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Correct evidence needed for TPD

TPD definition tax SMSF

Disabled members may not automatically meet the TPD definition for tax purposes despite satisfying both the underwriter and SIS Act definitions.

Satisfying the underwriter and Superannuation Industry (Supervision) (SIS) Act definitions of total and permanent disablement (TPD) does not mean a member will automatically meet the definition for tax purposes, an SMSF technical expert has warned.

SuperConcepts SMSF technical support executive manager Nicholas Ali pointed out meeting the tax definition of permanent incapacity would require a disabled member to provide additional evidence in the form of two legally qualified medical practitioners certifying the member was unlikely to ever be gainfully employed again in a capacity for which they were reasonably qualified.

Not meeting this requirement could mean a disabled member who received a lump-sum payment or income stream from their SMSF as a result of satisfying the insurer and SIS Act TPD definitions may be unable to access potential tax-free components of the benefit received.

“We could have the insidious situation where we satisfy the underwriter’s definition and we satisfy the SIS definition, but we don’t satisfy the tax definition,” Ali said.

For disabled members who did meet the necessary tax definition, and in the case of their proceeds being paid in the form of a lump sum, the tax components of the insurance proceeds would follow the tax components of their superannuation interest, he noted.

In addition, he said benefits taken as an income stream by disabled members in an SMSF who met the TPD tax definition would be taxed in a similar way to someone who was under the age of 60.

“If a member can satisfy an underwriter’s definition and they can satisfy the SIS definition, there’s perhaps the potential for them most likely to also satisfy the tax definition of permanent incapacity,” he added.

“If we can satisfy the tax definition of permanent incapacity, then the components of the TPD benefit can be modified to effectively increase or create a tax-free component.”

In December, Accurium head of education Mark Ellem said putting a split TPD insurance policy in place, where part of the cover is held within an SMSF and a separate part outside of the fund, was a strategy trustees could employ to ensure policy definitions not allowable under superannuation law could be included.

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