Insurance: Funding TPD insurance via superannuation
TB 28 | TECHNICAL SERVICES | ISSUED ON 25 SEPTEMBER 2014
ADVISER USE ONLY
VERSION 1.2
Summary
In addition to life insurance (death cover), it is possible
to fund Total and Permanent Disablement (TPD)
insurance via superannuation. The upfront tax benefits,
access to the benefit and the tax consequences of a
payment all need to be considered when holding TPD
insurance in a superannuation fund.
Tax deductions for premiums
There are two issues to consider when looking at the tax
deductibility of TPD premiums held via super:
1. tax deductibility of the contribution funding the
premium
2. whether the super fund is eligible to claim a tax
deduction for the premium
Information on the tax deductibility of super
contributions is available in Technical bulletin 35 Tax
deductibility of super contributions.
Tax deductibility of TPD premiums for super
funds
It was viewed that premiums for TPD policies were fully
deductible to a super fund. However, in 2008 the ATO
challenged this view indicating that not all TPD
premiums are tax deductible to super funds.
Currently the ATO’s view is, the extent to which
premiums are tax deductible is determined by the
degree of certainty of a ‘disability superannuation
benefit’ being paid as a consequence of the insured
event happening. This is outlined in Tax Ruling 2012/6.
The definition of a disability superannuation benefit
requires that a person is unable to be gainfully
employed in a capacity for which they are reasonably
qualified by education, training or experience.
This causes a problem for deductibility of premiums for
broader definitions of TPD cover such as own
occupation. If a member is unable to do their own job
but able to do another for which they are qualified, their
situation will not meet the definition of a disability
superannuation benefit and the premium would not be
fully deductible to the fund.
Transitional provisions provide full deductibility of
premiums for broader TPD cover in line with industry
practice up to 30 June 2011.
From 1 July 2011 where broader insurance cover is
provided and the insurance policy does not specify the
deductible portion of the premium, superannuation funds
must either:
•
obtain an actuarial certificate or
•
use a percentage specified in regulations
The following table outlines the percentages specified in
the regulations.
Policy type
Deductible
portion of
premium
TPD any occupation
100%
TPD any occupation with one or more of:
100%
1. activities of daily living
2. cognitive loss
3. loss of limb
4. domestic (home) duties
TPD own occupation
67%
Own occupation with one or more of:
67%
1. activities of daily living
2. cognitive loss
3. loss of limb
4. domestic (home) duties
TPD own occupation bundled* with death
(life) cover
80%
TPD own occupation bundled* with death
(life) cover with one or more of:
80%
1. activities of daily living
2. cognitive loss
3. loss of limb
4. domestic (home) duties
* Bundled means where the TPD and death components of the premium are
not separately identified and the TPD sum insured doesn’t exceed the death
cover.
2
Restricted insurance cover through
super from 1 July 2014
From 1 July 2014, super fund trustees must not
provide an insured benefit in relation to a member of
the fund unless the insured event is consistent with the
following conditions of release:
• death
• terminal medical condition
• permanent incapacity
• temporary incapacity.
Accordingly, super fund trustees will only be able to
acquire insurance contracts providing cover for death,
terminal medical condition, permanent incapacity and
temporary incapacity and ensures that benefits are
available if there is a successful claim on the insurance
contract.
This change impacts all super funds (including SMSFs),
not just MySuper and forms part of the Stronger Super
measures.
The prohibition will not apply to the continued provision
of insured benefits to members who joined a fund
before 1 July 2014. That is, existing insurance
arrangements in respect of members who had joined
the fund prior to 1 July 2014 will not be affected. This
includes where the level of cover in existing insurance
arrangements are increased or decreased after 1 July
2014 and the premiums are adjusted accordingly.
The exemption would apply even where the insured
event had not occurred before 1 July 2014. A trustee
may apply to the regulator before 1 July 2014 for
approval of the provision of other insured benefits to
members, which may be exempt.
No new ‘own-occupation’ TPD cover in
super from 1 July 2014
Under current rules trustees can acquire ‘own
occupation’ TPD insurance, whereby insured benefits
may not be accessible by the member at the time of
disability and instead remain in the fund until the
member satisfies a condition of release (eg
retirement). Own-occupation cover will not be available
to new members from 1 July 2014.
