Tax Deductible Life Insurance Premiums

TPD insurance provides for the payment of the insurance proceeds to the policy owner (in this case, the superannuation fund) in the event that the member of the fund (the life insured) becomes totally and permanently disabled. There are a number of different definitions of total and permanent disablement that may apply.

At a meeting of the National Tax Liaison Group - Superannuation Technical Sub-group held on 31^st March 2008, an issue was raised regarding tax deductibility of premiums paid by a superannuation fund to provide TPD cover for members. The minutes of this meeting were only recently released, hence the delay in reporting the developments.

It appears that to be eligible for a tax deduction, the premium must fund the insurance cover that pays a benefit where circumstances meet the specific definition of a “disability superannuation benefit”. In simple terms, if TPD insurance benefits are not aligned with the definition of a “disability superannuation benefit”, the premiums for the insurance cover may not be tax deductible to the super fund that pays the premium.

A “disability superannuation benefit” is defined as:

·         A benefit paid to a person because he or she suffers from physical or mental ill-health, and

·         Two legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely the person can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.

This is often referred to as the “any occupation” definition of TPD. 

By contrast, many life insurance contracts provide an “own occupation” definition. That is, a claim will be paid in circumstances where the individual insured is unable to work in their own occupation as a result of disablement (but they may be able to work in other occupations).

The preliminary view held by the Australian Taxation Office is that where the definition of TPD is not consistent with the definition of a “disability superannuation benefit” as set out in the Income Tax Assessment Act 1997, then a portion of the life insurance premium may not be tax deductible to the superannuation fund.

We are continuing to monitor developments in this area and will provide further information as it comes to hand.

Source: The Australian Taxation Office

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