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Tax deductibility of TPD premiums

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The tax office has made some changes to the deductibility of total and permanent disability premiums, says the Association of Superannuation Funds of Australia's Tony Keir.
A funny thing happened to the deductibility of total and permanent disability (TPD) premiums on the way home the other night.

For years it had quietly gone about its business, believing it was fully deductible when along came the Australian Taxation Office (ATO), which decided not only should full deductibility end, but it never existed in the first place.

This is a bit like giving someone a diamond ring, only to have the jeweller call you 20 years later to say that it's really just a hunk of glass. Parts of the ring, though, might still be diamond, but you need to get it certified. When you become peeved and question the jeweller about the original sale, they tell you they never said it was diamond, nor did they say it was a ring. They just more or less watched the transaction go through.

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Full deductibility of TPD premiums, as far as the superannuation industry is concerned, has been around for decades. However, as part of the 2007 Better Super reforms, the provisions regarding the deductibility of TPD insurance premiums paid by superannuation funds were rewritten and transferred from the Income Tax Assessment (ITAA) 1936 to the new plain English version ITAA 1997.

Under the ITAA 1936, TPD cover was deductible to a super fund if it was for policies that provided benefits in the event of permanent disability. However, permanent disability was not defined in the ITAA 1936, but industry interpreted it as covering a range of different definitions. 

Under sections 295-460 and 295-465 of the ITAA 1997 (rewritten in 2007), the ability for a fund to deduct insurance premiums for TPD benefits depends on whether the premiums are for insurance policies that provide disability superannuation benefits as specifically defined in subsection 995-1(1) of the act.

The explanatory memorandum (EM) to the Tax Laws Amendment (Simplified Superannuation) Bill 2007 indicated the rewritten provisions in division 295 of the ITAA 1997 were not intended to change the law as it operated under the ITAA 1936. It's clear, though, that the creation of a specific definition of disability superannuation benefit under the new act will always clash with the broader TPD policy definitions used by the industry.

This means for a fund to be able to claim a deduction for TPD premiums, the disability definition within the insurance policy will need to match the definition of disability superannuation benefit in the act. Where the definitions are different, the amount that is deductible is determined under either item 5 or item 6 in the table in section 295-465. Where the table provides no solution, the trustee must obtain an actuary's certificate to determine the proportion of the premium that is deductible.

It's now hard to argue that the law has not changed, notwithstanding the intention as stated in the EM. There is now a specific definition of disability superannuation benefit.

One of the more unsettling aspects of this saga though is the fact the ATO insists the law as it stands under the new act also applied under the old one. The reason for this is that even though super funds have for decades past claimed 100 per cent deductibility of TPD premiums, the ATO contends that it has never issued any ruling or guidance on this issue. It should also be noted that nor has the ATO ever felt obliged to question the practice until now.

On 13 October, Financial Services, Superannuation and Corporate Law Minister Chris Bowen announced an amendment to defer the application of the rewritten provisions in the tax law governing deductibility of insurance premiums for superannuation disability benefits to 1 July 2011. This will allow the current industry practice for deducting TPD premiums to continue applying until 30 June 2011.

Legislation that will give effect to Bowen's announcement is planned once industry consultation occurs. The Association of Superannuation Funds of Australia's concerns are that there will be significant costs associated with changing administration systems and disclosure documents. It may also reduce insurance coverage and cause confusion - all of which seem to fly in the face of simpler or even better super.

Nevertheless, the industry is appreciative of the lead time announced by Bowen. It is in line with what industry was seeking in the event that a long-held industry practice such as this needed altering. But the moral of the story is twofold. Firstly, just because the ATO is silent on an issue does not mean that it is okay. And secondly, be careful what you inquire about, as you may not like the answer.

 

Tax deductibility of TPD premiums
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