SMSF practitioners should be aware the treatment of superannuation benefits that arise when a client is diagnosed with a terminal illness differs from other payments to members and should avoid the usual strategies of rollovers or pensions, a technical specialist has noted.
MLC TechConnect technical services manager Julie Steed said most SMSF advisers do not get many clients with death benefit, total and permanent disability or terminal medical condition claims coming into their office and need to revisit these matters as they are not mainstream issues for most practices.
“Recontribution strategies or starting pensions we can do in our sleep, but dealing with more unique conditions of release and paying benefits means something should go off and we think about seeking help,” Steed said during a presentation at the SMSF Association National Conference 2025 in Melbourne today.
“When it comes to terminal medical conditions, there are strategies that can be used to help clients and getting advice for those clients can be really valuable.”
She noted a terminal medical condition benefit required proof from two legally qualified medical practitioners that the SMSF member would die within 24 months and once they were received, the benefit could be paid tax-free.
“That can be advantageous if they are expecting the benefit to go to non-tax dependants, such as adult children, without paying 17 per cent tax,” she said.
“Yet, it is really important the terminal illness benefits are not rolled over. The trade-off for getting it tax-free was that it has to leave the super system.
“If we roll over a terminal illness benefit, it’s treated as if the member has taken their money out as a tax-free benefit and then made a personal non-concessional contribution to the new fund.
“If the member has insurance or a large balance, that could end in a world of pain. I’ve seen this happen a couple of times and it’s usually in a SMSF because they haven’t known any better.”
She said it was possible to use a terminal illness benefit to start a pension, but questioned whether that was wise under the circumstances.
“They have the ability to start a pension as they have received unrestricted, non-preserved benefits, but I see this as an opportunity to get out and wind up the SMSF while still alive and get that process going, which is the most common option I see people taking,” she said.
“Where it is a two-member fund, thinking about the succession plan for the SMSF is important. When two members start the SMSF, it’s a fabulous adventure, but if you get down to one person, it might not be so great.”
