TPD Claims Advice

Do you really understand the implications of signing a superannuation TPD withdrawal form?

Super TPD settlements are nothing like any other personal injury compensation settlement.

When you make a withdrawal from your super, there are a range of potential financial implications that can result thousands of dollars of additional tax and/or lost benefits. Some of these include:

- Tax is a different rate for everyone (and can be different for different super accounts),
- Centrelink benefits can be impacted, eg: Jobseeker, Disability Support Pension, Carer payments, etc,
- Possible loss of any remaining insurance such as death cover or IP,
- Medicare levy surcharge,
- Family Tax Benefits, Part A & B,
- Child-support payments,
- Child care rebates,
- HECS, HELP or other ATO debts,
- Division 293: high income earner super contributions tax,
- Certain tax offsets can be impacted,
- Government housing arrangements,
- There may be other important considerations including bankruptcy, relationship breakdown etc.

These are just some of the potential implications of withdrawing super after a TPD claim. Make sure you understand the implications of what you are signing.

Tax rates can change if TPD claimants aren’t careful. And the tax calculation by the trustee really should be checked to make sure they haven’t over calculated the tax.

Claimants we speak to sometimes think they have to make a full withdrawal, or if they think that if they don’t make a full withdrawal, their super & TPD funds may be locked up until retirement age. This is not the case, they have flexibility.

However, there are also important considerations if you leave funds in super. And there may be opportunities you can take advantage of.

Our TPD Assessment Consultation takes you through a process to understand your super claim, options, and implications. We provide many of these each week, the feedback is overwhelmingly positive.

As part of this service, at the end of the meeting we go through the WITHDRAWAL FORM with you so you can have your invoice paid asap and give you piece of mind knowing what you’re signing.

Have a look at our website www.TPDClaimsAdvice.com.au for more information.

Some law firms are building the TPD Consultation into their processes to ensure their clients are protected and can feel confident when completing their withdrawal form, it also streamlines the processes for the client.

Let me know if you want further information on this.

If you are receiving a lump sum back-payment on their income protection claim, make sure you know about the “lump sum payment in arrears tax offset”. We spoke with someone last week who will SAVE OVER $16,000 IN TAX by applying this offset – and many accountants won’t know about this and/or won’t automatically apply this offset.

We often see people who have income protection (IP) but haven’t commenced their claim for a year or 2, or sometimes longer. Which means when the IP claim is approved, their first payment is usually a lump sum back dated to when the stopped working (plus the waiting period).

This lump sum is automatically taxed as income at marginal tax rates in the year it is received – which is usually much higher than if the lump sum was meant to paid out over multiple financial years.

In this case, this gentleman was back paid IP for 2 years, his IP benefit amount was $65,000 per annum and so was paid roughly $130,000 and the tax withheld by the insurer was a little over $33,000. He had had no other income for the last 2 years, so the tax withheld had he received this payment over the last 2 years would have been roughly $17,000. By applying this tax offset, this person will save roughly this $16k in tax on their tax return.

Section 159ZR of the Income Tax Assessment Act 1936 outlines the “lump sum payment in arrears tax offset” which can be applied to back dated income protection lump sums like this. Interestingly, this only applies to superannuation IP claims, the rules state it can’t be applied whether the beneficiary is the owner of the policy.

This offset is very manual, it requires the accountant to look at the persons prior tax returns to calculation it, the ATO has to manually check this calculation… which is why it's not commonly used and we often see accountants missing this.

But it’s not difficult. Our accountant may charge roughly an additional $50 to $100 (on a time basis) to work this out, not a bad deal to save $16k.

If the income protection amount is higher or the back dated period is longer this tax saving can be significantly higher.

If you have any questions on this let me know, we have a flyer on this we can send you or that your clients can take to their accountant.

Here is an article we published in the Australian Lawyers Alliance newsletter a couple of weeks ago explaining some of the unique financial strategies TPD claimants can apply to maximise their settlements.

I think the key benefit of some of these strategies isn't the tax savings, Centrelink benefits and/or other financial benefits…

*** it’s that these strategies allow TPD claimants to draw a line in the sand by locking in their TPD tax concessions and never needing medical certificates again ***

After a long and sometimes difficult process (ie the TPD claim process) which often takes its toll on mental health, this is often a key requirement for claimants.

Read more here: https://lnkd.in/dFAkdaxC

And for anyone that wants to get really technical, this article was published by the Financial Planning Association and goes into some more detail on these strategies: ttps://https://lnkd.in/devFJ5h3

Will your TPD claim proceeds be automatically invested?

I spoke with a lady recently whose TPD claim was recently approved and the value of her TPD amount has fallen roughly $20,000 in the last week due to falling markets.

What should superannuation funds do with Total & Permanent Disability insurance claim proceeds?

Ie, should they:
1. Automatically invest TPD proceeds,
2. Direct them into a cash option,
3. Hold them in cash (maybe for 90 days) and then invest them in the default investment option.

This is something I’ve written about in the past. I wrote this newsletter in March 2020 and the huge impact steeply falling markets during Covid had on TPD claimants: https://lnkd.in/gjhstrci.

