Senior SMSF Technical Specialist
My client is in their 40s and has accessed their superannuation due to being permanently incapacitated. For tax purposes, are the lump sums tax free if the member also has a terminal medical condition?
A lump sum paid to a member who has a terminal medical condition is tax free. Whereas a lump sum paid to a member who is permanently incapacitated is taxed in the normal way, with an additional tax free component based on their age and service period.
A terminal medical condition will exist if two registered medical practitioners have certified that the person suffers from an illness, or has incurred an injury, that is likely to result in the death of the person within the next 24 months. At least one of the registered medical practitioners must be a specialist practising in an area related to the person’s injury or illness.
In this case, the tax law does not require that the member’s condition of release (the reason why the trustee was permitted to pay a lump sum benefit to the member) is due to having a terminal medication condition. What is critical is that the member has genuinely met a condition of release and was eligible to take a lump sum benefit (that is, it wasn’t illegal early access). In fact, for tax purposes, the member has up to 90 days after receiving the lump sum benefit to qualify as having a terminal medication condition. This means that if the individual hasn’t yet obtained the medical certificates at the time the benefit is paid, they will still have a small window in which to obtain them.
So yes, if a member has been paid a lump sum because they satisfy the permanent incapacity condition of release, that lump sum will be tax free if they are also considered to have a terminal medical condition.
In my “Accessing super before retirement” session at our recent Super Intensive Day, I explored this issue plus a number of other tips. You can still watch the recording for this and all the other sessions – over 17 hours of valuable CPD.