The inclusion of disability insurance in the total super balance under the proposed $3 million super legislation is a glaring oversight by Treasury, says a legal expert.
Daniel Butler, director of DBA Lawyers, told SMSF Adviser that disability insurance will not be treated in the same way as a structured settlement under the proposed legislation.
“Under the proposed legislation, total and permanent disability (TPD) is excluded in the first year of receiving the person’s total superannuation balance (TSB) as a contribution,” he said.
“However, in the following year it is included in the TSB. While you may not be pinged in the first year, you will be taxed on the income from the TPD proceeds, including any unrealised gains, in subsequent years.
“On the other hand, if a client receives a structured settlement, they are forever excluded from the new Division 296, 15 per cent tax regime.”
Mr Butler said the SMSFA had been very vocal in its opposition to the current inclusion of disability insurance in the TSB, as had other industry bodies in the accountancy, tax and finance sectors.
The SMSFA has previously stated:
The failure to exclude disability insurance benefits from an individual’s TSB in the same way as compensation payments and the addition of amounts withdrawn as disability benefits or under a release authority for the payment of super-related taxes are glaring examples [of unintended consequences].
Mr Butler said the issue had been raised with Treasury in previous consultations.
“The industry pointed it out and asked what the real difference was between a structured settlement and a TPD payout, given they both involve a serious injury or disability,” Mr Butler continued.
“Insurance companies don’t just write a cheque. There are a lot of investigations that have to be done. A third party insurer doesn’t want to hand out money, so TPD and structured settlements should be treated the same.”
Mr Butler said that if an individual is paid a TPD, they would have to deal with an insurer and qualify under the strict terms of the policy to prove they are permanently disabled.
In contrast, clients who qualify for a structured settlement contribution under s 292-95 of the Income Tax Assessment Act 1997 (Cth) are paid compensation for a permanently disabling injury.
The structured settlement compensation must be paid as a result of a personal injury settlement deed or court order, not an insurance policy.
“Furthermore, while structured settlements are difficult to obtain, there aren’t many payouts for TPD either, so I’m not sure there’s any logical reason for Treasury to treat them differently under the legislation.”
He added that under superannuation law, an individual can only receive TPD if they are unable to find employment in “what they were trained to do”.
“But, for example, I am a lawyer with 40 years’ experience, but I started working as a cleaner when I was 16,” he said.
“So I would not get a TPD if I could go back to working as a cleaner.”
Mr Butler said that from a political point of view, there was no real difference between TPD and a structured settlement.
“It’s hard to accept in practice why the Treasury would treat them differently,” he said.
“Is it because they think insurance companies will be too willing to pay out money?
“For both TPD and structured settlements you need the same evidence – from two doctors, one of whom is a specialist.
“I don’t see much difference between the two and I don’t think there should be any difference in treatment. This difference in treatment may result in some people moving their insurance outside of super to avoid this anomaly.”
