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Superannuation: Deductibility of insurance premiums for disability benefits

Transitional relief will allow complying superannuation funds to deduct insurance premiums for disability superannuation benefits, known as 'TPD benefits'.

New tax law limits the deductibility of insurance premiums for certain TPD benefits. However, these new transitional measures delay those new limits until 1 July 2011 and give trustees more time to reassess existing TPD insurance arrangements.

Nicole Siemensma

The test under the current law — Do TPD premiums have the necessary connection to paying a 'disability superannuation benefit'?

The 2007 Better Super reforms introduced new law that limited the tax deductibility of TPD insurance premiums. They are deductible only to the extent that the relevant insurance policies have the necessary connection to a superannuation fund's liability to pay a 'disability superannuation benefit'.

You might be asking, "what does "necessary connection" mean?"

Basically, the current law allows trustees to treat insurance premiums as tax deductible only if:

  • a superannuation fund will make a payment because a member is totally and permanently disabled; and
  • the member is unlikely to ever be gainfully employed, in any occupation, in a capacity for which he or she is reasonably qualified because of education, experience or training.

This is the definition of 'disability superannuation benefit' and is also known as the 'any occupation' definition.

Before this new law was introduced, insurance premiums were fully deductible for any form of permanent disability payment, including disabilities that satisfied the 'own occupation' definition.

The 'own occupation' definition allows TPD payments to be made if a member is unlikely to ever work again in his or her own or normal occupation. An example of this distinction is if a surgeon loses a hand, then:

  • he or she would be considered TPD under the 'own occupation' definition, but
  • under the 'any occupation' definition he or she may be able to perform GP duties and therefore may not be considered TPD.

So how will the new 'transitional relief' work?

Effectively, the transitional relief:

  • will revert back to the old law and allow insurance premiums to be fully deductible to the trustee for any form of TPD payment — whether or not they fall under the 'any occupation' or 'own occupation' definitions; but
  • will be relevant only to superannuation funds that have an insurance policy that collects premiums from members for TPD payments which do not fall under the 'any occupation' definition.

It is important to note that the transitional relief will apply once it has been legislated, so for now the law introduced by the 2007 Better Super reforms is still current.

What does this mean for Cleardocs SMSFs?

Under the Cleardocs SMSF trust deed, the trustee can provide disability superannuation benefits, but needs to take out an insurance policy with a licensed insurer. The terms of that policy then govern what insurance premiums are payable, what they are payable for (e.g. TPD and death benefits) and, ultimately, whether a tax deduction is available for the relevant insurance premiums.

If a trustee of an SMSF has entered into an insurance policy for the payment of TPD benefits, then it will be prudent:

  • to review the insurance policy; and
  • determine if a portion of insurance premiums are paid for TPD benefits that fall under the 'own occupation' definition.

Based on such a review of the insurance policy:

  • if a portion of insurance premiums are paid for TPD benefits (other than those that fall under the 'any occupation' definition);
  • then from 1 July 2011, the trustee will not be able to claim a deduction for that portion of insurance premiums.

Moving forward

This transitional relief will be legislated after a consultation period with the superannuation industry. Once legislated (and subject to its wording), the normal industry practice for deducting insurance premiums for any TPD payments will continue to apply till 30 June 2011.

So, watch this space.

From 1 July 2011, superannuation funds will only be able to deduct insurance premiums paid that relate to the payment of a TPD benefit that falls under the 'disability superannuation benefit' and 'any occupation' definitions.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Superannuation Team.

More Cleardocs information on SMSFs —


You can read earlier ClearLaw articles on a wide range of SMSF topics here.

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Lawyer in Profile

Georgia Borg
Georgia Borg
+61 3 9258 3554

Qualifications: LLB, University of Sheffield, LLM(CL), University of British Columbia

Georgia is a member of Maddocks Commercial team and assists in a variety of commercial and corporate matters for private, public and not-for-profit clients.

Her expertise includes advising on general commercial law, wills and estates law, charities and not-for-profit law along with corporate law.

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