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Ruling

Subject: Deductibility of insurance premium

1. Is the insurance premium paid by a complying self managed superannuation fund (SMSF) for term life insurance effected by the fund on the life of a member of the fund deductible under section 295-465 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes, to the extent specified in an actuary's certificate to be attributable to the fund's liability to provide a superannuation death benefit for the member.

2. Is the insurance premium paid by a complying SMSF for total permanent disability insurance effected by the fund for a member of the fund deductible under section 295-465 of the ITAA 1997?

Yes, to the extent specified in an actuary's certificate to be attributable to the fund's liability to provide a disability superannuation benefit for the member.

This ruling applies for the following period

Year ending 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

An individual trustee of a SMSF has effected and owned, as trustee of the SMSF, a life insurance plan (the policy) with an Australian life insurer on the life of one of its members (the person insured).

The individual trustee referred to above, as a member of the SMSF, is the person insured.

The policy is a term insurance. It is renewable annually on payment of a yearly premium.

If the person insured has a terminal illness the policy may provide a terminal illness benefit in lieu of the death benefit. A terminal illness benefit is only payable by the insurer if the policy has life insurance. The person insured is regarded as terminally ill where:

(a) the person insured is diagnosed by two registered medical practitioners as being terminally ill, one which is nominated by the insured, and

(b) in the insurer's opinion the person insured is not expected to live more than 12 months.

The policy also includes a total and permanent disability (TPD) insurance option taken by the policy owner.

In the event of the total benefit being payable by the insurer, because the person insured suffers a TPD, the insurer will also meet the cost, incurred by the person insured, to obtain a financial plan up to an amount as is specified in the policy.

The yearly premium will rise as the age of the person insured increases. The yearly premium charged for the 2009-10 year comprises the following components:

Life insurance plan

Plus: TPD option

Less: large sum insured discount

Total

Add: policy fee

Total annual premium

The sums insured for the 2009-10 year are as follows:

Life insurance plan

TPD insurance option

Life insurance plan total

The person insured is totally and permanently disabled if he/she:

(a) is unable to work - is unable to follow his or her own occupation for a continuous period of three months because of an injury or sickness and in the insurer's opinion, based on medical or other evidence, because of that injury or sickness, he or she is unlikely to ever be able to follow any occupation for which he or she could be reasonably suited to by education, training or experience; or

(b) suffers a specific loss; or

(c) requires future care - because of injury or illness, he or she is totally and permanently unable to perform at least two of five specified activities without assistance; or

(d) is unable to perform domestic work - he or she is totally unable to perform his or her usual unpaid domestic work for a continuous period of three months because of an injury or sickness and in our opinion, based on medical or other evidence, because of that injury or sickness, he or she:

(i) is unlikely ever to be able to perform all of his or her usual unpaid domestic work;

(ii) is diagnosed by a registered medical practitioner as having a permanent disability;

(iii) is unable to leave the home unaided;

(iv) is unlikely ever to be able to engage in any occupation; and

(v) receives regular medical attention from a registered medical practitioner; or

(e) suffers significant cognitive impairment, which is defined as a permanent deterioration of cognitive functioning as observed clinically and confirmed by standardised testing, which results in a requirement for continuous supervision and care of the insured person by another person.

The insurer may waive the waiting period of three months when assessing a claim made under the definitions of TPD in paragraphs (a) or (d) above if the person insured has been diagnosed by a registered medical practitioner as suffering from one of the specified medical conditions.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 295-460.

Income Tax Assessment Act 1997 section 295-465.

Income Tax Assessment Act 1997 subsection 295-465(1).

Income Tax Assessment Act 1997 subsection 295-465(3).

Income Tax Assessment Act 1997 section 295-480.

Income Tax Assessment Act 1997 subsection 295-480(1).

Income Tax Assessment Act 1997 subsection 295-480(2).

Income Tax Assessment Act 1997 section 307-5.

Income Tax Assessment Act 1997 subsection 307-5(1).

