Q&A: In what circumstances can a self-managed superannuation fund (SMSF) pay a temporary incapacity benefit?
Question: In what circumstances can a self-managed superannuation fund (SMSF) pay a temporary incapacity benefit?
Answer: Prior to paying a benefit from an SMSF, the trustees will need to refer to the trust deed of the fund. Most trust deeds should be sufficiently flexible to pay a benefit on the basis of temporary incapacity, however, there may be some restrictions placed on the circumstances in which this type of benefit can be paid.
It may seem basic, but a key requirement to pay a temporary incapacity benefit is that the member must qualify as being temporarily incapacitated. That is, the member must have ceased gainful employment due to ill health that does not constitute permanent incapacity.
Once the trustees of the fund have determined this, the fund can pay a non-commutable income stream for the period of the incapacity, from either insurance proceeds (that is, an income protection policy) or in some instances from the member’s balance.
Where the income stream is funded from the member’s balance, the trustee is not permitted to pay the benefit out of the member’s ‘minimum benefits’. In accumulation funds there will include member financed benefits plus mandated employer-financed benefits (that is, member contributions, both undeducted and deducted, plus mandated employer contributions, plus earnings and growth on those amounts, less costs).
Therefore if the income stream is funded from the member’s account, it must come out of salary sacrificed contribution amounts, or additional voluntary employer-financed benefits.
Jason Menzies is head of technical services, Tribeca .
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