My preference is for option 2 above – for many reasons which include:

1. TPD claimants have full access to their TPD & super monies and in many cases are likely to be making large or full withdrawals,
2. Should anyone invest a large amount of money on 1 day?
3. Should they do this without advice or at least support to understand the risks & consequences?
4. Markets tend to fall more quickly than they rise,
5. Every superannuation “balance” or “growth” option will say the minimum investment time frame is between 6 to 8 years… this is usually not applicable to TPD claimants who will be drawing these funds in the near future,
6. TPD claimants tend to be the most vulnerable people in our society and if their TPD claim is invested (especially during volatile markets) this adds enormous stress during a difficult time.

I think the immediate, automatic investment of TPD proceeds is a result of superfunds not giving much thought to TPD claimants and their particular needs.

Obviously, cash is not the right option for long-term superannuation monies either, but I would say this is in the minority for TPD claimants. In an ideal world, I would love to see superannuation funds direct TPD proceeds into cash with clear (and ongoing) communication to their member about this and the pros and cons of cash.

2 years ago a number of superfunds compensated many members for automatically investing TPD proceeds and in some cases not even informing the claimant for several weeks that the claim was approved – the most extreme case I saw, was a fund informing a member of his claim had been approved 3 weeks before and during that time his TPD amount had fallen over $110,000 (for which he was fully compensated).

A number of superfunds changed their processes after Covid and now direct TPD proceeds into a cash option and let the member decide if they want to invest these funds. But many superfunds still automatically invest TPD proceeds.

We’ve just had a very negative week on investment markets and I’ve had several conversations this week with very anxious TPD claimants and am expecting many more – especially if financial markets continue to fall.

What do you think superfund trustees should do with TPD proceeds?

Risk of Default Investment Option for TPD Claimants Know your options. Some claimants have lost tens of thousands of dollars as their TPD proceeds have been automatically directed into their superannuation.

Recently we saved a client over $7,000 in tax (following his TPD claim) by sending an email to his superfund last week.

This gentleman’s TPD claim was approved last month, following an accident and he hasn’t worked a day since June 2019. However, he wasn't separated from his employer until September 2021.

When a superfund works out the tax rate for superannuation TPD claim they apply the “Disability Super Benefit” payment tax treatment, or the “tax-free uplift” – which effectively means the person receives a tax-free proportion when accessing these funds, which is taken from their DATE LAST WORKED until age 65.

The tax legislation says this date last worked should be "the date the person stopped being eligible to be gainfully employed". Different super funds will interpret this differently. Some will use:

- The date of an injury or illness,
- Some will take the date the person stopped going to work,
- Some will take the date of employment separation,
- And some just get this wrong, eg using the date the TPD claim was accepted, or when the TPD payment was made.

The earlier this date is, the lower the amount of tax the TPD claimant will pay.

In this instance, this gentleman had already made a withdrawal, his superfund had applied the date of employment separation (Sept 2021), we emailed to argue for the date he stopped working (June 2019). A week later the superfund has agreed to use the earlier date and reduce the tax rate.

TPD Claims Advice has sent countless similar queries (and sometimes escalating to complaints) to super funds over the years. We've had multiple super funds acknowledge they've reviewed their TPD tax calculation process (sometimes involving consultants in the process) and have updated their processes to apply the earlier "date last worked" and therefore apply a lower tax rate for all future TPD claimants. We can’t know the amount of ongoing tax savings this has provided to TPD claimants – but it would be well into the millions of dollars of savings per year – for some of the most vulnerable Australians.

When Australians have a Total & Permanent Disability (TPD) Claim approved through their superannuation account, this can be a bitter-sweet experience. On the one hand, they are obviously thrilled and/or relieved that their claim has been approved... then they realize they have choices with a range of confusing financial implications (eg tax, Centrelink, and many more).

Our attached checklist is a little busy but, outlines some of the options, pitfalls & opportunities TPD claimants can take advantage of following a successful TPD claim.

Have you had a superannuation TPD claim approved? Stop! Don't make any decisions until you understand the significant financial implications.

TPD Claims through super are unique, the proceeds are paid in to your super account, you can then access all your super and TPD, BUT, if you are under age 60 there will be tax to pay. The amount of tax is different for everyone and there can be a whole range of other financial implications.

Have a look at our website: www.TPDClaimsAdvice.com.au for further details.

And send us an email to [email protected] if you'd like further information or want us to send you our information pack.

TPD Claims Advice updated their address.

How much tax will you pay on a super TPD claim?

Have you had a superannuation Total & Permanent Disability (TPD) claim approved and are trying to work out how the tax works? Well, it's a little complicated and people get misinformed all the time.

This page on our website gives some information on how tax on super TPD claims works: https://www.tpdclaimsadvice.com.au/tax-on-tpd-claims/.

This page has a free super TPD tax estimator: https://www.tpdclaimsadvice.com.au/tpd-tax-calculator/.

Comment below if you have any questions.

TPD Tax Calculator | Minimise Tax on Payouts & Save Money Free TPD Tax Calculator. Tax paid on TPD insurance claims is complex and paid at different rates. Receive your complimentary tax calculation here!