Insurance in a Super Fund

1. Introduction
2. Advantages & Disadvantages of Insurance
3. No deduction for Premiums & Assessability of Proceeds

Introduction

Many Insurance policies have different components to them, such as Life, Total permanent disability, terminal medical condition, Trauma, Income Protection. Accordingly it is important to understand the differences as the tax outcome will be different.

Prior to 1.7.07, proceeds from Life Insurance received by a tax dependant could have been taxable above the RBL, however since 1.7.07, the whole amount is generally completely tax free to the fund (except in certain situations) . This together with other advantages and banks requiring Insurance for borrowing arrangements, have made obtaining Insurance through a SMSF more common and popular.

Advantages & Disadvantages of Insurance

Advantages of Insurance in a Superannuation Fund are:

• The premium is generally a tax deduction to the fund s295-465, for exceptions click here;
• The proceeds from the Insurance are not generally assessable in the fund as they are of a capital nature for exceptions click here;
• Payment to a tax dependant beneficiary or to a non tax dependant as a death benefit pension is tax free.
• Be used to fund an anti detriment payment, best used or a payment to a tax dependant, to read more <click here>.

Disadvantages:

• Increase taxable component – Payment to a non tax dependant beneficiary as a death benefit LUMP SUM will trigger an untaxed element that will result in tax payable by a non tax dependant beneficiary. To read more <click here>.

Insurance policies can include one or more of the following in the same policy:

• Life,
• Total Permanent Disability (“TPD”),
• Trauma,
• Terminal medical condition; and
• Income Protection

Only Death, terminal medical condition,  Permanent and Temporary incapacity can be taken out in a SMSF from 1.7.14 (see further details below). All proceeds from a policy are tax free to the fund except for Life Insurance (not risk only) TPD (policy wording is insufficient), Income Protection (“IP”) for Income Tax Purposes and possibly Trauma for CGT purposes. Premiums are deductible except for trauma.

No deduction for Premiums & Assessability of Proceeds

Life Insurance – Reduced deductibility of premiums
Insurance policies can vary and its important to read it. The deductibility of Insurance (s295-465(1)) is allowable where the premium is for risk only. If the premium funds a policy that has an investment portion then the deductibility needs to be apportioned. Life Insurance Product examples include a endowment policy or whole of life where the deduction apportionment is 10% and 30% respectively.

Total Permanent Disability (“TPD”) – no deduction for premiums
Post 1.7.07 the deduction was restricted from the previous position by requiring the policy payout to be conditional upon the member not being able to work in any income earning occupation suited to their education, training or experience. Where the policy does not contain this restriction then the deduction is not allowed.

Trauma – no longer allowable since 1.7.14 see further info at the <ATO>
For existing policies they can continue with restrictions, again see ATO link above. The premiums are not specifically allowed as a tax deduction (s295-465(1)). SMSF’s are allowed to provide Trauma provided SMSF 2010/1 is adhered too. Trauma proceeds should be CGT exempt (S118-37).

Income Protection – no longer allowable since 1.7.14 see further info at the <ATO>

Income protection is on revenue account and not on capital account therefore is assessable to the fund whilst in accumulation interest.

Insurance Proceeds can be Taxable (untaxed element)
Where premiums on Life and TPD are claimed a untaxed element may arise. Where an untaxed element arises the death benefit paid as a LUMP SUM to a non tax dependant will give rise to a tax liability, to read more on the tax rate applicable <click here>

The untaxed element is calculated by the following formula (s307-290):

Untaxed Element = Death benefit Lump Sum x [service days/service days + days to retirement] [/emaillocker]