Deductions for the cost of total and permanent disability insurance provided through superannuation Consultation Paper June 2011
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CONSULTATION PROCESS Request for feedback and comments Interested parties are invited to lodge written submissions on the issues raised in this paper. Submissions will be made available on the Treasury website unless you clearly indicate that you would like all or part of your submission to remain confidential. Automatically generated confidentiality statements in emails do not suffice for this purpose. A request made under the Freedom of Information Act 1982 for access to a submission marked confidential will be determined in accordance with that Act. Closing date for submissions: 1 July 2011 Email: Mail: Inquiries: superamendments@treasury.gov.au Benefits and Regulation Unit Personal and Retirement Income Division The Treasury Langton Crescent PARKES ACT 2600 Michael Dalton / Adriana Siddle Benefits and Regulations Unit Phone: (02) 6263 3713/ (02) 6263 3373 Page iii
CONTENTS FOREWORD...1 1. OVERVIEW...2 2. BACKGROUND...2 2.1 Insurance through superannuation... 2 2.2 Taxation treatment of insurance costs incurred by superannuation funds... 2 3. OUTLINE OF NEW ARRANGEMENTS...3 3.1 General outline... 3 3.2 Details of the arrangements... 3 3.3 Specific information sought... 5 Page iv
FOREWORD I am pleased to release this discussion paper on the Government s initiative to improve the operation of the income tax law for superannuation funds that claim tax deductions for the cost of total and permanent disability (TPD) insurance policies. The Government has previously provided transitional relief to superannuation funds for the deductibility of TPD insurance costs and is now facilitating the on-going workability of the law in this area. Amendments contained in the Tax Laws Amendment (2011 Measures No. 4) Bill 2011 will streamline the process for claiming tax deductions for the cost of disability insurance provided through superannuation when the transitional relief expires on 30 June 2011. The new arrangements involve specifying in regulations the percentage of premiums for various TPD insurance policies that can be claimed as tax deductions. This regime will apply from the 2011-12 income year. The new arrangements aim to balance operational concerns of superannuation funds, actuaries and insurance providers with retirement income policy objectives. This discussion paper sets out the proposed percentages to be specified in regulations and the descriptions of the types of TPD policies to which these percentages will apply. The Government looks forward to receiving the industry s views on the content of the proposed regulations as set out in this discussion paper. The Hon Bill Shorten MP Assistant Treasurer and Minister for Financial Services and Superannuation Page 1
1. OVERVIEW 1. Amendments contained in Schedule 3 to the Tax Laws Amendment (2011 Measures No. 4) Bill 2011 will reduce compliance costs for the superannuation, actuarial, and insurance industries on the expiration of the current transitional provisions relating to the deductibility of total and permanent disability (TPD) insurance costs. 2. The changes contained in the Bill will allow superannuation funds to claim deductions for a portion of the cost of certain TPD insurance policies based on percentages prescribed in regulations. This will provide an alternative to the need to engage an actuary to determine the deductible portion of insurance premiums in many cases. 3. This discussion paper provides the basis for consultation on the content of the regulations. 2. BACKGROUND 2.1 INSURANCE THROUGH SUPERANNUATION 4. Superannuation funds commonly take out death and disability insurance cover to insure against liabilities they may incur to their members. How a fund insures that risk (for example, in whole or in part, or with or without other insured risks) may vary between funds and insurance policies. 5. The purchase of death and disability insurance for this purpose is consistent with the key objective of superannuation, which is the provision of benefits to members in retirement or where they are no longer able to work, or in the event of a member s death, to the member s beneficiaries. 6. Disability insurance taken out by superannuation funds includes TPD insurance. The definition of TPD can vary across insurance policies. For example, insurance policies can provide TPD cover based on a definition of permanent disability as being the inability of the member to perform any occupation, or the inability of the member to perform his or her own occupation. Other TPD cover can be provided for insured events such as loss of independence, inability to perform home duties or loss of limbs/sight. 2.2 TAXATION TREATMENT OF INSURANCE COSTS INCURRED BY SUPERANNUATION FUNDS 7. The cost of TPD insurance provided through superannuation is deductible to the extent the policies provide cover which is consistent with the definition of disability superannuation benefit in the Income Tax Assessment Act 1997 (ITAA 1997). Where broader insurance cover is provided, superannuation funds are required to obtain an actuary s certificate to determine Page 2
