Insurance cover through your SMSF can be tax deductible

 

Buying insurance within an SMSF can give access to deductible expenses that would otherwise not be available, as some insurance premiums, such as for life insurance (which typically cannot be claimed as deductions by individuals for income tax purposes) may be available as tax deductions for the SMSF.

The same concession applies for any super fund, but the deductibility is available to the fund itself — therefore previous members of retail or industry funds who subsequently set up their own SMSF may not be aware of the deductibility of insurance premiums.

On top of this, life insurance payouts made to death benefit dependants of the deceased via a super fund are tax-free, regardless of whether a tax deduction for premiums has been claimed or not. Note however that insurance benefits paid to a non-dependant may attract tax, and death benefits can only be received as a lump sum.

According to the ATO, the forms of insurance open to trustees to buy via an SMSF are:

  • life insurance
  • total and permanent disability insurance (TPD)
  • income protection (IP) insurance

The rules about the deductibility of premiums for life insurances distinguish between the premiums paid to provide a benefit and premiums that have a savings element – as is the case with certain variable life policies that build a cash value. No deduction is available for the proportion of the premium that supports this investment element.

The one essential however is that policies must be held in the trustee’s name, and the fund must be the sole beneficiary of the policy. And it is prohibited from transferring existing life insurance policies of related parties to the SMSF — the law prohibits a super fund from acquiring an asset from a “related party”, and an insurance policy is a financial asset.

Another point to note regarding the income protection insurance is the “occupation clause”. If the income protection insurance will pay benefits in cases where the insured becomes disabled and consequently is unable to perform work in their own occupation, then premiums for such insurance will only be partially deductible. In contrast, if the matter was about not being able to work in any occupation, which is a more restrictive clause, then the deduction for full policy is generally available.

Note that other forms of insurance, such as health insurance, may not fit with the “sole purpose test” and therefore it would be inappropriate to hold such policies in an SMSF. Note that trauma insurance is generally not able to be taken up by SMSFs.

 


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Website Comments

  1. Sandor
    Reply

    Thanks for the article!
    There is just one point which is unclear. You wrote: “The one essential however is that policies must be held in the trustee’s name, and the fund must be the sole beneficiary of the policy.”
    The purpose of the insurance is to get the member through a difficult time, e.g. in the case of the salary continuance insurance paying off after loss of job. There could be loan payments due, medical bills piling up, everyday living costs, dependants to look after etc. If the sole beneficiary is the fund, that seems to mean that the fund gets the insurance payout. However, once the money gets into the walled garden of the fund, it can be very difficult to get it out.
    The ATO page linked in the article ( https://www.ato.gov.au/super/self-managed-super-funds/investing/your-investment-strategy/insurance-for-members/ ) writes: “those benefits will become part of the assets of the SMSF at least until such time as the relevant member satisfies a condition of release”. Then, there is a separate page on the conditions of release ( https://www.ato.gov.au/Super/Self-managed-super-funds/Paying-benefits/Conditions-of-release/ ).
    The release seems to be an arduous bureaucratic process and may take considerable time while the member can be in a very difficult financial position and due to incapacity, may have difficulty pursuing his/her case. In fact, the payment of the insurance benefits may also be subject to some delay, already, which is bad enough by itself.
    Aren’t the whole purpose of the insurance is to provide immediate help in a difficult situation? Am I missing something?

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