This article explores whether TPD insurance is tax deductible within a SMSF.

TPD stands for Total and Permanent Disability.

In certain circumstances, the premiums for TPD insurance can be a tax deductible expense to an SMSF.

TPD is an insurance that can be owned inside or outside of the superannuation environment (including within a SMSF).

IT is common for TPD to be held within a SMSF, as premiums can be paid from your superannuation member balance, rather than from your personal bank account.

Another reason for holding TPD within a SMSF is that premiums can be wholly or partly tax deductible.

While there are benefits to holding TPD insurance within a SMSF, there are some also some considerations to be mindful of.
 

Tax Deductible TPD Insurance SMSF

 
The deductibility of TPD insurance premiums for policies held within a SMSF are determined by the TPD policy type.

A TPD policy can be ‘own occupation’ or ‘any occupation’.
 
TPD Own Occupation – An ‘own occupation’ TPD policy will generally pay a benefit to the insured if the insured suffers an illness or injury that is likely to result in a permanent inability to work in their own occupation.
 
TPD Any Occupation – An ‘any occupation’ TPD policy will generally pay a benefit to the insured if the insured suffers an injury or illness that is likely to result in a permanent inability to work in a job that they are reasonably qualified by education, training or experience.

As detailed in the Taxation Ruling 2012/6:

A complying superannuation fund (including SMSF) can claim a tax deduction for TPD insurance policy premiums paid for by the SMSF if there is a connection between the payment and a current or contingent liability of the SMSF to provide a disability superannuation benefit to it’s members.

In order to claim a tax deduction for TPD insurance premiums for a policy owned within a SMSF, the policy must be wholly or partly in respect of the provision of ‘disability superannuation benefits’.

A ‘Disability superannuation benefit’ is defined by  the Income Tax Assessment Act (ITAA) 1997 section 995-1 as:

(a) the benefit is paid to an individual because he or she suffers from ill-health (whether physical or mental); and
(b) 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the individual can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.

The portion of how much a benefit meets the disability superannuation benefit definition, above, will determine the portion of the TPD premium that will qualify as a tax deduction within a Self Managed Superannuation Fund (SMSF).
 

How Much of TPD is Tax Deductible in a SMSF?

 
The table below details the proportion of a TPD insurance premium that is tax deductible within a SMSF, based on the type of policy owned:

(Source: Income Tax Assessment Regulations 1997 – REG 295.465.01)

Item TPD Policy Deductible Proportion of Premium
1 TPD any occupation 100%
2 TPD any occupation with one or more of following inclusions: 100%
(a) activities of daily living
(b) cognitive loss
(c) loss of limb
(d) domestic (home) duties
3 TPD own occupation 67%
4 TPD own occupation with one or more of the following inclusions: 67%
(a) activities of daily living
(b) cognitive loss
(c) loss of limb
(d) domestic (home) duties
5 TPD own occupation bundled with death (life) cover 80%
6 TPD own occupation bundled with death (life) cover with one or more of the following inclusions: 80%
(a) activities of daily living
(b) cognitive loss
(c) loss of limb
(d) domestic (home) duties

As of 1 July 2014, new TPD (own occupation) policies are unable to be taken out within superannuation.

Some insurers will offer a structured linked policy, whereby the ‘any occupation’ part of a policy is held and paid for within super and ‘own occupation’ held and paid for outside superannuation.
 

TPD Insurance within SMSF Considerations

 
The benefits of owning TPD insurance within a SMSF is that:

  • premiums can be wholly or partially tax deductible; and
  • premiums are paid from your SMSF member balance rather than your personal bank account, which can reduce stress on your cash flow.

However, there are some disadvantages of holding TPD insurance within an SMSF also.

Listed below are some of the disadvantages of owning TPD insurance within a SMSF:

  • To pay for premiums, you may decide to make additional concessional or non-concessional contributions, which will use up part of your contribution caps
  • Upon claim, the insurance proceeds will be paid into the SMSF. In order to access those proceeds, you will need to meet a superannuation condition of release. The Permanent Incapacity condition of release will only provide you with access to TPD ‘any occupation’ benefits.
  • There will often be tax payable on TPD insurance benefits paid out of superannuation.

 

Tax on TPD Insurance Payments

 
The amount of tax payable on TPD insurance proceeds is based on the tax components that make up the proceeds, the age of the recipient and the form in while they are taken.

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Superannuation benefits (including insurance proceeds) can be made up of tax-free, taxable (taxed) and/or taxable (untaxed) components.

TPD insurance proceeds are usually added to the taxable component of a member’s balance. However, a benefit may include a tax-free component representing the ‘future service‘ component of the benefit.

Whether taken as an income stream or a lump sum, the tax-free component of the insurance benefit will always be received tax-free when withdrawn from super.

The taxable (taxed/untaxed) component will incur tax. A guide to the amount of tax on the taxable component can be found here.
 

SMSF Investment Strategy

 
Lastly, it is important to note that the Superannuation Industry (Supervision) Regulations 1994 REG 4.09 state that the trustee of a SMSF must give effect to an investment strategy that has regard to the whole of the circumstances of the SMSF including, but not limited to, whether the trustee of the SMSF should hold a contract of insurance that provides insurance cover for one or more members of the SMSF.

Chris Strano

Chris Strano created SuperGuy to help the average punter navigate through the complex and ever-changing super rules. It has since become one of Australia's leading digital super resources. Subscribe to SuperGuy's YouTube channel for the latest strategies to boost your super savings. https://www.youtube.com/channel/UCs1ARI2y18hrjNYVqjtJ-pQ

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