Advisers are often asked whether or not a client should own their total and permanent disability (TPD) policy individually (self-owned) or have it structured via a superannuation fund where they are a member. When comparing the pair, the answer may come as a surprise. Let's explore.
In order to compare 'apples with apples', we will assume that the policies being considered in the examples in the following sections of this paper are TPD policies that would meet the common "any occupation" definition, and thus also meet the permanent incapacity definition condition of release under the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) (SIS Regulation 1.03C, & Schedule 1, item 103), superannuation disability benefit (section 995-1 of the Income Tax Assessment Act 1997 (ITAA)), and the definition of compensation for injury or illness (ITAA section 118-37).
Deductibility of premium payments by the individual
First, where the life insured owns a TPD policy on their own life (outside superannuation), the life insured may not claim a tax deduction for the premiums paid (ITAA section 8-1). This means that the premiums are paid in after-tax dollars. For an individual who is on the highest marginal tax rate, this means that they must earn $1,886.79 in order to afford a $1,000 premium.
If the life insured has structured a TPD policy so that it is owned by the trustee of the superannuation fund where they are the member, depending on how they then pay for premiums, they may be cheaper due to potential tax deductions:
- If the member pays the premium with non-concessional contributions (NCCs), then the net tax result to the life insured is no different if they are on the highest marginal tax rate and paying a premium for policy outside superannuation (i.e. ordinary policy).
- Where a member makes a concessional contribution to the fund, this will normally attract contributions tax except where the contribution is used to pay for an insurance premium (ITAA sections 295-460 to 295-495). In order to pay a $1,000 premium in a superannuation fund, a member can make a $1,000 concessional contribution, and claim a tax deduction at their marginal tax rate (ITAA sections 290-10, and 290-155). This is subject to the $25,000 concessional contribution cap from all sources for the 2020/21 financial year (superannuation guarantee, voluntary employer contributions, salary sacrifice, and personal concessional contributions—ITAA sections 280-10, 280-15, 290-60, 290-65, 290-80, 290-85, 290-150, 290-165, 290-170, 290-175, 290-180, 291-15, 291-20 and 291-25).
- A third alternative is when a member chooses to roll over the amount of the premium from a superannuation fund where they are an existing member, to a different superannuation fund where their life insurance is owned by the trustee—in this circumstance, the member is not entitled to a tax deduction.