Private ruling: Deductibility of insurance premiums
Published: February 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Is the self managed superannuation fund (SMSF) entitled to claim a deduction for premiums paid in respect of total and permanent disablement (TPD) cover under a life insurance policy held by the trustee of the SMSF? 2. Is the SMSF entitled to claim a percentage deduction for the premiums paid in respect of the life insurance policy? Advice/Answers 1. Yes. 2. Yes. This review applies for the following period Year ended 30 June 2013

Relevant facts and circumstances: A fund is a complying self managed superannuation fund (the Fund). Member 1 and Member 2 are members of the Fund. In the 20YY income year, the Fund commenced a Life Insurance Plan with a life company under a 'Stepped' premium structure under separate policies for each Member. The life insurance policy taken out by the Fund for Member 1 comprises life cover and includes an additional option of total and permanent disablement (TPD) 'any occupation' insurance plan. The life insurance policy taken out by the Fund for Member 2 comprises life cover and includes an additional option of an 'activities of daily life' total and permanent disablement (TPD) insurance plan. The yearly premiums for each benefit for each member have been provided. During the 20XX income year, the Company and all its Australian and an overseas country's subsidiaries ceased to be members of the Company Group and became members of another Company Group.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 295-460. | Income Tax Assessment Act 1997 Section 295-465. | Income Tax Assessment Act 1997 Subsection 295-465(1). | Income Tax Assessment Act 1997 Subsection 995-1(1). | Income Tax Assessment Regulations 1997 Regulation 295-465.01(5). Summary | The Fund is entitled to a 100% deduction of the premium paid for TPD cover for each member of the fund. | The Fund is entitled to a 30% deduction of the premium paid for the life insurance cover for each member of the fund. | Detailed reasoning | The legislation that governs the deductibility of an insurance premium paid by a complying superannuation fund on behalf of its members is contained in section 295-460 and section 295-465 of the Income Tax Assessment Act 1997 (ITAA 1997). For any insurance premiums paid by a superannuation fund to be deductible pursuant to section 295-465, the premiums must be wholly or partly for the current or contingent liabilities of the fund to provide the benefits specified under section 295-460. Subsection 995-1(1) of the ITAA 1997 defines a disability superannuation benefit as follows: | disability superannuation benefit means a superannuation benefit if: | (a) the benefit is paid to a person because he or she suffered from ill-health (whether physical or mental); and | (b) 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in capacity for which he or she is reasonably qualified because of education, experience or training. | A complying superannuation fund can deduct the proportions specified in the table in subsection 295-465(1) of the ITAA 1997 of premiums it pays for insurance policies that are (wholly or partly) for current or contingent liabilities of the fund to provide benefits referred to in section 295-460 for its members. | The deduction for insurance premiums under subsection 295-465(1) of the ITAA 1997 is specified by the items in the subsection as follows: | Item | The fund can deduct this amount: | 1 | 30% of the premium for a *whole of life policy if all individuals whose lives are insured are members of the fund | 2 | 10% of the premium for an *endowment policy if all individuals whose lives are insured are members of the fund | 3 | 30% of the part of an insurance policy premium (for a policy that is not a *whole of life policy or an *endowment policy) that is specified in the policy as being for a distinct part of the policy, if that part would have been a whole of life policy had it been a separate policy | 4 | 10% of the part of an insurance policy premium (for a policy that is not a *whole of life policy or an *endowment policy) that is specified in the policy as being for a distinct part of the policy, if that part would have been an endowment policy had it been a separate policy | 5 | The part of a premium that is specified in the policy as being wholly for the liability to provide certain benefits, if those benefits are benefits referred to in section 295-460 | 6 | So much of other insurance policy premiums as are attributable to the liability to provide benefits referred to in section 295-460 | The Commissioner has issued Taxation Ruling TR 2012/6 which outlines the Commissioner's view and provides guidelines on the deductibility under section 295-465(1) of the ITAA 1997 of premiums paid by a complying superannuation fund for insurance policies which provide total and permanent disability cover for members. | At paragraph 