Income Tax Assessment Act 1997 subsection 307-5(4).

Income Tax Assessment Act 1997 subsection 995-1(1).

Superannuation Industry (Supervision) Regulations 1994 Schedule 1.

Superannuation Industry (Supervision) Regulations 1994 subregulation 6.01(2).

Reasons for decision

Summary of decision

A complying superannuation fund that has current or contingent liabilities to provide superannuation death benefit and/or disability superannuation benefit for its members may claim a deduction for part of the premium it pays for an insurance policy or policies that cover those liabilities.

In this case, a deduction may be available for so much of the insurance policy premium that an actuary calculates as being attributable to the fund's liability to provide a superannuation death benefit and a disability superannuation benefit.

Detailed reasoning

Under section 295-465 of the ITAA 1997, a complying superannuation fund may be eligible to deduct part of the premiums it pays for insurance policies that cover its current or contingent liabilities to pay superannuation death benefit and/or disability superannuation benefits to its members.

Section 295-460 of the ITAA 1997 provides that the deduction available for insurance premiums paid apply to the following benefits:

(a) a superannuation death benefit;

(b) a disability superannuation benefit;

(c) a benefit consisting of an amount payable to a person under an income stream because of the person's temporary inability to engage in gainful employment, that is payable for no longer than:

(i) 2 years; or

(ii) if an approval under section 62 of the Superannuation Industry (Supervision) Act 1993 is in force for benefits of that kind and the approval specifies a longer maximum period - that longer period; or

(iii) if there is no such approval in force - a longer period allowed by the Commissioner.

The term 'superannuation death benefit' is defined under section 307-5 of the ITAA 1997. Subsection 307-5(4) states that a superannuation death benefit is a payment described in column three of the table under subsection 307-5(1). The payments listed in column three includes, under item 1, a payment to a person from a superannuation fund after another person's death because the other person was a fund member.

Subsection 995-1(1) of the ITAA 1997 defines a 'disability superannuation benefit' as meaning:

a superannuation benefit if:

(a) the benefit is paid to a person 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 person can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.

A complying superannuation fund can deduct the proportions of premiums specified in the table under subsection 295-465(1) of the ITAA 1997 it pays for insurance policies that are wholly or partly for current or contingent liabilities of the fund to provide benefits referred to in section 295-460 of the ITAA 1997 for its members.

Items 1, 2, 3 and 4 of the table in subsection 295-465(1) of the ITAA 1997 refer to whole of life policies or endowment policies. Item 5 of the table allows a deduction for the part of the premium that is specified in the policy as being wholly for the liability to provide benefits under section 295-460 of the ITAA 1997. Item 6 refers to so much of other insurance policy premiums as are attributable to the liability to provide benefits referred to in section 295-460.

Subsection 295-480(1) of the ITAA 1997 defines a 'whole of life policy' as an insurance policy:

(a) that includes an investment component;

(b) the premiums for which are not dissected; and

(c) the sum insured (and any bonuses) are payable on:

(i) the death of the individual insured; or

(ii) the earlier of the death of the individual insured and the individual attaining the age specified in the policy (being at least the age of 85).

Subsection 295-480(2) of the ITAA 1997 defines an 'endowment policy' as an insurance policy:

(a) that includes an investment component;

(b) the premiums for which are not dissected; and

(c) where the sum insured (and any bonuses) are payable on:

(i) a day specified in, or worked out under, the policy; or

(ii) the death of the individual insured if that happens before that day;

but does not include a whole of life policy.

In this case the life insurance plan premium that covers the 2009-10 year relates to the term life insurance component of the policy. However, if the person insured has a terminal illness, the policy states that a benefit may be paid in lieu of the death benefit.

As the policy is not a whole of life policy or an endowment policy, a deduction is not available under items 1 to 4 of the table in subsection 295-465(1) of the ITAA 1997.

Item 5 of the table in subsection 295-465(1) of the ITAA 1997 allows a deduction for the part of the premium that is specified in the policy as being wholly for a liability to provide a benefit referred to in section 295-460.

