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Taxation of super benefits

Terminal medical condition benefit payments

Section: 7.2

Clients with a terminal medical condition who withdraw superannuation lump sums under age 60 are not subject to tax on that lump sum.

A payee will be taken to be assessed as suffering from a terminal medical condition if two medical practitioners (at least one of these is a specialist) certify that the member is suffering from an illness or has incurred an injury, that is likely to result in the death of the person within a period of 24 months. A superannuation condition of release also applies to terminal medical illness.  See section 12.3 for more information.

Note: Once a person has advised his or her superannuation fund of their terminal medical condition they cannot roll over their super benefits. Terminal medical condition benefits may only be cashed out as either a lump sum or a pension.

Where such a benefit is transferred between complying super funds, the transfer will be treated as having been cashed out as a lump sum and re-contributed for tax and contributions cap purposes and excess contributions tax could apply.

Estate planning implications

It is important to note that where a fund also pays anti-detriment payments, a member would forgo any anti-detriment payment (see section 10.7) where they withdrew their super balance as a lump sum terminal medical condition benefit instead of leaving it in their fund to be paid as a death benefit after their death. Depending on the amount of the member's accumulated superannuation savings this could make a significant difference to the amount of benefits payable.

Example

Lea is 53 and has been diagnosed with a terminal illness. She is not expected to survive longer than 24 months. Her super balance is $100,000 (100% taxable component) but she also has a life insurance policy through her super for $500,000.

Under the policy the insurer will pay 100% of the insured amount upon the member being diagnosed with a terminal medical condition. The trustee of Lea's fund also pays anti-detriment payments.

If Lea withdrew her full benefit, including the $500,000 life insurance proceeds as a terminal medical condition benefit, she would receive the full $600,000 tax-free.
However, if Lea left her benefit in super and it was paid to her spouse, Rob, as a death benefit, the total amount payable would have been increased to $617,647, taking into account an anti-detriment payment of $17,647.1

1 Lea's anti-detriment payment is calculated using the approved formula in ATO ID 2010/5 assuming her eligible service date is on or after 1 July 1988.

2016 Federal Budget proposal: Anti-detriment payments abolished

From 1 July 2017, the Government has proposed abolishing anti-detriment payments, effectively removing the ability of superannuation funds to increase lump sum superannuation death benefits when paid to eligible beneficiaries.

Last modified: Tuesday, May 2, 2017