24 of TR 2012/6 it refers to a deduction for the whole premium and states: | A deduction for the whole of the premium paid under a TPD insurance policy will be allowed under item 5 in the table in subsection 295-465(1) where the occurrence of an insured event specified in the policy is certain to result in a fund liability, pursuant to the terms of the fund trust deed: | (a) to provide a 'disability superannuation benefit' to a member; and | (b) the insured events under the policy are otherwise exclusively for the provision of benefits covered by section 295-460 … | The three types of benefits under section 295-460 of the ITAA 1997 are: superannuation death benefits, disability superannuation benefits, and certain benefits provided because of the temporary inability of a person to engage in gainful employment. | The terms 'TPD any occupation' and 'activities of daily living' used in the table as defined in Regulation 295-465.01(5) of the Income Tax Assessment Regulations 1997 (ITAR) state: TPD any occupation - means insurance against the member suffering an illness or injury that is likely to result in the member's permanent inability to engage in gainful employment for which the member is reasonably qualified by education, training or experience. | Activities of daily living - means a component of a disability insurance policy that insures against a disability that results in a member's total and permanent inability to perform at least two of the following activities of daily living without the assistance of another person: | · bathing and showering | · dressing and undressing | · eating and drinking | · mobility, to the extent of being able to get in and out of bed or a chair, and move from place to place without using a wheelchair | · the ability to use a toilet. | Regulation 295-465.01 of the ITAR specifies the deductible proportion of premiums for certain types of TPD insurance policies. Superannuation funds which hold the relevant policies will have the option of claiming deductions in accordance with the regulations. Item 1 of the Table in subsection 295-465(1) of the ITAA 1997 is the relevant item governing insurance premium deductibility a whole of life policy if all individuals whose lives are insured are members of the fund. | Items 5 of the Table in subsection 295-465(1) of the ITAA 1997 are the relevant items governing insurance premium deductibility for policies held by complying superannuation funds where the part of a premium that is specified in the policy as being wholly for the liability to provide certain benefits, if those benefits are benefits referred to in section 295-460. | In the Full High Court decision National Mutual Life Association of Australasia Ltd v. Federal Commissioner of Taxation (National Mutual) , the insurer charged an additional premium to what it would have otherwise charged on a similar policy for providing certain disability insurance benefits in addition to the life assurance benefits provided under the principal policy. The Full High Court found that the insurers obligation with respect to the disability insurance was separate from its obligation to provide life assurance benefits under the life insurance policy to which it was attached. | Justices Taylor and Windeyer agreed that if any part of the premium is designed to secure additional benefits of a character which, considered alone, are foreign to what the original insurance policy was intended to provide and the premium attributable to the additional insurance is recorded and ascertainable, then the additional premium is divisible from the premium in relation to the other benefits under the policy. | In this case, the life insurance policies taken out by the Fund comprise life cover and include an additional option of TPD insurance cover. | The life insurance policies will support the liability of the superannuation trustee policy holder to provide benefits referred to in section 295-460 of the ITAA 1997 for its members. Accordingly, it is necessary to determine the deductible proportion of the policy premium in accordance with the table in subsection 295-465(1). | As specified under Item 1 of the Table in subsection 295-465(1) of the ITAA 1997, it allows a 30% deduction of the premium for the life insurance cover for each member of the fund. | The insurer charged an additional premium for each policy for providing TPD insurance benefits in addition to the life insurance benefits provided under the principal policy. | The premium separately specified within the policy for TPD any occupation, including TPD activities of daily living cover is fully deductible under Item 5 in the Table in subsection 295-465(1) of the ITAA 1997. It allows a deduction for the part of premium that is specified in the policy as being wholly for the liability to provide benefits under section 295-460. | Therefore, the Fund can deduct 100% of the premium for TPD cover for each member of the fund.