Early release of super due to permanent incapacity

You can access your super benefits early due to permanent incapacity under Australian law, provided you meet the eligibility conditions.

Normally you can only access your super once you’ve reached your preservation age and met a condition of release (such as retiring from the workforce or turning 65). Your preservation age is between the ages of 55 and 60, depending on your date of birth.

However, these super release conditions can be waived due to permanent incapacity.

What is meant by permanent incapacity?

You’re permanently incapacitated according to Australian super legislation if two medical practitioners certify that you have physical or mental ill-health issues that are likely to stop you from ever working again in the job you’re qualified to do. Those qualifications could include your prior experience, training or education.

What permanent incapacity benefits can you potentially access via super?

If you’re permanently incapacitated you can access:

1. any total and permanent disability (TPD) insurance benefits that you may have in your super fund, and/or
2. any other super benefits you have accumulated. There are no restrictions on the amount of your own benefits that you can access, and you can access them either as lump sum or as a regular income stream of payments.

If you have TPD insurance coverage via your super fund, the benefits you can claim will depend on the extent of the coverage that you have. TPD benefits can be paid either as a lump sum or an income stream, depending on the terms and conditions of your insurance policy.

You may not need to withdraw all (or any) of your other super benefits of you have sufficient TPD insurance coverage. It’s important to remember that your super is designed to fund your retirement, so any early withdrawal will impact the amount you’ll have available when you retire. You’ll also lose the power of compound interest on any withdrawn funds. That power can be substantial over time.

TPD insurance cover can therefore be an effective way of preserving your super funds.

Other reasons for early release of super

You can find all the ways that you can access your super here, or continue reading for other conditions of release that can intersect with permanent incapacity.

Temporary incapacity

If you’re temporarily incapacitated (i.e. if you have a temporary physical or mental condition that means you’re unable to work for specific period of time, or you can only work reduced hours for that period), you’re only entitled to two specific benefits via your super fund:

1. any income protection insurance benefits that you may have, and/or
2. any voluntary employer-funded benefits that you may have (e.g. any super contributions made by your employer that are in excess of the 9.5% compulsory superannuation guarantee contributions that they are required to make on your behalf).

Compassionate grounds

Accessing super benefits early due to permanent incapacity is different from accessing them on ‘compassionate grounds’ (which is another potential way that super can be accessed early under Australian law). It’s important to understand the difference between these two categories because there are different terms and conditions for access.

The compassionate grounds provision only applies to your inability to pay one or more of the following expenses:

• Your own (or one of your a dependant’s) medical treatment or transport for a life-threatening or mental illness, or one that generates chronic pain.
• A mortgage or council rates payment to prevent you from losing your home.
• Home or vehicle costs to accommodate your own (or a dependant’s) disability.
• Paying for your own (or a dependant’s) palliative care.
• Paying for the death, funeral or burial expenses of a dependant.

The early super payment you can receive on compassionate grounds is also limited to the amount you need to cover any of these expenses.

In contrast (as mentioned earlier), there are no restrictions on the amount of your own super that you can access early if you become permanently incapacitated.

How do you apply for permanent incapacity benefits via your super?

If you’re permanently incapacitated, you can apply to your super fund to claim any TPD insurance benefits that may be available to you and/or for the early release of any or all of your other accumulated super benefits.

Your application will need to include certificates verifying your permanent incapacity from two medical practitioners, as outlined earlier in this article.

Your super fund (or its associated insurance company) will assess any information you provide in deciding whether or not to approve any early release of your super funds or a TPD  insurance claim.

Do the rules differ if you’re in an SMSF?

No. SMSF trustees are only able to release super funds for permanent incapacity if a member provides the required certificates from two medical practitioners, just like any other super fund. Trustees should also pass any member TPD insurance claims onto their insurance company for assessment and processing.

The Australian Taxation Office (ATO) can impose severe penalties on SMSF trustees for the illegal or unauthorised early release of super funds. These penalties can include very heavy fines (up to $420,000 for individual trustees and up to $1.1 million for corporate trustees), and/or up to five years imprisonment.

What are the tax implications?

If the payments you receive via your super fund are TPD insurance benefits, these payments are tax-free.

However, if you’re accessing permanent incapacity benefits from your super fund that aren’t TPD insurance payments, these payments are taxable. Your rate of tax will depend upon:

• whether or not you have reached your preservation age,
• whether you receive lump sump or income stream payments,
• whether your payments have taxable and non-taxable components, and
• whether or not your fund has already paid tax on any taxable component of your payments (i.e. whether that taxable component has taxed or untaxed elements).

If you receive early super income payments for your permanent incapacity and you haven’t reached your preservation age (or if you have but are still aged under 60):

• The taxed element of the taxable component is taxed at your marginal rate, but you’re entitled to a tax offset of 15%.
• The untaxed element of the taxable component is taxed at your marginal rate.

If you receive an early super lump sum payment for your permanent incapacity and you haven’t reached your preservation age (or if you have but are still aged under 60):

• The taxed element of the taxable component is taxed at your marginal rate or between 17 and 22% (depending on your age), whichever rate is lower.
• The untaxed element of the taxable component is taxed at your marginal rate or 32%, (whichever rate is lower), unless the lump sum payment exceeds the untaxed plan cap (which is $1.48 million in the 2018/19 financial year). If your temporary incapacity lump sum payment exceeds this cap, you’ll be taxed at the top marginal rate (47%).

If you receive early super income payments for your permanent incapacity and you’re aged over 60:

• No tax is payable on the taxed element of your taxable component.
• The untaxed element of the taxable component is taxed at your marginal rate, but you’re entitled to a tax offset of 10%.

If you receive early super lump sum payment for your permanent incapacity and you’re aged over 60:

• No tax is payable on the taxed element of your taxable component.
• The untaxed element of the taxable component is taxed at your marginal rate or 17%, whichever is lowest (unless you exceed the untaxed plan cap).

Example

Jane is 52 years old and is permanently incapacitated. She had no TPD insurance but receives a regular income stream of $30,000 per year from the accumulated balance in her super fund. The payments she receives have been taxed by her fund.

Jane must add the $30,000 onto her taxable income in each financial year that she receives these payments. She’ll pay tax at her marginal rate, less a 15% tax offset to reflect the tax already paid on her payments by her super fund.

The bottom line

Australian super law allows you to access your super benefits if you’re permanently incapacitated. However, if you have TPD insurance coverage via your fund, you may not need to withdraw all (or any) of your super benefits early.

It’s worthwhile to seek independent professional advice about having an appropriate level of total and permanent disablement insurance coverage in your super fund for your individual financial circumstances. The information contained in this article is general in nature.