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Income Protection Insurance Tax Deductible SMSF

     Copyright (c) 2014 Kerrie Peacock

Superannuation funds, including SMSF (Self-Managed Super Funds), are eligible to make tax deduction claims for income protection insurance premiums. This feature will have various implications on the management of funds as well as administration of policies within the fund.

How Income Protection Insurance Tax Deductible SMSF Affects Management Of Funds

One key role for trustees of an SMSF (self-managed superannuation fund) is developing an investment strategy to address insurance needs for each fund member. This is based on a legal requirement under the SIS Act (Superannuation Industry Supervision Act of 1993) that necessitates an annual review of the insurance requirements for each member of the fund. One aspect that is considered when making such investment decisions is the tax deductibility of income protection insurance.

Apart from the tax deductibility of insurance premiums, trustees would also consider cost of premiums, taxation of benefits, age of individual members, liabilities of individual members and necessary conditions of release. All these aspects are pivotal in making the best investment decision for member funds.

After evaluating the various aspects, including tax deductibility, trustees will make appropriate decisions on the best method of holding insurance for each member. Such aspects as tax deductibility will determine whether all conditions are favorable for members to hold cover fully inside super. This is especially so if the tax deductibility aspect provides a significant advantage to holding cover fullly inside SMSF. In other circumstances, it would be better for the member to hold cover completely outside SMSF. Alternatively, a balance may be the most favorable option, in which part of the cover is held both inside and outside SMSF. In certain situations, it may even be better not to have any insurance cover at all.

Proper documentation of these considerations is necessary to indicate to all members (all trustees are also members of the SMSF) how investment decisions are made. Hence the trustees will need to be well versed in all matters concerning taxation affecting insurance premiums in order to make well-informed investment decisions.

What If SMSF Trustees Don't Understand Taxation Requirements?

However, due to the complex nature of various tax issues regarding super funds, trustees may not have sufficient understanding of taxation requirements. In such a case, if the SMSF trustees are not clear about how much income protection insurance premiums are taxes deductible, they may opt for either of three options:

(i) The Australian Taxation Office advices that you may need to obtain an actuarial certificate and also appoint an actuary, in case a fund member starts an income stream within your super fund. In this instance, you would need an actuarial certificate to determine the amount of income exemption from assets supporting the benefit payment in form of an income stream.

(i) Alternatively, you may apply for a private ruling from the Australian Taxation Office (ATO). A private ruling is a legally binding written advice, under the Australian tax law. The key benefit to taxpayers is that private rulings bind the ATO, hence no extra income tax, interest and penalties can be charged on a taxpayer even if such an advice is wrong.

(ii) The final option is simply not claiming the tax deductions.

Article Source:

Kerrie Peacock possesses an in-depth understanding of taxation issues regarding income protection insurance in Australia. For more information and tips on what can work for you, visit

Posted on 2014-05-24, By: *

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Note: The content of this article solely conveys the opinion of its author.

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