit the 15 per cent tax offset, which applies to trustees who have either died or have suffered an incapacity event.
“In the circumstances given, to be considered as a pension you have to have a contractual agreement between the member and the fund trustees to pay a series of periodic payments,” he said.
“Unless they agree upfront to have that arrangement where you are taking a periodic set of payments, you are highly unlikely to meet the definition of a pension income stream, so you need to be careful around what documentation you put upfront.
“As a general rule, unless you’ve got that upfront agreement, it’s not going to be considered a pension income stream and you’re most likely going to want to take those benefits as a lump sum payment.”
