Changes to terminal medical condition

There have been recent changes to the definition of terminal medical condition. This affects both super and tax law.

In short, it provides more flexibility to those are going to die shortly.

Background

Before 2008, having a terminal medical condition was not a condition of release. Under the early release provisions that existed before then, a terminally ill member who had not ceased work was restricted in terms of the amount of the benefit that he or she could access.

However all that changed in 2008. Since then, if someone has a terminal medical condition, all of their benefits become unrestricted non-preserved benefits and can be cashed without restriction. (Naturally this depended on the terms of the fund’s deed.)

More specifically, under the changes implemented in 2008 a person has a terminal medical condition where:

1. two registered medical practitioners have certified, jointly or separately, that the person suffers from an illness, or has incurred an injury, that is likely to result in the death of the person within a period (the certification period) that ends not more than 12 months after the date of the certification;
2. at least one of the registered medical practitioners is a specialist practicing in an area related to the illness or injury suffered by the person;
3. for each of the certificates, the certification period has not ended.

As a side note, I stress that this definition is very paperwork dependent. A person can be literally on their death bed and unless they have the relevant certification that person does not have a terminal medical condition!

Taxation

A person might receive super benefits due to a terminal medical condition while under age 60. Accordingly, on its face, it appears that such a person might have to pay tax.

However, when the super law was amended to insert the new condition of release, the tax law was also amended.

The effect of the tax law amendment was that where a person receives a lump sum benefit, the lump sum is income tax free in their hand if a terminal medical condition exists in relation to that person when he or she receives the lump sum or within 90 days after receipt. There is no express special treatment for a pension paid to someone who has had a terminal medical condition.

The definition of terminal medical condition for tax purposes was essentially identical to that for super law purposes.

This would often raise a question in respect of someone who receives a lump sum income tax free due to a terminal medical condition. Namely, if his or her health improves and he or she lives longer than 12 months, does that person have to then pay tax? Mercifully the answer is no: the lump sum would retain its income tax free characteristics for the recipient.

The recent changes

The Hon Josh Frydenberg MP announced earlier this year that the government would amend the provision for accessing superannuation for people suffering a terminal illness. This followed submissions by the Breast Cancer Network Australia and other organisations.

The definition of terminal medical condition, which required a life expectancy period of 12 months, had been causing difficulty for some people, including women with secondary breast cancer diagnoses.

The Hon Josh Frydenberg MP stated that understandably, such people would want access to their money to relieve the financial burdens associated with treatment costs or to make the most of their time with their family.

The Hon Josh Frydenberg MP went on to state that the government would amend the relevant regulations to change the life expectancy period to 24 months and that the proposed change would take effect from 1 July 2015.

True to their word, the government has implemented this change.

More specifically, the Tax and Superannuation Laws Amendment (Terminal Medical Conditions) Regulation 2015 (Cth) have been registered, which give effect to the announcement.

Essentially, the changes provide that in the relevant super and tax legislation replace ‘12 months’ with ‘24 months’.

The changes took effect from 1 July 2015.

A trap to watch out for

The explanatory statement that accompanied the legislative changes highlighted a trap. It is important that advisers are aware of this trap. Specifically, the explanatory statement made the following warnings:

It is common for superannuation trustees to also offer members insurance products which pay a benefit in the event of a terminal medical condition, and these products use similar definitions based on a 12 month certification period.

The Regulation makes no amendment to require such insurance products be offered on a 24 month certification period …

Consultation also identified that superannuation funds are aware of the need to inform affected members of any differences between their superannuation and insurance benefits, and of any impacts that might have for the member (including, for example, the need to retain money in the superannuation fund to pay insurance premiums).

It is unusual for explanatory material to contain such a strategic warning. However, given its importance I feel the drafters should be commended for including it.

In response to this trap, trustees and advisers should review any insurance arrangements in place and any terminal medical condition riders that may exist in respect of any life insurance policies.

For completeness I note that arguably such a review should occur anyway. This is due to relatively recent changes to the Superannuation Industry (Supervision) Regulations 1994 (Cth). Under these changes, the investment strategy of an SMSF must now also include considerations as to whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund. Further, the investment strategy must now ‘regularly’ be reviewed.

Conclusion

To quote the media release that first announced these changes:

While this is a small regulatory amendment, it will make a big difference to the lives of those affected and that is why the Government has decided to act.

I agree completely with these comments and feel that the government should be commended for their actions.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.