The use of the temporary incapacity provisions within the Superannuation Industry (Supervision) (SIS) Regulations enabling fiscal relief for loss of income resulting from the coronavirus may not be applicable for many SMSF trustees, a technical expert has said.
SuperGuardian education manager Tim Miller noted certain protection mechanisms contained in the SIS Regulations have to be observed when looking to take advantage of the temporary incapacity rules.
“There is a catch and that is that a temporary incapacity benefit can only be funded via insurance proceeds or non-mandated employer contributions,” Miller said.
“There are protection mechanisms within the SIS Regulations that protect members’ minimum benefits, being all the benefits attributable to a member, until such time as the member’s benefits are cashed, that is, a condition of release is met.
“These mechanisms go further to protect the member’s own contributions and mandated employer contributions, plus earnings, in the event of temporary incapacity.”
In turn, he pointed out these parameters may have the effect of preventing a large number of SMSF trustees from using the temporary incapacity provisions as a financial safety net for adverse coronavirus outcomes.
“It means for a significant proportion of SMSF members, in particular those who are self-employed and those who do not salary sacrifice, the income stream will need to be funded from an income protection or continuance insurance policy,” he noted.
He said temporary incapacity income streams were able to be funded by self-insurance reserves in the past, but the ATO’s current attitude to reserves makes this strategy no longer viable.
“The ATO has made it clear benefits allocated from a reserve to fund a temporary incapacity benefit will be treated as concessional contributions for excess contribution purposes,” he said.
“This could result in the benefit being taxed twice – once upon allocation and once as an income stream payment as the non-commutable income stream is not entitled to any tax concessions as the member is not in retirement phase.”