Opinion
Superannuation and TPD insurance: Ensure your clients don’t lose thousands of dollars in tax
19th Sep 2019
Personal injury law firms practising in the areas of superannuation and total & permanent disability (TPD) are increasingly aware of the risk of sending a withdrawal form to a client without first ensuring that the client understands the financial consequences of completing this form.
TPD claims paid through superannuation have complicated tax treatment and financial consequences (such as potential impacts on Centrelink benefits), and are unlike any other type of personal injury settlement. Claimants can potentially lose thousands or tens of thousands of dollars in tax through errors, making poor decisions or being unaware of their options.
Below are four recent case studies giving examples of how TPD claimants have lost significant portions of their settlement in additional tax or have been able to save tax by implementing certain strategies.
CASE STUDY 1 – Risk of claimants consolidating super accounts without advice
Total settlement: $200,000
What tax should have been: $2,000
Actual tax she paid: $27,000
Additional tax paid: $25,000 (1,250% tax penalty)
Situation
Jane began pursuing her TPD claim through her AMP super fund. Eight months later her account balance was getting very low, so she rolled over a portion of her Rest superannuation account into her AMP account. Jane’s AMP TPD claim was approved a year later and she made a full withdrawal of her TPD claim from her super account.
Outcome
Because Jane had rolled a small amount of funds from her Rest super account into her AMP account, this changed her AMP ‘eligible service date’ (the ‘eligible service date’ is used when calculating tax on withdrawal after a TPD claim) to the date when she started her Rest account, which was many years earlier. This meant that Jane’s decision to rollover resulted in her paying an additional $25,000 in tax.
What should have happened
If personal injury law firms can warn their clients of the risks associated with consolidating without getting advice first it will reduce the number of these unfortunate cases.
CASE STUDY 2 – Risk of leaving funds in super after a TPD claim
Total settlement: $350,000
What tax should have been: $3,500
Actual tax she paid: $11,000
Additional tax paid: $6,500 (185% increase in tax)
Situation
Tina’s TPD claim was approved in 2018 and she made a partial withdrawal of $50,000 to pay her legal fees and other bills – she paid tax of $3,500 on this withdrawal. Tina left the balance of her TPD claim in her superannuation account. She then made another withdrawal 12 months later of $50,000, and her superannuation account withheld $11,000. Tina couldn’t understand why she had paid an additional $6,500 in tax on her 2nd withdrawal, and her super fund couldn’t give her a good explanation.
Outcome
After some investigation, the super fund advised that the reason for the higher tax rate was that the two medical certificates that Tina had provided during her TPD claim process were over one year old, and therefore she was no longer entitled to the tax concessions when withdrawing her super. On the provision of two new medical certificates her superannuation fund agreed to calculate tax at the lower amount and refund her the $6,500.
After getting some financial advice, Tina has rolled her super and TPD benefit over to another superannuation account which has locked in her benefit as ‘unpreserved’, and she has also locked in her ‘tax-free component’ which means any withdrawals she makes in the future will be taxed at the lower tax rate. Tina won’t need to provide updated medical certificates ever again, and her funds will remain accessible at the lower tax rate even if she goes back into some form of work.
CASE STUDY 3 – Income stream and super contributions
Total settlement: $200,000
Tax would have paid: $19,000
Actual tax she paid: Nil
Tax saved: $19,000
Situation
Rhiannon had a TPD claim approved in mid-2018 and a motor vehicle personal injury claim settle soon after. Had she made a withdrawal of her $200,000 TPD claim from her super account she would have paid 9.5% in tax, or $19,000. Instead she made a contribution of $150,000 with the proceeds from her motor vehicle settlement and then rolled over her super account into another super account.
Outcome
Due to the way the tax calculation works, if a TPD claimant makes a contribution into their superannuation account and then rolls over to another super account it can increase the power of the TPD ‘tax-free uplift’ calculation. We calculated that Rhiannon would need to make a contribution of $150,000 to maximise the benefit of this strategy.
Rhiannon now has a $350,000 superannuation account, with the total benefit in the ‘tax-free’ component, and she has turned this into a superannuation income stream. This means that there is no tax on her earnings, there is no tax on the income she draws from this account (even if she goes back to work one day) and she has complete flexibility to draw as much as she likes from her super income stream account in future.
CASE STUDY 4 – Tax calculation errors by superannuation funds
Total TPD settlement: $150,000
What tax should have been: $14,000
Actual tax he paid: $21,500
Additional tax paid: $7,500 (53% over-taxed)
Situation
Tim had a TPD claim approved for $150,000, which he planned to withdraw in full to pay debts and put the balance on his mortgage. We estimated that his tax on withdrawal would be roughly $14,000, however his super fund deducted tax of $21,500. Following an investigation we determined that the issue was the fact he stopped working in 2015 but his superannuation fund had incorrectly used the date of calculation as his last date worked. This is a very common error we see with tax calculations on TPD claims.
Outcome
Tim’s super fund subsequently amended its tax calculation and has paid him the additional $7,500 in tax and amended his PAYG summary.
SUMMARY
TPD claim tax calculations are complicated and our statistics show that in roughly 30% of cases claimants are over-taxed through error. Many superannuation funds have had systematic issues when calculating tax for their members following a TPD claim and have since had to update their processes. At a minimum, all claimants should have their tax calculation checked when withdrawing TPD claims from super. The fee for our TPD Assessment Service is $770, a small price to pay to ensure your client protects and maximises their settlement.
Giving TPD claimants some information early on in the claim process and also once their claim is approved can stop them from making some potentially very costly decisions and help them to start planning to maximise their benefit.
Andrew Reynolds is an ALA member and a Certified Financial Planner. Andrew assists personal injury law firms specialising in the superannuation and insurance area.
Go to www.tpdclaimsadvice.com.au for more information.
The views and opinions expressed in these articles are the authors' and do not necessarily represent the views and opinions of the Australian Lawyers Alliance (ALA).
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