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Self Managed Super Fund (SMSF) Article
Disability insurance tangled in red tape
By Tony Negline.
This article may be out of date.
13th August 2008
Investors who have Total & Permanent Disablement insurance in their super fund might be surprised to learn that this insurance may not be as tax effective as they originally thought. But then again it may be. Unfortunately no one is quite sure.
As Mr Bumble said in Dickens' Oliver Twist, "The law is an ass."
To help the ATO communicate with various industries it has established a number of committees to provide a forum for discussions of mutual interest. One such committee is the National Tax Liaison Group Superannuation Technical Sub-group.
A couple of weeks ago the Tax Office released minutes for this committee's March meeting. These minutes contain a fascinating item about super funds claiming deductibility for total and permanent disability insurance.
Out of the two lists in our box, it would appear that there might be problems brewing for funds wanting to claim a tax deduction for the insurance policy premium.
When Costello's Better Super changes were being legislated the government decided to move the super fund tax laws from the Income Tax Assessment Act 1936 to the Income Tax Assessment Act 1997.
The wording of ITAA 1997 changes what type of TPD insurance contract is tax deductible. Under the new law a deduction is only allowed for TPD insurance contracts that provide that two medical practitioners have declared the person is TPD.
The old tax law did not make this demand and allowed a tax deduction for a super fund who purchased an insurance policy that provided a benefit to a member if they became permanent disabled. The old law did not have a definition for TPD in this area.
Most TPD insurance contracts that super fund trustees buy will satisfy this old requirement which may or may not include a proviso that a TPD benefit will be paid if medical practitioners have determined a member is TPD.
Under nearly all TPD insurance policies, the insurers will have the ability to demand that a claimant provides a wide range of information and also sees the insurers appointed medical assessors. The insurer's claims department makes the final decisions about the benefit payment not the doctors.
Some TPD insurance contracts pay a TPD claim because the insured has lost a limb but in these cases a medical doctor may not be able to declare that an injury of this type automatically makes a person TPD.
On the face of it the difference between the old law and the new law may not seem like a big issue because the explanatory memorandum issued when the Better Super legislation was introduced into Parliament says, "the rewritten provisions … do not change the law as it currently operates".
Unfortunately the ATO believe that the wording of the law is clear and say that it is the law – not the Parliament's intent when making that law – that applies. Their rationale for this view is, "as the legislative provisions are clear and unambiguous the intention of Parliament is determined from the provisions themselves without the use of extrinsic material such as the Explanatory Memorandum."
The ATO have released the minutes for the June National Tax Liason Group Superannuation Technical Sub-group meeting and they show that the issue remains unresolved.
What should super funds do? Trustees and their advisers should check the wording of their TPD insurance contracts to see if it pays out a benefit based on the new tax law requirements.
What's at stake? Tax concessions and submitting a wrong annual tax return. Not only that but access to other potential tax concessions.
Many super fund trustees will now find an impossible mismatch between the need to have two doctors sign off on permanent disability (solely for insurance policy premium concession purposes) when the super law demands that it is the super fund trustee's job to do this.
A spokeswoman for the responsible Minister, Senator Sherry, told DIY Super that this is a "very complex area and we are considering our position."
Super funds will soon be preparing to submit their 2008 tax returns will be in a quandary. Fortunately given the poor performance of financial markets the inability to claim the deduction for these TPD insurance premiums this year may not increase a fund's tax liability too much. It would be nice however to have that deduction available to offset future tax liabilities.This area is an unfortunate mess and hopefully the government and its departments will seek to ensure that the matter is cleared up as quickly as possible.
From a tax perspective the provision of any insurance via a super fund involves four key elements:
- the tax status of any contributions made by or for a member to their super fund to subsidize the insurance policy premium
- a super fund's ability to claim a deduction for the actual insurance policy premium
- the tax impacts on a super fund if it has to pay a TPD benefit
- the tax impacts on the individual who receives a TPD benefit
Sitting over the top of all these tax issues is the ability of a fund to actually pay a permanent disability benefit. There are three key elements in relation to this:
- Will a life insurer pay out the TPD contract it has with a super fund (this very much depends upon the terms of the contract)?
- Does the super fund's trust deed (or other governing rules) allow a benefit to be paid?
- Does the SIS Act allow the fund's trustee to pay a benefit?
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