Q&As

Andrew Reynolds on Tax and Centrelink Implications for TPD Insurance Claimants

Friday March 9, 2018

Andrew Reynolds has been in Financial Services for 20 years and providing financial advice for over 12 years, most of this time helping individuals and families who have suffered an illness or disability. Andrew Reynolds Andrew has a wealth of technical knowledge around disability payments and benefits and has a passion for educating professionals in the industry so they can better help their clients.

We had the pleasure of sitting down with Andrew recently to discuss key challenges and opportunities facing the industry today.

You can find the full Q&A below.

What’s one key consideration people should keep in mind with respect to total & permanent disability (TPD) claims?

Tax is the biggest consideration, with Centrelink a close second consideration. TPD insurance claimants accessing their benefits from superannuation often have the ability to reduce the tax they pay by thousands of dollars through simple strategies.

Is there an element of superannuation that’s often misunderstood?

Once someone has had a TPD claim approved and then have access to their superannuation funds, they don’t have to access their full benefit immediately. Their superannuation becomes “unrestricted non-preserved,” which effectively means they can access their super at any time in future by completing a withdrawal form. The TPD claim process takes so long, so people think if they don’t withdraw their entire benefit then they might have to go through the same process again to access super – this often leads to the person paying significantly higher tax than they need to.

What’s something about the interplay between TPD insurance claims, superannuation and taxes that some people tend to overlook?

Approved TPD claims are paid into superannuation, then the claimant can make a withdrawal from super, if the claimant is under preservation age (between 56 and 60) then they will pay tax. This rate of tax is different for everyone and could be anywhere from 1% to 20% of the withdrawal. A person making a withdrawal from multiple superannuation funds will have a different tax rate for each withdrawal.

What’s an example of a tax pitfall that insurance claimants can fall into?

Claimants should NOT consolidate superfunds without getting advice. This is the most common pitfall we see. They may have a claim in process or a recently approved claim. If the person then consolidates super funds this can significantly increase the amount of tax they pay on withdrawal.

Not being aware of the claimants superannuation preservation age is another pitfall. Time and time again I see 50+ year old insurance claimants planning to withdraw their entire benefit and pay 10’s of thousands of dollars in tax, not realising they may only need to wait a handful of months to access their entire benefit tax free.

Is there a threat of losing Centrelink benefits if TPD insurance claims aren’t properly handled?

Yes. Different Centrelink benefits will have different means testing. For Disability Support Pension and Newstart Allowance, the actual withdrawal does not impact Centrelink entitlements, but what the person does with the funds will be assessed by Centrelink. Family Tax Benefits and Child Support Payments are impacted by the superannuation withdrawal because they are based on “adjusted taxable income.”

What are some consequences of tax calculation errors involving TPD insurance claims?

Tax calculation errors are not uncommon because the calculation is fairly complex. The most common error when a superfund uses the incorrect “Date Last Worked.” Some funds will use the date the claim is accepted or the date a withdrawal is made, which can be years after the date the person stopped working. Using the later date means a higher rate of tax will be deducted. If there is an error, the superfund may tell the member to fix it up on their tax return, but most accountants won’t amend their clients tax return without something from the superfund. The responsibility of fixing up any tax error lies with the superannuation fund.

When a TPD claim is approved, most law firms will state in their letter that there are tax and Centrelink consequences when they make a withdrawal from super, is this enough to protect their liability?

Many law firms are beginning to think this is not enough. Often TPD claimants are vulnerable people and will struggle to source the advice they need, so more often law firms are building in a process to ensure that their clients get advice or opt out in writing. This eliminates the risk to the law firm of their clients pay much more tax than they need to or losing any benefits they are entitled to.

You can hear more from Andrew at The Rising Tide of TPD Claims: Tax and Centrelink Implications for TPD Insurance Claimants lunchtime web seminar, being held on Wednesday 14 March via live web link.

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