Australia: Insurance cover through your SMSF can be tax deductible

Last Updated: 5 June 2012
Article by Amanda Verratti

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 at a rate of 16.5% or 31.5%.

The forms of insurance open to trustees to buy via an SMSF are:

  • life insurance
  • total and permanent disability insurance (TPD)
  • temporary disability-based income stream support (up to two years)
  • terminal medical condition benefit.

The rules about the deductibility of premiums for life insurances distinguish between 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.

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. However the Tax Office has ruled that trauma insurance is consistent with the sole purpose test (although the cover must be held for trustees/members only). Please seek advice from this office for more details.

Did you know ... FBT 'odd spot'

The 2011-12 fringe benefits tax year-end has come and gone, and the FBT lodgement deadline is on the horizon (May 28). With this in mind, here are some 'left field' FBT facts that employers may find useful, both now and to keep in mind for the 2012-13 year.

  • Shopping centre car parks that provide free parking for an initial period (the first two hours, for example), and thereafter charge a fee based on time (to discourage all-day parking), are not considered by the Tax Office to be 'commercial parking stations' for the purpose of determining if there is a car parking fringe benefit
  • Where a mobile phone or similar item is treated as an exempt work-related item, and the monthly call costs are exempt, the exemption will extend to internet data usage fees
  • The Tax Office released a ruling during the 2011-12 FBT year that clarifies the 'base value' of a car. Where an employee contributes to the purchase price of a car, either by cash or by making their own vehicle available as a trade-in, the base value of the car benefit will be the amount paid by the employer/lessor, (that is, an amount net of the employee's contribution)
  • Where a loan is made in respect of employment to an employee who is also a shareholder of a private company, there will be no loan fringe benefit if the loan amount (or residual un-repaid balance) is deemed to be a dividend made to the borrower (even if the private company had 'nil' distributable surplus).

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2011 Moore Stephens Australia Pty Limited. All rights reserved.

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