A terminal illness benefit is not a benefit referred to in section 295-460 of the ITAA 1997. The part of the life insurance plan premium that refers to the terminal illness benefit under the policy is, therefore, not deductible. As no part of the life insurance plan premium is specified as being wholly for the provision of a benefit referred to in section 295-460, a deduction is therefore not available under item 5 of the table in subsection 295-465(1).

Where a deduction is not allowed under item 5 of the table in subsection 295-465(1) of the ITAA 1997, item 6 of the table may apply to allow a deduction for so much of the insurance policy premium as is attributable to the fund's liability to provide a superannuation death benefit.

An apportionment of the life insurance plan premium between the provision of benefits referred to in section 295-460 of the ITAA 1997 and that of terminal illness benefit under the policy is therefore required. Under subsection 295-465(3) of the ITAA 1997, an actuary's certificate must be obtained before the date for lodgement of the fund's income tax return for the income year concerned in order for part of the premium to be deducted under item 6 of the table in subsection 295-465(1).

For a TPD insurance premium paid by a complying superannuation fund to be deductible under section 295-465 of the ITAA 1997, the law requires a connection between the payment of the premium and the current or contingent liabilities of the fund to provide a disability superannuation benefit defined in subsection 995-1(1).

In this case, there are five events that qualify as TPD as defined in the policy. However, none of these relate wholly to the fund's liability to provide a superannuation disability benefit as defined. For example, TPD condition (c) is in respect of future care for the person insured and TPD condition (d) is in respect of the inability of the person insured to perform domestic work. The premium paid for taking the TPD option is therefore not deductible in part or in full.

Where the definition(s) of TPD in an insurance policy differs from the definition of disability superannuation benefit under subsection 995-1(1) of the ITAA 1997, an apportionment between the provision of disability superannuation benefit as defined under subsection 995-1(1) and that of the other disability benefits payable under the policy is required. As noted earlier, this apportionment must be supported by an actuary's certificate that must be obtained before the date for lodgement of the fund's income tax return for the income year concerned.

It should also be noted that a complying superannuation fund may provide a benefit to a member in respect of whom an insured event occurs only if a condition of release stipulated in Schedule 1 to the Superannuation Industry (Supervision) Regulations 1994 (SISR) has been satisfied. Permanent incapacity is one of the conditions of release. Under subregulation 6.01(2) of the SISR, 'permanent incapacity', in relation to a member, means:

… ill health (whether physical or mental), where the trustee is reasonably satisfied that the member is unlikely, because of the ill-health, to engage in gainful employment for which the member is reasonably qualified by education, training or experience.

It follows that, even though an insurer may have paid a complying superannuation fund the sum insured on the happening of an insured event in relation to a member of the fund, before the trustee of the fund can pay a benefit from the fund (whether based on the amount received from the insurer or otherwise) to the member, the trustee of the fund must be reasonably satisfied that the member's disability caused by the insured event nevertheless meets the definition of permanent incapacity under the SISR noted above, or otherwise satisfies a particular condition of release.

Other relevant comments

As noted before, the TPD insurance premium is deductible only to the extent that the policies have the necessary connection to a liability of a superannuation fund to provide its members with a disability superannuation benefit as defined in subsection 995-1(1) the ITAA 1997. However, within the industry there has been a practice to deduct TPD insurance premium even though a policy is insuring against some form of permanent disability which does not fully meet the definition of disability superannuation benefit.

To allow superannuation funds enough time to make necessary administrative changes in order to comply with the law regarding deductibility, the Federal Government has agreed to amend the tax law to provide transitional relief for the income years from 2004-05 to 2010-11.

On 24 June 2010 the Superannuation Legislation Amendment Bill 2010 was introduced to the Federal Parliament. For the transitional relief to apply to a TPD insurance policy premium, the insured permanent disability must be one that is described in regulations made for the purposes of the transitional provisions.

At this stage no regulations have yet been made.

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