David Busoli, principal of SMSF Alliance, said despite what many believe, life insurance premiums don’t have to be paid from a member’s accumulation account for the fund to claim a tax deduction.
The ATO said typically, super funds offer three types of life insurance to their members: life (or death) cover, TPD insurance and income protection.
Each of these types of cover is paid for through deductions from pre-tax contributions, which have already received favourable tax treatment. In addition, the ATO has ruled that no premiums paid for a life insurance policy that compensates against personal physical injury can be used as a tax deduction.
However, in an SMSF, the ATO, states a deduction may be available to the trustee of a complying super fund for insurance premiums.
“Life insurance premiums are deductible to the fund irrespective of the member account debited,” Mr Busoli said.
“The deduction is generally 100 per cent of the premium unless the policy contains an element of grandfathered, non-deductible cover types or is a whole of life (30 per cent) or endowment (10 per cent) policy.”
Mr Busoli said the general expectation is that the premium will be deducted from the insured member’s account but said questions arise if the member has both accumulation and pension accounts.
He said the ATO expect the proceeds to be paid to the account from which the premium has been drawn, so it is possible for all of the premium to be sourced from the pension interest without affecting the fund’s tax deduction.
The rationale behind this is simple, he said.
“Insurance proceeds are tax-exempt to the fund and generally increase the value of the deceased member’s account.
“If proceeds are paid to an accumulation interest, they will add to the taxable component of the interest. If they are paid to a non-reversionary pension, they will also increase the death benefit and be similarly treated but if they are paid to a reversionary pension interest, they will be treated as if they are income – though tax free.”
He continued that this means that the tax components will mirror those of the pension and, most importantly, they will not be counted against the beneficiary’s transfer balance cap a year after death – though they will be counted against the beneficiary’s total super balance.
“For example, if a member dies leaving a reversionary pension of $1 million which receives a life insurance payout of $2 million, only $1 million will be counted against the reversionary beneficiary’s transfer balance cap in a year’s time,” he added.
“They will, however, be precluded from making further non-concessional contributions as the whole pension balance would be counted against their total super balance.”
