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Insure for tax effectiveness
The taxman is coming! How can insurance assist your clients? Let’s look at the four types of life insurance and how each of them may benefit your client at tax time.
Premiums
In superannuation — life (term), total and permanent disability (TPD) or income protection premiums:
may be paid from normal super guarantee (SG) contributions (ie, 9 per cent paid by employer); or
may be eligible for government co-contribution if paid as an un-deducted contribution to a fund and member earns less than $58,000 per annum as an employee. The government pays up to $1,500 per annum to your superannuation fund for personal contributions up to $1,000 per annum.
Term and TPD premiums are deductible expenses to the superannuation fund.
Income protection premiums are deductible to the fund only if the benefit period is 2 years or less.
Note: It is not recommended to put trauma insurance within a superannuation fund as the premiums are not deductible to the fund, and the benefits normally do not meet a condition of release from the superannuation fund.
Outside superannuation — term, TPD, or trauma premiums = no tax deduction.
Outside superannuation — income protection premiums = tax deduction for premiums.
Benefits
Outside superannuation — term = tax-free.
Outside superannuation — TPD or trauma = tax-free if paid to life insured or relative. Otherwise, treated as a capital gain and capital gains tax may apply.
Outside superannuation — income protection = taxed as normal income at the marginal tax rate.
In-superannuation — income protection = taxed as normal income at the marginal tax rate.
In-superannuation — TPD = taxed as an eligible termination payment with four usual components — post-June 1983 (taxable), pre-July 1983 (taxable), invalidity component (tax-free), and excessive component (taxable — based on reduced lump sum reasonable benefit limits (RBL)). Must also meet a condition of release from the superannuation fund before benefits will be paid to life insured.
In-superannuation — life (term) = tax-free up to $1,238,440 if paid to a dependent (2004-05). Excess amount taxed at highest marginal tax rate (48.5 per cent). If paid to non-dependent, then treated as an ETP, with no tax-free amount.
It should be noted that as a general rule of thumb, if the Australian Taxation Office (ATO) gives a taxpayer a deduction for premiums paid (either as an individual or via their superannuation fund) there is normally a sting in the tail when the insured individual receives the benefits, as they are often taxable.
Jeffrey Scott is executive manager, business growth services with CommInsure.
AUTHOR
Mike Taylor
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