Bruce said that a rollover is where a member transfers some, or all of their super benefits between super funds. It can be used to consolidate multiple super accounts or to move the member’s super benefits to a fund that may be more suitable given their needs and objectives. Rollovers can also include other transactions that advisers can sometimes overlook as they do not look like typical rollovers.

“A good example of this relates to using super rollovers to fund personal insurance policies held in a risk-only super account. As a risk-only super account cannot accumulate any member benefits, using super rollovers from an accumulation account is a very popular way to fund the cost of insurance premiums,” Bruce said.

“Usually, an enduring rollover is set up with the member’s accumulation account so that an annual rollover comes out of the accumulation account to pay for the cost of insurance.

“This type of arrangement involves the transfer of benefits between different super accounts and therefore is a super rollover.”

Another example that Bruce said is often overlooked is when the ATO automatically consolidates a member’s super accounts, which can happen where a super fund transfers a member’s inactive, low-balance accounts or unclaimed money to the ATO, and the ATO then transfers it to an eligible active super account on behalf of the member.

“This also, technically speaking, involves a super rollover,” Bruce said.

“And a super rollover can potentially impact a member’s eligible service period start date.”

A client’s eligible service period start date is generally the day a client joined a fund or the day a client commenced employment with an employer who contributed to the fund if that's earlier, but there is also an important modification where a fund receives a rollover.

“A super rollover carries forward the start date of the eligible service period in the original fund to the receiving fund. If the original fund has an earlier start date, the receiving fund’s service period start date must be reset with this earlier date,” Bruce said.

“For example, if I just opened a new super account today, and my employer doesn't contribute to this account, the eligible service period in this new fund should have started today. However, if I consolidated my other super accounts into this new super account, the earliest start date among all my existing super accounts, which could be from 20 years ago when I just started working, would be transferred into my new super account and become the new start date of eligible service period of my new super account, even though I have just opened this new super account.”

Having an earlier eligible service period start date due to a super rollover can result in a negative tax impact in the event of a client’s permanent incapacity, and a positive tax impact for a non-tax dependent beneficiary in the event of the client’s death if the super death benefit contains a life insurance payout.

“If a client becomes permanently incapacitated, they may want to take a lump sum payment out of the fund, or rollover their disability super benefit to a different fund. When the lump sum withdrawal or rollover occurs, there potentially could be an increase in the tax-free component, which is commonly referred to as the tax-free uplift,” she said.

The tax-free uplift calculation is based on a legislative formula (i.e. section 307-145 of the Income Tax Assessment Act 1997) and the additional tax-free amount of the lump sum disability benefit is increased by a percentage based on days to retirement divided by service period plus days to retirement. This means that a longer eligible service period due to the receipt of a super rollover can result in a smaller tax-free uplift amount.

“Let’s take Mike as an example. Mike is 40 years old. He implemented a TPD policy in a new risk-only super fund about a year ago. Unfortunately, Mike just became permanently incapacitated and $1 million TPD insurance payout is made to the trustee of the risk-only super fund,” Bruce said.

“Mike wants to take a lump sum out to pay off his mortgage and then roll over the rest to a different a super fund where he can keep his super in the accumulation account or commence a pension. The insurance premiums were funded by enduring super rollovers from Mike’s main accumulation fund. The super rollover reset the start date of the eligible service period to 20 years ago in the risk-only super fund.”

Based on the legislative formula used to calculate the tax uplift (Mike’s age of 40 means he has approximately 25 years to retirement, which is divided by 20 years of his service period plus years to retirement) the tax-free uplift of the super lump sum withdrawal and rollover would be approximately 56 per cent.

“So of the $1,000,000 TPD insurance payout, 56 per cent can be converted to the tax-free component and the remaining 46 per cent is the taxable component,” Bruce said.

“In comparison, if Mike's risk-only super account never received a rollover that carried an earlier eligible service period, the tax-free component of the disability lump sum benefit would be much higher.”

She continued that if Mike funded the insurance premiums by making personal deductible super contributions, rather than via enduring rollovers, the start date of the eligible service period in this situation would have been a year ago when Mike became a member of the insurance-only fund.

“If we do the tax-free uplift calculation again, Mike has 25 years to retirement which is divided by one year service period plus 25 years to retirement, his lump sum super benefit would have a 96 per cent tax-free component if he takes it out or rolls it over to a different fund,” she said.

“Advisers need to be aware of this issue and maybe tweak the strategy if needed. We are not saying that advisers should not recommend a client to use super rollovers to fund insurance premiums. If using super rollovers to pay for insurance premiums is the only way for a client to afford to have protection from a TPD insurance policy, the client is better off having the insurance cover by funding the cost of insurance this way than not having insurance protection at all.”

Bruce said advisers need to understand how a super rollover can affect the tax-free uplift calculation if the client becomes permanently incapacitated and consider alternatives.

“For example, if the client has multiple super accounts, the client may be better off funding the TPD insurance premiums by rolling over the amounts from the super account that has the latest eligible service period start date," she said.