SMSF trustees holding total and permanent disability (TPD) insurance policies inside their fund should examine the nature of the cover and be cautious about the timing of a claim to ensure they do not trigger an excessive tax bill.
MetLife Australia head of advice strategy Jeffrey Scott said all TPD policies issued since 1 July 2014 will have an any occupation definition, while those issued prior to that date may have an own occupation definition and these will impact on the tax deductibility of premiums.
“The any occupation definition states an individual is unable to work in any occupation they are reasonably suited for based on education, training and experience and that is the definition we find in the [Income] Tax [Assessment] Act and the SIS (Superannuation Industry (Supervision)) Act,” Scott said during a session at the recent SMSF Association National Conference 2024 in Brisbane.
“If you have an own occupation definition policy that was in your super fund prior to 1 July 2014, you may retain that own occupation definition, but you don’t get a full tax deduction for the premiums that are paid.
“The income tax regulations state that for an any occupation definition there is full tax deductibility, but for an own occupation definition you only get two-thirds tax deductibility of that premium.
“So this means we are looking at a cost versus risk reward trade-off and you have to be mindful of this if you have an old own occupation definition sitting inside your super fund.”
He added the issue of definition was not considered when calculating the tax on a TPD benefit and those aged over 60 and those above the preservation age but under 60 will receive the benefit tax-free, while those below preservation age would be taxed at 20 per cent.
However, he said this figure could be reduced through the use of a non-concessional contribution and gave the example of Raquelle who at the age of 41 receives $500,000 under her TPD cover after having paid premiums since she was 20.
“She gets the exact same benefit [if she took no action], but if before she draws any money out of the fund she puts $330,000 in as a maximum bring-forward non-concessional contribution, this reduces the tax liability from being almost $50,000 down to less than $12,000,” she said.
“So if your clients are going to make a TPD claim, do not allow them to take any money out of the fund until they’ve talked to you first because you could manage the tax and save them a whole lot of money merely by getting the order right now.”
