The ATO needs to provide clarification as to whether it views life insurance benefits received by a superannuation fund to be income or a contribution after it gave mixed messages on this issue in a recently released draft tax ruling, the Institute of Financial Professional Australia (IFPA) has stated.
IFPA head of superannuation and financial services Natasha Panagis said it has asked the ATO for clarity regarding a paragraph in draft Taxation Ruling (TR) 2010/1DC2 that appears to state an insurance benefit paid to a member would be viewed as a contribution.
The paragraph states an insurance company that pays an amount to a superannuation provider under the terms of a policy ordinarily does so under the conditions of the insurance contract.
“The proceeds of the policy will ordinarily be treated as income, profit or gain from the use of the fund’s existing capital and not as a superannuation contribution,” the draft TR said.
“However, where it is objectively determined that the purpose of the insurance payment is to benefit a member of the fund, the payment may be a treated as a contribution.”
Panagis noted this latter statement was a recent insertion into the ruling and was regarded by IFPA as unusual because, by default, insurance proceeds were considered to be part of a fund’s investment returns under income tax regulations.
“We thought in what circumstances would insurance proceeds be seen as a contribution to the fund? In most cases, if not all, insurance proceeds are meant to benefit a member of the fund so we found it odd that this was inserted,” she said during an IFPA superannuation discussion group today.
“We’ve asked for clarification from the ATO to see what are they referring to here because if we’re talking about death benefits, total and permanent disability benefits, and income protection, once the member meets the definition of the policy and a condition of release, they are entitled to that payment.
“That money is for their benefit and the trustee holds the insurance policies for the benefit of the members.”
She noted there had been changes to the holding of life insurance within superannuation over time so funds can now only hold policies where their definitions align with conditions of release and that buy-sell agreements for insurance within a super fund were also not allowed.
“Given these changes, we have also asked the ATO if this new statement has anything to do with its previous stance on insurance within super and if so, please clarify,” she said.
