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Insurance within super

Taxation of insurance through super

Section: 10.8

There is no tax payable on the proceeds received by the trustee of the superannuation fund. Remember, the owner of the insurance policy is the trustee of the superannuation fund. The insurance proceeds are generally added to the member's account and becomes part of the superannuation account balance.

However, any benefits being paid out of the superannuation account balance will be taxed under superannuation benefit taxation rules.

Paying death cover as a lump sum

Paid to dependants - Death benefits paid as a lump sum to dependants of the deceased member are tax-free.

Dependants, for tax purposes are classified as spouse (including a de facto spouse of same or opposite sex), a child under age 18, a financial dependant or someone with whom the member shared an interdependency relationship.

Paid to non-dependants - Death benefits paid as a lump sum to non-dependants may consist both a taxed and/or untaxed component.  The taxed component is subject to a maximum tax rate of 15% plus Medicare levy. The untaxed component is subject to a maximum tax rate of 30% plus Medicare levy.

Paying death cover as an income protection

Death benefits paid as an income stream to dependants who are age 60 or over (including the member) the income will be tax-free. Where both the deceased member was, and beneficiary is, less than age 60, any taxable income payments will attract a 15% tax offset.

If the death benefit pension is paid from an untaxed fund, the taxable portion of pension payments received by a beneficiary under age 60 (where member is under 60 at the time of their death) will be taxed at the beneficiary's maximum tax rate, and no tax offset provided. If both beneficiary and member are over age 60 at the time od death, the taxable portion of pension payments will be eligible for a 10% tax offset.

Paying a TPD benefits

In order for a member to receive a benefit payment from a super fund a member must satisfy a condition of release, including reaching age 65 or their preservation age and having permanently retired. A person may also satisfy a condition of release where they are permanently incapacitated.

The trustee of the super fund may pay the benefit in the following ways:

  • lump sum
  • disability income stream
  • or a combination of both (subject to the governing rules of the fund)

A member receiving a disability superannuation income stream before reaching their preservation age will be entitled to a 15% tax offset on the element taxed in the fund. The tax-free portion is tax free.

The benefit received by the member is broken up into tax-free and taxable components. If the benefit is received as  lump sum, the tax-free component of the benefit is increased to broadly reflect the period where the member would have expected to be gainfully employed. The existing tax-free amount is calculated using the formula in subsection 307-145 of the ITAA 1997:

Days to retirement: Number of days from the day on which the member stopped being capable of being gainfully employed to their last retirement date.

Last retirement date: If a person's employment or office would have terminated when he or she reached a particular age or completed a particular period of service the day the member reach the age or completed the period of service; or in any other case the day on which the member would turn 65.

Service days: Number of days in the service period for the lump sum.

The balance of a payment is a taxable component.

Income protection

Income protection within super can cover a member for either two-year or five year period or until a member turns 65. This provides members with  protection if they are unable to work for a long time.

COVID-19

Income protection insurance doesn't cover a member for lost income because they have been stood down or become unemployed.

The income paid is fully taxable at the member's marginal tax rates.

This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.

Last modified: Friday, September 25, 2020