Are premiums for TPD Insurance tax deductible to SMSF’s?
Self Managed Superannuation Funds can normally claim a tax deduction for Life Insurance, TPD Insurance and Income Protection. Claiming a tax deduction for the premiums of Total and Permanent Disablement insurance is handled differently than Life Insurance and Income Protection. SMSF trustees 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.
UPDATE! As part of Stronger Super changes – from 1st July 2014 TPD accessibility and deductiblity is changing! From the 1st July 2014, a SMSF trustee (or any other super fund for that matter) cannot provide insurance for its members unless it strictly aligns with the conditions of release around death, terminal illness, total and permanent incapacity (total and permanent disablement) or temporary incapacity (income protection).
This means that from 1st July 2014, SMSF’s can only obtain and hold new TPD Insurance that is the ‘any occupation’ definition that aligns with the applicable condition of release. Any existing TPD policies that are not ‘any occupation’ that were acquired prior to 1st July 2014 can continue.
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.
Under the Stronger Super changes above, if you have this coverage and still want it, after 1st July 2014, you need to make sure it stays current! If the policy lapses (or you try to change to another policy) then you will lose the ability to be insured under this definition so beware!
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 market, 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.
Questions? Comment below!
About the Author – Benjamin Irons
Benjamin has been involved in the financial services industry since 2004. Benjamin has a Bachelor in Business, Diploma of Financial Services (Financial Planning). Previously a Financial Adviser and a business owner, Benjamin has worked with hundreds of individuals and businesses to implement simple strategies to improve wealth. Benjamin writes for a number of websites to assist people take control of their finances and find their financial freedom!