Tip:
Clients who want own occupation TPD cover, should
ensure they become a member of the fund and
establish cover before 1 July 2014.
As the exemption requires the continued provision of
benefits by the trustee to the member, a lapse in cover
or rollover to another fund may result in losing the
exemption.
Payment of a TPD benefit
To receive a benefit payment from a super fund a
member must satisfy a condition of release, including
reaching age 65 or their preservation age and having
permanently retired. A person may also satisfy a
condition of release where they are permanently
incapacitated.
Permanent incapacity condition of release
Permanent incapacity means a superannuation trustee
is reasonably satisfied that a member is unlikely,
because of physical or mental ill-health, to engage in
gainful employment for which they are reasonably
qualified by education, training or experience. The
definition does not require the person to have engaged
in gainful employment.
As permanent incapacity usually aligns with the ‘any
occupation’ TPD definition, insured benefits should be
accessible. However, this may not apply to ‘own
occupation’ policies.
While this would see the life insurance proceeds
payable to the super fund, the proceeds may not
released until a condition of release is satisfied.
Taxation consequences of receiving a
TPD benefit from a super fund
It is a common misconception that lump sum TPD
super payments are tax free. While part of a TPD
benefit paid may be tax free, lump sum and income
stream payments are taxed under the superannuation
benefit payment rules. For further information please
refer to Technical Bulletins 64 Lump sum
superannuation member benefits and 31
Superannuation income streams.
Disability superannuation benefits
The definition of a disability superannuation benefit
aligns with the permanent incapacity condition of
release.
A person receives a disability superannuation benefit if:
• they have suffered physical or mental ill-health or
injury; and
• two legally qualified medical practitioners certify
the person is unlikely to be gainfully employed in
a capacity for which he or she is reasonably
qualified due to education experience or training.
A person is gainfully employed if employed or self
employed for gain or reward in a business, trade,
profession, vocation, calling, occupation or
employment.
A disability super benefit may be paid as a lump sum or
income stream or a combination of both.
3
Disability lump sum
If the benefit is received as a lump sum, or rolled over
to another fund, the tax free component of the benefit
is increased to broadly reflect the period the member
would have expected to be gainfully employed. The
existing tax free amount in the super fund is increased
by an amount calculated as follows:
amount of benefit x
days to retirement
(service days + days to retirement)
The impact of contribution caps and potentially
retirement funding are important factors which
to be taken into account when deciding to fund
insurance with superannuation contributions or
benefits.
reduced
also need
TPD
existing
Other technical resources available via the OnePath
Technical Services library include:
• Disability lump sum calculator
• Insurance via super calculator.
Days to retirement: number of days from the day on
which the person stopped being capable of being
gainfully employed to their last retirement date.
Last retirement date: if a person’s employment or
office would have terminated when he or she reached a
particular age or completed a particular period of
service - the day he or she would reach the age or
complete the period of service (as the case may be); or
in any other case the day on which he or she would
turn 65.
Service days: number of days in the service period for
the lump sum.
The balance of a payment consists of taxable
component.
Disability superannuation income stream
A person receiving a disability superannuation income
stream before reaching their preservation age will be
entitled to a 15% tax offset on the element taxed in
the fund. The tax free portion is tax free (nonassessable non-exempt income).
Inside or outside of superannuation?
It could be suggested that because of the above issues,
all TPD insurance should be funded outside of super.
Such conclusions may be premature.
Access to TPD benefits is an important factor and the
risk of being unable to access TPD proceeds, especially
for an own occupation policy needs to be considered.
The taxation consequences of the payment should also
be taken into account. Broadly, even if a client were to
pay 22% tax on the entire sum insured (i.e. no tax free
component available) it is important to remember that
the premium could be funded from deductible super
contributions (including salary sacrifice). Effectively,
this allows a person, subject to underwriting limits, to
increase the sum insured for any likely income tax
liability and still pay less in after tax terms for the
benefit. For further information please refer to
Technical bulletin 27 Insurance: Funding life insurance
via superannuation.
This Technical Bulletin has been produced by ANZ Wealth Technical Services and is intended for the use of financial advisers only. It is current as at the date of
publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation or
needs. Before making a recommendation based on this publication, consider its appropriateness based on the client’s objectives, financial situation and needs.
ANZ Wealth Technical Services is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before
relying on information in this publication that may impact their tax obligations, liabilities or entitlements.