Are life insurance premiums tax deductible?

Individuals who make personal superannuation contributions in order to obtain superannuation benefits for themselves or for their dependants in the event of their death by purchasing Life Insurance within superannuation may be entitled to tax concessions for those contributions as follows:

• If the contributor is self employed or derives only a small part of their income from employment, the pre-tax (concessional) contributions may be deductible
• Contributions on behalf of a low income spouse may entitle the contributor to an offset.

However, where term life insurance is held outside of the superannuation environment, the premiums are generally not tax deductible and tax concessions are not available.

How much can I deduct?

For the personal contributions to be deductible it must be a concessional contribution, meaning it must be a pre-tax contribution.

Although there is generally no limit on the amount of contribution or on the deduction allowable, if the member exceeds their contributions cap they may be liable for excess contributions tax if the contributions made exceeds the contributions cap for the year in which it was made.

It is important to understand how much can be contributed to superannuation so that the rules are met and the benefits can be triggered.

So, what are the limits on the Contributions?

From 1 July 2009, the contributions caps are as follows:

Contributions Cap for 2009/10
Age Amount

Under 50 years on 1/7/2009 $25,000

50 or over on 1/07/09 $50,000

Non-Concessional Contributions Cap for 2009/10
Age Amount

Under 65 $150,000
or up to $450,000 over a 3 year period
(under the bring forward provision)

Age 65 > 2009/10 $150,000

Examples of concessional contributions include:

• contributions made in respect of super guarantee
• any additional employer contributions
• salary sacrifice
• personal pre-tax contributions in respect of self employed persons
• contributions made by friends

Concessional contributions are included in the fund’s assessable income and these contributions form part of the taxable component within a superannuation fund.

Examples of non-concessional contributions include:

• excess concessional contributions
• government co-contributions
• personal contributions for which no tax deduction is claimed
• spouse contributions
• 100% of transfers of overseas pensions into Australian superannuation funds within six months of Australian residency
• proceeds from the sale of a small business that are contributed into superannuation (if the amount did not qualify for the 15 year or retirement CGT small business exemptions. Also the contributions which were included in the fund’s assessable income but where a tax deduction was disallowed)

Non-concessional contributions are not included in the super fund’s assessable income and form part of the tax-free component.

What conditions must be satisfied for contributions to be deductible?

Personal contributions by a member are only deductible if certain conditions are satisfied:

• If the contribution is to a superannuation fund, it must be a complying superannuation fund.
• Less than 10% of the total of the contributor's assessable income and reportable fringe benefits for the income year comes from employment-related activities.
• A contributor aged under 18 at the end of the income year must have earned income from carrying on a business or from employment.
• The contribution must be made by the 28th day after the month in which the contributor turns 75, and;
• The contributor must notify the trustee in writing that they intend to claim the deduction, they must receive acknowledgement from the trustee, and they cannot deduct more than the amount stated in the notice.

Is there a limit to the level of life insurance cover available through a superannuation fund?

Since simplified superannuation reforms came into effect on 1 July 2007, it has been important to consider the benefits of holding Life Cover within the superannuation environment. This is possible due to the removal of reasonable benefit limits, (RBL) that used to impose tax on excess benefits within the superannuation fund, and the introduction of tax free benefits where a member has reached age 60.

Issues you should consider when placing life insurance cover within superannuation
The main forms of term life insurance coverage offered within superannuation are death cover, Total Permanent Disablement cover and income protection insurance, often referred to as, salary continuance.

As with all benefits within a superannuation fund, insurance proceeds are subject to the Superannuation Industry Supervision (SIS) legislation, particularly the preservation of benefits. In addition, there is need to consider the taxation on the net benefit to the member, their dependants and other beneficiaries.

These conditions affect life, TPD and income protection proceeds differently and while death benefit proceeds paid from a superannuation fund are usually straightforward when paid to the member’s dependants, income protection benefits are deemed assessable income for tax purposes.

As for the taxation of TPD benefits, although simplified under the new rules, they still remain subject to the SIS legislation’s definition of ‘permanent incapacity’ which can be more restrictive than definitions within some insurance policies outside of the superannuation environment.

Who has control over my life insurance within superannuation?

Unlike direct ownership of life insurance, cover placed within superannuation is subject to superannuation regulation and taxation with the responsibility for compliance placed in the hands of the fund trustee. This includes powers and obligations to distribute benefits to members.

Upon death, the death benefit of a person can be paid out in one of four ways, depending on the fund rules or policy terms:

• To the beneficiary at the binding direction of the member. A beneficiary could be the estate and/or a dependant of the original member. This method enables the member to "estate plan" with certainty as no one else has a say as to who will receive the benefit. It also provides flexibility in that a binding direction can be varied or replaced at any time by the member to take account of any change in family circumstances. Note, however, that under some fund rules a binding direction will generally lapse if it is not reviewed within three years.
• To a reversionary beneficiary who has been identified to receive the pension of the deceased. In this case, the pension does not form part of the estate. It passes immediately to the reversionary beneficiary and is therefore, a non-estate asset. The other thing to note is that a pension can only be paid to a reversionary beneficiary if the deceased was in receipt of a superannuation pension. Taxation implications apply under certain circumstances.
• To the estate will maker in accordance with the fund rules. In this case, it is an estate asset and the proceeds can be distributed in accordance with the wishes of the will.
• To a beneficiary chosen at the discretion of the trustee. A beneficiary could be the deceased estate or one or more of the dependants of the deceased. While this option provides the trustee with flexibility the member does not control who will receive their life insurance proceeds even if the member lodges a form indicating his/her preferences in this regard. Thus it can be difficult to estate plan with any certainty

A superannuation death benefit can only be paid to a person's dependants and/or to their estate. A dependant is defined in the Superannuation Industry (Supervision) Act 1993 (Cth) as including:

• a spouse
• a child of the person, or
• Any person with whom the person has an interdependency relationship.

A person who is financially dependent on the deceased at the time of death is also considered a superannuation dependant for the purposes of payment of death benefits.

Do my death benefits paid from superannuation get taxed?

The taxation treatment of benefits paid from a super fund depends on whether the recipient was a ‘tax dependant’ of the deceased member immediately prior to death.

What happens if my death benefit is paid to a non-dependant?

A lump sum death benefit paid to a person who does not meet the definition of a death benefits dependant is taxed according to whether the deceased's superannuation balance comprises the tax-free component, the taxable component, or both components.

The tax-free component of the benefit is tax-free. However, where the death benefit comprises the taxable component, the recipient of the death benefit will be entitled to a tax offset to ensure that the rate of tax on the element taxed in the fund does not exceed 15%, and the rate of tax on the element untaxed in the fund does not exceed 30%. The medicare levy must also be added.

Should you insure through superannuation?

There are several factors to consider when deciding whether to hold life cover inside or outside the superannuation environment, and where the most usual approach to hold life insurance in superannuation is for money saving purposes. Some consideration should also be put into holding life cover outside the superannuation environment along with individual circumstances being taken into account, including:

• Provision for non-dependant beneficiaries
• The selection of "own occupation" for TPD that may be required to be accessed prior to retirement following age 60.

xLife can offer superannuation advice

Determining the strategy which is most appropriate will vary from person to person, and with a solid understanding of the rules, xLife can play a key role in advising on the relative appropriateness of purchasing insurance cover within superannuation.

Contact xLife to discuss your needs or request superannuation advice.

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August 2009