TPD claims within super
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An unintended consequence of the Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019 (PYSP Act) that came into effect on 1 July 2019 means that many total and permanent disability (TPD) insurance claimants may have significantly higher tax rates when they access their TPD benefits, potentially costing them thousands of dollars in additional tax. 

On 21 April 2020, the Australian Prudential Regulation Author- ity released data showing there were 17,500 group TPD insurance claims approved via members' superannuation accounts in 2019. Many of these claimants may be surprised and disappointed to learn that when they come to access these TPD proceeds from their super- annuation account, they will have to pay a significant amount of tax when accessing their TPD benefit.

The PYSP Act and inactive superannuation accounts
One element of the legislation requires "inactive low-balance ac- counts" (that is, superannuation accounts with balances under $6,000 that have had no contributions for at least 16 months) to be rolled over to the Australian Taxation Office (ATO) every six months (on 31 Oc- tober and 30 April each year). The ATO will then direct these pro- ceeds into an "active" superannuation account that the member holds.

The first tranche of rollovers happened on 31 October 2019 and will continue to occur every six months. An unintended consequence of this legislation is that some TPD claimants will have a significantly higher tax rate when they access these funds.

Tax treatment of disability superannuation withdrawals

When a TPD claim held through superannuation is approved, the proceeds are then paid into the member's superannuation account and combined with their existing balance. When meeting the TPD definition, the member also meets the superannuation "permanent incapacity" condition of release (these two definitions are aligned), meaning their superannuation becomes unrestricted, non-preserved and they have full access to their superannuation/TPD money.

If the member then makes a withdrawal from their superannuation account before preservation age (between 55 and 60, de- pending on when a person was born), they will pay tax at a rate of 22% on the taxable component. When accessing funds under permanent incapacity, there is a 'tax-free uplift' calculation applied, which means a portion of the superannuation withdrawal amount will be tax free (see Figure 1).

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