Before 2008, having a terminal medical condition was not a “condition of release” for superannuation. Under the early-release provisions that existed before then, a terminally ill member who had not ceased work was restricted in terms of the amount of the benefit that he or she could access.
However, all that changed in 2008. Since then, if someone has a terminal medical condition then all of their benefits become unrestricted, non-preserved benefits and can be cashed without restriction. (Naturally this has depended on the terms of the fund’s deed.) More specifically, under the changes implemented in 2008, a person has a terminal medical condition where:
(a) Two registered medical practitioners have certified, jointly or separately, that the person suffers from an illness, or has incurred an injury, that is likely to result in the death of the person within a period (the certification period) that ends not more than 12 months after the date of the certification
(b) At least one of the registered medical practitioners is a specialist practising in an area related to the illness or injury suffered by the person
(c) For each of the certificates, the certification period has not ended.
As a side note, I stress that this definition is very paperwork-dependent. A person can be literally on their deathbed and, unless they have the relevant certification, that member does not qualify as having a “terminal medical condition” by the definition above.
A person might receive super benefits due to a terminal medical condition while under age 60. Accordingly, on its face, it appears that such a person might have to pay tax. However, when the super law was amended to insert the new condition of release, the tax law was also amended.
The amendment means that a lump sum that a person receives is income tax-free in their hands if a terminal medical condition exists in relation to that person when they receive the lump sum, or within 90 days after receipt. There was no express special treatment for a pension paid to someone who had a terminal medical condition.
The definition of terminal medical condition for tax purposes was identical to that for super law purposes.
This would often raise a question in respect of someone who receives a lump sum income-tax-free due to a terminal medical condition.
If their health improves and they live longer than 12 months, does that person have to then pay tax? Mercifully, the answer is no: the lump sum would retain its income-tax-free characteristics for the recipient.
The recent changes
The Assistant Treasurer, Josh Frydenberg, announced earlier this year that the government would amend the provision for accessing superannuation for people suffering a terminal illness. This followed submissions by the Breast Cancer Network Australia and other organisations.
The definition of terminal medical condition, requiring a life expectancy period of 12 months, had been causing difficulty for some people, including women with secondary breast cancer diagnoses. Frydenberg stated that understandably, such people want access to their money as they may experience significant financial burden associated with treatment costs or want to make the most of their time with their family.
He went on to state that the government would amend the relevant regulations to change the life expectancy period to 24 months and that the proposed change would take effect from July 1, 2015.
True to its word, the government has implemented this change. More specifically, the Tax and Superannuation Laws Amendment (Terminal Medical Conditions) Regulation 2015 (Cth) has been registered, which gives effect to the announcement.
Essentially, the changes are very straightforward. They simply provide that in the relevant super and tax legislation, omit “12 months” and substitute “24 months”. The changes took effect from July 1, 2015.
A trap to watch out for
The explanatory statement that accompanied the changes highlighted a trap. It is important that advisers are aware of this. Namely, the explanatory statement warned people as follows:
“It is common for superannuation trustees to also offer members insurance products which pay a benefit in the event of a terminal medical condition, and these products use similar definitions based on a 12-month certification period.
“The Regulation makes no amendment to require such insurance products be offered on a 24-month certification period…
“Consultation also identified that superannuation funds are aware of the need to inform affected members of any differences between their superannuation and insurance benefits, and of any impacts that might have for the member (including, for example, the need to retain money in the superannuation fund to pay insurance premiums).”
It is unusual for explanatory material to contain such a strategic warning. However, given its importance, I feel the draftspeople should be commended for including it.
In response to this trap, naturally, trustees and advisers should review insurance arrangements in place and any terminal medical condition riders that might exist in respect of any life insurance policy.
For completeness, such a review should arguably occur anyway. This is due to relatively recent changes to the Superannuation Industry (Supervision) Regulations 1994 (Cth). Under these changes, the investment strategy of a self-managed super fund (SMSF) must now also include consideration as to whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund. Further, the investment strategy must now “regularly” be reviewed.
To quote the media release that first announced these changes: “While this is a small regulatory amendment, it will make a big difference to the lives of those affected, and that is why the government has decided to act”.
It is hard to disagree with that statement.
TOPICS: condition of release, terminal illness, trustees of self-managed super funds (SMSFs)