A number of super funds have noted with interest that it is now possible to pay out terminal illness benefits (TIBs) to members who obtain medical certification that their life expectancy is less than 2 years.
TIBs may assist members with medical bills or may enable travel or other spending before an illness becomes too debilitating. Until recently, funds were unable to pay out TIBs unless the member’s certified life expectancy was less than 1 year, and the increase to 2 years may prompt funds to revisit their present arrangements for TIBs.
TIBs are tax free, similar to death benefits paid to surviving spouses or dependents. However, whilst taxed similarly, TIBs are not actually death benefits.
One important difference is that the anti-detriment increase cannot attach to a TIB. This is an additional death benefit that funds can pay to reflect the impact of the 15 percent contributions tax in reducing the accrued benefits for the deceased member during the member’s lifetime. This anti-detriment increase is not available to TIBs. Thus, if a member’s accrued benefits in a fund were $200,000, a balance needs to be struck between taking the $200,000 prior to death as a TIB or paying a death benefit of up to $235,000 to the member’s spouse or dependents.
It may be possible to argue that, if at least some of the $200,000 is left in the fund and paid after death, the full increase of up to $35,000 may still attach. However, the Australian Taxation Office (ATO) has provided no guidance on this issue and it is at least equally likely that the increase is limited proportionately to the part of the $200,000 that is paid after death. Thus, retaining $20,000 until after death would result in an increase of up to $3,500 only.
In this light, super funds should consider whether, in any discussions with members seeking TIBs, they should caution members in relation to this potential reduction in the overall benefits that may be payable before and after death.
Given that TIBs are in many respects just the bringing forward of death benefits, the superannuation industry may also wish to make submissions to the Government to consider extending the anti-detriment provisions to TIBs.