Monthly technical briefing - November 2025

Recent developments

Welcome to the November Adviser query of the month and technical briefing, an update of recent key technical developments for financial advisers for the period from 27 September 2025 to 26 October 2025.

In this edition, the Adviser query of the month takes a deep dive into the technical considerations for super accounts where a client suffers from a disability.

Adviser query of the month

Implications of increase to the deeming rates

Question

My client has been successful in claiming on their total and permanent disability (TPD) insurance policy that is held inside their super fund. What are some of the factors to consider when providing advice on this matter?

Note: The answer to this question is based on benefits in a taxed super scheme and the income stream of choice being an account based pension. Also, the rules regarding access, preservation and taxation are relevant to accounts without TPD insurance.

Answer

The technical financial planning considerations usually relate to access to benefits and the taxation of those benefits. It is often a very challenging time for someone suffering from a disability and there are many personal matters that need to be considered.

Access to benefits

The general position that all benefits paid to an accumulation account are preserved applies to TPD proceeds as well. To access these benefits the individual will need to satisfy a condition of release. Common conditions of release include:

• Age 65 - for those that are already age 65, the proceeds will be accessible.
• Retirement - for those that are at least age 60, the individual may satisfy the retirement condition of release.
• Permanent incapacity - for those under age 65 that don’t satisfy the retirement condition of release, the individual will need to satisfy an alternative condition of release, such as ‘permanent incapacity’, to gain access.

The permanent incapacity condition of release can be met irrespective of whether their account has insurance.

The legal definition of permanent incapacity is contained in the Superannuation Industry (Supervision) Regulations 1994 and is as follows:

‘a member….is taken to be suffering permanent incapacity if a trustee of the fund is reasonably satisfied that the member's ill-health (whether physical or mental) makes it unlikely that the member will engage in gainful employment for which the member is reasonably qualified by education, training or experience.’

Individuals who qualify for payment under TPD policies commenced on or after 1 July 2014 (or pre 1 July 2014 ‘any occupation’ TPD policies) will usually satisfy the permanent incapacity condition of release (refer to ‘TPD definition alignment’ box below). That said, the trustee of the fund is still required to assess whether the individual meets the legal definition of permanent incapacity and this is separate to the insurer’s decision on the TPD policy.

Once the permanent incapacity condition of release is met, the benefits become unrestricted non-preserved. Unrestricted non-preserved benefits can be accessed as either a lump sum or income stream.

Any additional benefits that accrue in an accumulation account (eg earnings or contributions) will be preserved until a new condition of release is met. If the super fund has previously allowed the release of benefits based on permanent incapacity, they may be willing to use the initial medical certification for the new assessment, particularly if it’s been a short period since the last assessment. The balance of a pension that commences solely with unrestricted non-preserved benefits will remain unrestricted non-preserved, irrespective of movements in value.

If, after receiving the insurance proceeds into their super account, the individual rolls over their benefits to another super fund, the preservation components in the paying fund will be carried over to the receiving fund. Therefore, if the client satisfies the permanent incapacity condition of release in the paying fund and all benefits become unrestricted non-preserved, this classification will be carried over to the receiving fund*. The receiving fund does not need to assess whether the individual has met a condition of release to pay these benefits.

If the client satisfies the permanent incapacity condition of release and commences an account based pension (ABP), the minimum annual pension payment required is 4 per cent. We’re used to this being the minimum pension for those from age 60 to 64 (inclusive) however it applies to all ABPs where the individual is under age 65 at 1 July in the year of payment. The exception to this is where the pension is commenced in the year and the individual was 64 at the start of the year but 65 at pension commencement. 

* Super funds have the ability to change the preservation status of unrestricted non-preserved benefits to preserved benefits provided the rules of the fund allow them to do so. Anecdotal evidence suggests that it is rare however it is advisable to check with the specific fund you are considering.

Taxation of payments

There are a number of tax and tax-related considerations when paying benefits from super due to disability. These include:

• Taxation of payments from the fund
• Tax implications from rolling over benefits from one fund to another
• Transfer balance cap (TBC) for income streams
• Taxation of earnings within the fund.

Special tax treatment applies to lump sum and pension payments made from superannuation as a result of a client’s permanent incapacity.

For this treatment to apply, the benefit needs to be classified as a ‘disability superannuation benefit’. The definition of a disability superannuation benefit comes from the Income Tax Assessment Act 1997 and is as follows:

‘disability superannuation benefit means a superannuation benefit if:

(a) the benefit is paid to an individual because he or she suffers from ill-health (whether physical or mental); and

(b) 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the individual can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.’

Some points to note for disability superannuation benefits include:

• Payments from a super fund can be classified as disability superannuation benefits irrespective of whether the account has insurance
• The definition is very similar to the definition used for the permanent incapacity condition of release. If the individual satisfies one definition they’ll usually satisfy both.
• As with permanent incapacity, each fund will need to assess the client separately. One super fund can’t rely on the assessment made by a different super fund.

A common situation involves the individual providing the medical certification to the fund that held the TPD policy before their account is rolled over to another fund. The new fund will need to make their own assessment before treating any subsequent payments as disability superannuation benefits.

Proceeds from a TPD policy paid to an accumulation account effectively form part of the taxable component. The reason being that the taxable component is calculated as the balance of the account less the tax free component. The tax free component is generally created by non-taxable contributions (eg non-concessional and downsizer contributions) though doesn’t include insurance proceeds. As TPD proceeds don’t add to the tax free component, they by default form part of the taxable component.

