Early release of super due to temporary incapacity

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You can access super benefits early due to temporary incapacity under Australian law, provided that the benefits come from specific sources.

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 55 and 60, depending on your date of birth.

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

What is meant by temporary incapacity?

You’re temporarily incapacitated according to Australian super legislation if either physical or mental ill-health issues cause you to temporarily:

• be unable to work at all, or
• work less hours than you normally would.

Either way, your income is negatively affected.

What temporary incapacity benefits can you potentially access via super?

If you’re temporarily incapacitated and you need to supplement your income via your super, you may be able to access two potential benefits:

1) income protection insurance benefits, or

2) any voluntary employer-funded benefits that you may have in your super fund. This includes 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.

Both of these potential benefits must be paid as an income stream. They cannot be converted to a lump sum. The amount of your regular payments will depend on your level of insurance cover or the amount of voluntary employer-funded benefits that you have. If you don’t have either of these benefits and you temporarily lose your income-earning capacity, you might need to apply to have your super funds released early on compassionate grounds to make ends meet. But this isn’t an ideal option.

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 You’ll also lose the power of compound interest on any withdrawn funds.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.

It’s also important to understand that if you’re receiving sickness benefits from your employer, you generally won’t be eligible for any super benefits for your temporary incapacity.

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.

Permanent incapacity

If you’re permanently incapacitated (i.e. you have a permanent physical or mental condition that prevents you from ever working again), you’re entitled to either a lump sum or a regular income stream of the following benefits:

1) total and permanent disablement (TPD) benefits if you have this cover in your

     super fund, and/or

2) the early release of all or some of your own super funds.

Compassionate grounds

Accessing super benefits due to temporary 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 limited to the amount you need to cover any of these expenses.

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

If you’re temporarily incapacitated, you can apply to your super fund to claim any income protection insurance benefits available to you or for the early release of any voluntary employer-funded benefits that you may have.

Different funds will have different application requirements, including supporting medical and/or employer documentation that may need to be provided.

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 an income protection insurance claim.

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

No. SMSF trustees should pass any member insurance claims onto their insurance company for assessment and processing. Trustees are also only able to release any voluntary employer-funded benefits to their members due to temporary incapacity, just like any other super fund.

The Australian Taxation Office (ATO) can impose severe penalties on SMSF trustees for the illegal and/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 you’re accessing temporary incapacity benefits from your super fund, they’ll be taxed as a super income stream. Your rate of tax will depend upon:

• whether or not you have reached your preservation age, and
• whether your income stream has 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 haven’t reached your preservation age (or if you have reached it but are aged under 60):

• The taxed element of the taxable component of your income stream payment 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 are aged over 60:

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

Example

Tom is 40 years old and receives total payments of $18,000 as a super income stream in the current financial year due to temporary incapacity. His fund has already paid tax on the $18,000. Tom must include the $18,000 as income on his tax return and won’t be entitled to any tax offset. He’ll therefore pay tax on the $18,000 payment at his marginal rate.

The bottom line

Australian super law allows you to access specific super benefits if you’re temporarily incapacitated. One of those income protection insurance benefits if you have this type of coverage in your fund. It helps you to protect your retirement nest egg.

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