When advising a claimant on a superannuation total and permanent disability (TPD) claim, telling them there could be tax implications when making a withdrawal after the claim is approved should be one of your key messages.
Matters involving total and permanent disability (TPD) claim withdrawals from superannuation are complex and need expert tax and financial advice right from the start. Don’t do anything until clients get that advice. There can be significant and unexpected tax and financial implications for a client if they are not advised about the different rules and options before they make a withdrawal.
When acting for these clients your key message should be to obtain expert tax and financial advice before any decisions are made about withdrawals.
When a TPD claim is approved, clients withdrawing their entire benefit can incur unexpected hefty tax and Centrelink liabilities if they do not understand the following key points.
- Tax is payable on the TPD benefit. Tax is payable when a client withdraws their benefit from superannuation prior to their preservation age, which is between ages 55 and 60 depending on their date of birth. The standard tax rate when withdrawing non-TPD benefit superannuation before retirement age is 22 per cent. However, when withdrawing superannuation following a TPD claim this rate is reduced and is different for everybody. The rate of tax someone pays can be anywhere between one and 18 per cent and is different for each claim if the person has more than one superannuation account. Having an appropriate strategy for accessing TPD and superannuation benefits which is more flexible than a lump sum withdrawal can result in a significantly lower effective tax rate.
- Consolidating superannuation accounts can increase the client’s tax liability. Rolling over superannuation funds can increase the tax payable when accessing a TPD benefit. The earlier the date a client commenced their superannuation account or any account rolled into their current superannuation account, the higher the tax rate they will pay when withdrawing their benefit.
- Centrelink and other benefits may be affected. A successful TPD claim does not affect a person’s Centrelink or other benefits, because superannuation is excluded from Centrelink means testing until a person reaches their Centrelink Age Pension Age, which is between 65.5 and 67. However, once money is removed from the superannuation fund it may affect a person’s Centrelink entitlements.
- Superannuation and TPD funds remain accessible. Some clients are concerned that if they leave money in superannuation, it might be locked up. However, when a TPD claim is approved the client’s existing superannuation balance and TPD claim becomes ‘unrestricted, non-preserved’, meaning the funds can be accessed at any time in future.
This is a complex area of law that is subject to regular changes and while you need to have a general understanding of the area you should refer clients for expert advice.
Tell your clients early on about potential tax, entitlement and access issues and give them an opportunity to obtain expert financial advice on the best strategy for them. This will minimise surprises and avoid a claim against you.