Lump sum payments A lump sum payment that is classified as a disability superannuation benefit receives an increase to the tax free component. The formula for calculating the increase to the tax free component is as follows:

Benefit amount   x                  Days to retirement

                                   (Service days + Days to retirement)

Where:

• Days to retirement = number of days from day person stopped being capable of gainful employment to their last retirement day (assumed to be the person’s 65th birthday in the absence of a specified retirement age)
• Service days = number of days in the service period for the lump sum.

The service period usually starts from the date the super account was opened. It can be earlier than this date when a rollover is received from a super account with an earlier service date as the receiving fund takes on the earlier service date. This should be a consideration where a client has two or more super funds with different service dates, as combining the accounts may reduce the tax free increase on future disability superannuation benefit lump sums.

Some points to note about this calculation are:

• The client will usually need to request that the paying fund treat the payment as a disability superannuation benefit before the payment is made.
• The additional tax free component is only calculated on the payment from the fund. It does not change the tax free value of super benefits remaining in the account.
• Lump sum payments include a rollover from one fund to another. Having the paying fund apply the tax free increase on rollover can be particularly useful for any subsequent benefit payments for someone under the age of 60 when the taxable component is subject to tax or for death benefits paid to a non-dependant.
• The ATO's view is that the denominator in this formula (ie Service days + Days to retirement) is to be calculated by taking the number of days from the service period start date to the person's last retirement day (ie no day is counted twice).

The taxation of the tax free and taxable components of the lump sum are consistent with the general rules that apply to other lump sum super payments.

Note that for those under age 60, the taxable component is included in the individual’s assessable income and is taxed at their marginal tax rate. They subsequently receive a tax offset that reduces the rate of tax to a maximum of 20 per cent.

Pension payments

The taxable and tax free portions of the pension are determined at the commencement of the ABP. The components of each pension payment are calculated based on this split.

The taxation of pension payments that are also disability superannuation benefits is shown in the table below. The benefit of having the pension classified as a disability superannuation benefit is that the taxable component receives a 15 per cent tax offset for those under age 60.

Choosing between pension payments and lump sums from an ABP

In the situation where the client takes payments that exceed their ABPs minimum pension, they will have the choice between having the payment treated as a lump sum or a pension payment. This decision must be made before the payment is made.

In deciding whether to take a payment from an ABP as a pension payment or lump sum, some considerations include:

• Income tax 1 – lump sum payments may attract the increased tax free amount as noted above. Pension payments don’t receive this increase.

For the super fund to apply the tax free component increase to future lump sum payments, they may need the client to ask for the lump sum to be classified as a disability superannuation benefit. That is, the fund may not automatically treat each lump sum in this way.

A further consideration will be whether the super fund will ask for further medical certification in order to apply the tax free increase for any subsequent lump sum payments.

• Income tax 2 – tax on the taxable component of a lump sum payment is no greater than 22 per cent (including Medicare levy).
• Tax components and income tests – the increase to the tax free component on the payment of a lump sum may affect any benefits they receive that use assessable or taxable income as part of the test. Examples of such tests include family tax benefits and the child care subsidy (CSS).
  
  For instance, the CCS income test looks at the individuals adjusted taxable income (ATI). The rate of CCS reduces where ATI moves into a higher income test bracket. Increasing the tax free component has the effect of reducing the level of ATI and potentially a higher rate of CCS.

• Transfer balance cap (TBC) – lump sum payments receive a debit in the client’s transfer balance account whereas pension payments do not. Receiving a debit will allow the client to move additional benefits into the tax free pension phase at a later date.

Dealing with multiple super funds

As noted previously, each super fund needs to make their own assessment of permanent incapacity and disability superannuation benefits. One fund can’t rely on another fund’s assessment.

When dealing with multiple super funds it’s important to know what their requirements are for making the assessment as each fund may have their own forms or rules.

If you’re considering rolling over benefits from one fund to another, it will be important to know whether your client is able and willing to get the necessary medical certification required by the receiving fund. If not, consider the implications of rolling over. It may still be in the client’s best interests though it will come down to the clients’ circumstances and objectives.

An example may be where the client is over 60 years of age and wants to start an ABP. In this situation, the paying fund may classify the benefits as unrestricted non-preserved and the receiving fund can commence an ABP with the rollover. Given the client is at least age 60, pension and lump sum payments will be tax free and therefore having the pension classified as a disability superannuation benefit isn’t necessary. That said, the original fund may apply the tax free increase on rollover, which could be beneficial from a tax perspective should the client pass away and their death benefits are paid to a non-dependent.

For someone under age 60, having the rollover classified as a disability superannuation benefit will result in an increase tax free component. This will help reduce the taxable component of subsequent payments and help reduce tax while the individual is under age 60.

Finally, as mentioned earlier, when you combine super funds, the entire balance takes on the earlier service date. The impact this could have on future disability superannuation benefit lump sums should be factored into the decision-making process.

Summary

It can be a difficult time for clients who are faced with a disability and there are many considerations from a technical planning perspective as well, particularly in relation to a client’s super benefits. Being aware of the rules around access to benefits and the tax implications of the alternatives can assist in developing strategies that produce an improved outcome that is in their best interests.