Terminally ill risk super tax bill
Terminally ill clients who attempt to roll over their superannuation could end up with a big tax bill, warns OnePath technical services manager Scott Quinn.
If a client satisfies the terminal medical condition (TMC) of release, they can only receive their benefit as a cash lump sum or a pension - they cannot roll it over to another superannuation fund, he said.
"Because tax law doesn't recognise it as a rollover superannuation benefit, it's treated as a new contribution and counted against the contribution caps," Quinn said.
The situation could crop up if a client receives a terminal illness insurance payout in one super fund, and then attempts to roll over the money to a different fund with a more favourable death benefit pension or access to an anti-detriment payment, he said.
While the client may be able to utilise the 'bring forward' rule to reduce the breach of the non-concessional contributions (NCC) cap, anything over $450,000 will potentially be subject to the 46.5 per cent NCC cap breach, Quinn said.
Colonial First State executive manager of technical services Deborah Wixted said the Australian Taxation Office would view any attempted rollover for clients in this situation as a cash lump sum that has been contributed to a new fund.
In her experience, terminally ill clients who seek to roll over their superannuation do so in order to have their benefit paid as a pension to their surviving family.
While the adviser needs to understand the consequences of any attempted rollover, the fund also has an important role to play, she said.
"A good fund will understand that it is not part of the rollover system, and they should not receive it as a rollover," Wixted said.
"But some trustees are a bit more across things than others, and some self-managed superannuation fund [SMSF] trustees might be a little less knowledgeable about these things," she said.
SMSF Professionals' Association director of education Graeme Colley said in his experience retail funds were more likely to accept a rollover from a member who satisfied the TMC of release.
In the examples he has seen, the retail funds simply acted on the instructions of the individual member, rather than exercising their full responsibilities as a trustee, he said.
For clients who end up getting hit with the excess contributions tax as a result of an inadvertent contribution, the avenues of appeal are slim.
"The only way would be to claim to the tax commissioner that special circumstances exist. But illness in that situation is generally not regarded as a special circumstance," Colley said.
"I've spoken to people in that situation and they tell me that 'I don't want to leave a tax liability for my survivors'. It's really heart-rending," he said.
