ITAA incapacity rules more sound

insurance benefits incapacity

Best SMSF practice would suggest trustees not rely only on the SIS Regulations to justify releasing member benefits as a result of incapacity.

An SMSF expert has recommended advisers and their trustee clients not rely solely on the Superannuation Industry (Supervision) (SIS) Regulations to determine if a condition of release has been met with regard to the incapacity of a member.

SuperGuardian education manager Tim Miller warned against the practice due to the subjective nature of the SIS Regulations definitions.

Under SIS regulation 6.01 temporary incapacity justifying a condition of release is: “Where you suffer from physical or mental ill-health that has temporarily caused you to cease gainful employment (which does not constitute permanent incapacity).”

This definition forces trustees to consider the meaning of permanent incapacity and SIS regulation 1.03C dictates it is: “Where you suffer from physical or mental ill-health and the trustee is reasonably satisfied you are unlikely to engage in gainful employment for which you are reasonably qualified by education, training or experience.”

“Both these conditions of release are reliant on the trustees’ interpretation of the member’s condition. Now what we ultimately have here is a self-assessment of our own health to access benefits from the SIS point of view,” Miller told attendees of a technical webinar he hosted yesterday.

“That is quite a dubious way to go about things.”

Instead he recommended SMSF trustees place more reliance on the directives regarding a disability superannuation benefit contained in the Income Tax Assessment Act (ITAA).

To this end, ITAA section 955.1 determines a disability superannuation benefit means “the benefit is paid to an individual because he or she suffers from ill-health (whether physical or mental); and 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the individual can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training”.

“In other words, to have your benefit taxed concessionally you need to go and get that medical advice,” Miller noted.

“So, in many respects, I think it’s very important if not critical to be far more reliant on the taxation determination or the taxation definition of a disability benefit before contemplating [a release of super benefits by way of] permanent incapacity.

“Similarly with temporary incapacity [trustees should probably consider whether their] insurer [would] pay out under an income protection policy to determine if it is possible to access benefits for temporary incapacity purposes.”

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