Print this     

Date of article: 1 June 2011
Last updated: 28 June 2011

Changes to deductibility of TPD insurance

Update: See end of article for update on prescribed deductible portion of TPD premium announced 16 June 2011.

Where superannuation funds have Total and Permanent Disability (TPD) cover in respect of fund members, claiming a tax deduction on premiums paid will depend on the type of cover come 1 July 2011.

Industry practice was to claim a full tax deduction for the premiums paid for a wide range of TPD cover, regardless of the definition. When the deductibility provisions were rewritten to Division 295 of the ITAA 1997, it resulted in a stricter definition. In response to the concerns raised by the superannuation and insurance industry, transitional relief amended the tax laws to ensure that superannuation funds could continue to deduct in full premiums paid for income years to 2010-11.

From 1 July 2011, in order to claim a full tax deduction on premiums paid, the cover need to strictly meet the definition of 'disability superannuation benefit'. This is to align the cover to satisfy the condition of release for permanent incapacity, allowing for the insurance proceeds received by the superannuation fund to be paid out to the member.

Essentially, the deductibility provisions (section 295-465(1) of the ITAA1997) says that a superannuation fund can deduct the portion of premiums paid that are for current or contigent liabilities for the fund to provide 'disability superannuation benefits'.

'Disability superannuation fund' is defined as superannuation benefits where:

  • the benefit is paid to a person because he or she suffers from ill-health (whether physical or mental); and
  • 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.

What does this all mean?

There are generally two main types of TPD definitions:

  • any occupation - fully deductible
  • own occupation - partially deductible

An any occupation definition generally defines disability in terms of the person being unlikely to be able to ever perform the duties of any occupation, business, profession or employment for which the person is reasonably suited by education, training or experience.

An own occupation definition generally defines disability in terms of the person being unlikely to be able to perform the usual and customary duties of the occupation, business, profession or employment that they were engaged in when they suffered the illness injury.

A summary of the tax deductiability is as follows:

Policy defintion Deductibility
Any occupation TPD Fully tax deductible
Own occupation TPD Partially deductible, require actuary to certify
Loss of independence TPD Fully tax deductible
Home or domestic duties TPD Fully tax deductible (in limited cases, partially deductible and require actuary to certify)
Loss of limbs and/or sight TPD Partially deductible, require actuary to certify

Where an actuary's certificate is required, the actuarial task is to determine that part of the premium paid that is attributable to the above deductibility provisions.

 

Update 28 June 2008 - Prescribed deductible portion of TPD premium

When the transitional arrangement expires on 30 June 2011, the cost of TPD insurance is deductible to the extent that the policies provide cover that is consistent with the definition of 'disability superannuation benefit' in the ITAA1997. Where broader insurance cover is provided, an actuary's certificate determining the deductible portion of the premium is required (unless that portion is specified in the insurance policy).

As announced by the Assistant Treasurer and Minister for Financial Services and Superannuation on 16 June 2011, the new arrangements announced will streamline the process for claiming tax deductions. The approach involves specifying the deductible proportion in percentage of certain TPD insurance policies that can be claimed as deductions, applying from 2011-12 financial year. This will negate the need for superannuation funds to incur the cost of engaging an actuary to determine the deductible portion of the insurance premiums.

Proposed percentages:

Policy defintion Deductible portion of premium
Any occupation insurance     100%
Any occupation insurance with loss of limb add-on     90%
Own occupation insurance     60%
Own occupation insurance with loss of limb add-on     50%
Inability to perform activities of daily living insurance     60%
Inability to perform activities of daily living insurance with loss of limb add-on     50%

The definitions of the terms used in the table are as follows:

'any occupation insurance' is insurance against a disability that is likely to result in a member's inability ever to work in any occupation for which the member is reasonably qualified by education, training or experience.

'own occupation insurance' is insurance against a disability that is likely to result in a member's inability ever to work again in the member's own occupation.

'inability to perform activities of daily living insurance' is insurance against a disability that results in a substantial reduction in a member's capacity to perform two or more activities of daily living; where activities of daily living are: eating and/or drinking; dressing and/or undressing; toileting and/or attending to personal hygiene; bathing and/or showering; getting in and out of a bed, a chair or a wheelchair or moving from place to place by walking, a wheelchair or with a walking aid; communicating with others (including writing or using a keyboard).

'loss of limb add-on' is an additional component of a disability insurance policy that insures against a permanent loss of: the member's sight in both eyes resulting in the member being legally blind; or the use of two or more of the member's limbs, feet or hands; or the member's sight in one eye resulting in the member being legally blind in that eye, and the use of one of the member's limbs, feet or hands.

'inability ever to work' includes a situation where a member is unable to work other than in a substantially reduced capacity to that in which the member worked before suffering the disability.

Source of update: Deductions for the cost of total and permanent disability insurance provided through superannuation, Consultation Paper June 2011.

 

More information and contacting us

If you wish to discuss the above, please contact us. Our contact details.