Evidence central to incapacity claim

incapacity condition of release

Trustees should seek strong medical evidence a member is incapacitated before allowing them to access their benefits to ensure the payments pass a fund audit.

SMSF trustees called upon to decide if a fund member is permanently incapacitated should aim to have two doctor certificates stating that fact to ensure any claims for benefits pass inspection by an auditor and the ATO, according to an SMSF service provider.

Heffron client relationship manager Sean Johnston said in circumstances involving permanent incapacity the only restriction on meeting a condition of release for benefits was the trustee must be reasonably satisfied a member can never return to the work for which they are educated, trained or experienced because of an injury or an illness.

Speaking during a recent webinar, Johnston said this raised the question of how an SMSF trustee can, as part of the year-end audit, be reasonably satisfied a member has met the permanent incapacity condition of release.

“Our first port of call every time is two doctor certificates, not only because they are really good evidence, but because you get a tax uplift to tax-free component on your benefits when you start to pull them out,” he said.

“Two doctor certificates basically say that member will never work again for something they are reasonably qualified and experienced to do.

“Failing that, it gets hard because you are trying to look for objective evidence that people are not going to be able to return to work.”

He said media coverage of an accident or injury may be suitable in some cases, while some injuries, such as a musician losing fingers or a hand, would be self-evident that a person will be unable to return to work.

“If a member can adequately demonstrate, even without doctor certificates, they have an injury or illness where it’s self-evident they can’t go back to work, that should be okay, but outside of that it gets to the point where the member is telling the trustee a story and nobody can objectively prove that story,” he said.

He added that a statutory declaration would be insufficient evidence as it was not objective and only the retelling of events or circumstances with no substantive base to allow an SMSF fund member to withdraw their fund benefits.

“The fund auditor has to make a determination on whether the trustee has complied with the law and if you can’t provide some sort of objective evidence, it’s going to be hard to do that,” he said.

“The way the audit standards of conduct are written for an SMSF is if the auditor can’t reasonably figure it out, they will qualify it and let the ATO figure it out.

“If I am permanently incapacitated, the last thing I want is this to be escalated from my auditor to the ATO. I would be aiming to get those two doctor’s certificates so that the person asking me the questions is my auditor rather than the ATO.”

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