Are premiums for TPD Insurance tax deductible to SMSF’s?
Tax deductible insurance is available to Self Managed Superannuation Funds (SMSF) in the form of Life Insurance, TPD Insurance and Income Protection. Deducting insurance premiums for Total and Permanent Disablement insurance is handled differently than Life Insurance and Income Protection, and for those who hold insurance in superannuation, an understanding of the regime can assist SMSF trustees avoid adverse tax consequences.
TPD cover is offered in a number of forms, with the three main definitions being; Any Occupation TPD, Own Occupation TPD and Non-Occupational TPD. The Any Occupation TPD definition is the most closely aligned with the definition of permanent disablement (with regards to release) for superannuation and the majority of policies obtained under superannuation are based on this definition to avoid claims and release complications.
Historically, disability insurance has been fully tax deductible to SMSF’s for TPD Insurance when the insurance policy complies with relevant legislation and associated regulations. Recent changes by the government on the back of a draft determination by the ATO (TR 2010/D9) have altered the manner in which trustees can hold tax deductible insurance for TPD policies within a Self Managed Superannuation fund.
There is still in some circumstances a requirement for a definition that differs to the ‘any occupation’ definition, for example, a specialised occupation or age restrictions and as of the 1st July 2011 the manner in which the premiums for these policies are deductible has changed.
As of the 1st July 2011, premiums inside superannuation (including SMSF’s) for TPD Insurance are tax deductible in the following manner;
- Any Occupation TPD Cover – 100% deductible
- Own Occupation TPD Cover –67% deductible
- Own Occupation TPD Cover (bundled with Life Cover) –80% deductible
Although there is no change and no impact for SMSF’s that hold the ‘any occupation’ definition of TPD Insurance, SMSF’s that already hold a policy, or will seek a policy, that does not strictly align with the superannuation disability definition, will have the possible deduction reduced to either 80% or 67%, reducing the overall tax effectiveness of the TPD insurance policy within the fund.
What if my SMSF has the ‘Own Occupation’ TPD definition?
We are concluding the end of the first full financial year of the changes and SMSF trustees need to ensure that they check the definition of their cover and apply the appropriate deduction to their returns. The result of the changes mean an SMSF will lose approx. $48.50 in disability insurance tax deductions per $1,000 of premium of Own Occupation TPD cover and approx. $30 per $1,000 of premium where that Own Occupational TPD is bundled with Life. By no stretch a large amount, however an oversight that can attract the ire of the ATO and attract unnecessary audits.
Is there a different way of making Total and Permanent Disability insurance tax deductible in my SMSF?
There are a number of products available on the market that take advantage of the tax deductible insurance premiums of the ‘any occupational’ style of TPD insurance within SMSF’s and combine that with the more comprehensive own occupation definition without the restrictions of releasing benefits. The policies work by holding a portion of the TPD Insurance policy within the SMSF and a ‘linked’ portion outside, with some of the ‘non-deductible’ premium paid by the member personally. These types of policies, although not common in the markete, offer a higher level of flexibility to trustee’s in deriving the maximum possible benefit both from the super insurance premiums whilst maintaining a high standard of coverage.
Advice is key and proper insurance and superannuation advice can assist trustees obtain a policy that best suits the needs of the fund and of the members.
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