An SMSF technical expert has warned advisers against allowing their clients to pass on the full amount of any successful temporary incapacity or income protection insurance payments to a super fund before they analyse and assess them.
Accurium head of education Mark Ellem stressed the income stream that is being substituted by a successful income protection insurance cover claim, where the policy is held within the SMSF, must be fully considered before any money is distributed to the relevant member.
“[It’s important to note] the payment to the member is limited to the earnings before the incapacity and it’s only for the period not exceeding the period of incapacity from employment of the kind engaged in immediately before the incapacity,” Ellem said.
“So we’ve got to assess how much the person gets [from this insurance cover] is limited to what they were earning before the event occurred that caused them to be temporarily incapacitated,” he added.
To this end he explained if the SMSF member was only earning $8000 before having their capacity temporarily compromised and the payout from the insurance policy was $10,000, then amount paid to the member must be limited to $8000.
According to Ellem this is not the only element that must be considered before an incapacity payment is forwarded to an SMSF member.
“[The payment] is also [potentially] subject to PAYG (pay as you go) withholding [tax]. If the person is under age 65, because otherwise you’d be using the age 65 access, then [the payment] is going to be fully assessable to them. There will be a tax withholding requirement,” he advised.
“So even if they were earning $10,000 before [the event causing incapacity] and there was $10,000 coming in [from the insurance policy], you couldn’t pay the whole $10,000 out to them because there would be PAYG withholding requirements.”
Ellem took the time to remind practitioners minimum benefits cannot be used to fund temporary incapacity payments to members. This means member balances accumulated from superannuation guarantee or personal contributions cannot be used for these purposes and only balances stemming from activities such as salary sacrifice arrangements qualify to be used for these actions.
He pointed out payouts of this nature could be difficult because the practice of recording the portion of a member’s balance accounted for by salary sacrifice arrangements is rare.