the deductible part of the premium (unless the deductible part is specified in the insurance policy). 8. The Government introduced transitional provisions in 2010 which were designed to allow time for industry practice of deducting the full cost of broader types of disability insurance to be brought into alignment with the operation of the tax law. These transitional provisions expire on 30 June 2011. 3. OUTLINE OF NEW ARRANGEMENTS 3.1 GENERAL OUTLINE 9. The new arrangements will streamline the process for claiming tax deductions for the cost of TPD insurance provided through superannuation. The approach involves specifying in regulations the deductible proportion of premiums for various TPD insurance policies. These arrangements will apply from the 2011-12 income year, on the expiration of the current transitional relief. 10. These changes will reduce the need for funds to incur the cost of engaging an actuary to determine the deductible portion of insurance premiums. The proposed arrangements are consistent with retirement income policy in that only the part of premiums or insurance costs that is attributable to a fund s liability to provide disability superannuation benefits to members will be deductible. 11. The example at the end of this discussion paper describes the operation of the proposed arrangements compared to the operation of the ITAA 1997 and the current transitional provisions. 3.2 DETAILS OF THE ARRANGEMENTS 12. The percentage of premiums for certain TPD insurance policies that can be claimed as deductions will be specified in regulations. It is recognised that not all TPD policies will be captured by the regulations. However, the intention is that the most commonly used types of polices will be covered. 13. Use of the prescribed percentages will be optional. Superannuation funds will retain the option of engaging an actuary to determine the deductible portion of insurance costs. For example, funds may choose to obtain actuarial certification if the TPD policy they have is unusual, or if the fund trustees consider that the prescribed percentages do not reflect the particular circumstances of the fund. Page 3
14. The proposed percentages which would be prescribed in the regulations are set out in the following table: Policy type Any occupation insurance 100% Any occupation insurance with loss of limb add-on 90% Own occupation insurance 60% Own occupation insurance with loss of limb add-on Inability to perform activities of daily living insurance Inability to perform activities of daily living insurance with loss of limb add-on Deductible portion of premium 50% 60% 50% 15. The definitions of the terms used in the table are as follows: any occupation insurance is insurance against a disability that is likely to result in a member s inability ever to work in any occupation for which the member is reasonably qualified by education, training or experience. own occupation insurance is insurance against a disability that is likely to result in a member s inability ever to work again in the member s own occupation. inability to perform activities of daily living insurance is insurance against a disability that results in a substantial reduction in a member s capacity to perform two or more activities of daily living; where activities of daily living are: eating and/or drinking; dressing and/or undressing; toileting and/or attending to personal hygiene; bathing and/or showering; getting in and out of a bed, a chair or a wheelchair or moving from place to place by walking, a wheelchair or with a walking aid; communicating with others (including writing or using a keyboard). loss of limb add-on is an additional component of a disability insurance policy that insures against a permanent loss of: the member s sight in both eyes resulting in the member being legally blind; or the use of two or more of the member s limbs, feet or hands; or the member s sight in one eye resulting in the member being legally blind in that eye, and the use of one of the member s limbs, feet or hands. Page 4
inability ever to work includes a situation where a member is unable to work other than in a substantially reduced capacity to that in which the member worked before suffering the disability. 16. An amount will be deductible in accordance with a percentage specified in the table if the corresponding insurance policy allows for a payout to be made in circumstances at least as restrictive as those described in the above definitions. It follows that any additional criteria that a member must satisfy in order to be eligible for a payment under the insurance policy may be disregarded for purposes of claiming deductions in accordance with the percentages in the table. 3.3 SPECIFIC INFORMATION SOUGHT 17. Information is sought on: industry s views in relation to the specified percentages and policy descriptions; relevant pricing differences between various types of TPD insurance policies; and any other commonly used policies that should be included in the schedule of prescribed percentages. Page 5
Example: A superannuation fund has own occupation TPD cover for members Persephone Super Fund pays premiums to Hades Insurance to cover Persephone Super s liabilities to pay benefits to its members in the event of permanent disability. Permanent disability is defined in the insurance policy as the member s inability to perform his or her own occupation. The part of the insurance premium that relates to Persephone Super s liability to provide disability superannuation benefits to members is not specified in the policy. Outcome under the current provisions of the ITAA 1997 Under the current provisions of the ITAA 1997, Persephone Super is required to obtain an actuary s certificate to determine the amount of the own occupation insurance premium that relates to its liability to provide disability superannuation benefits to its members. Persephone Super can claim a deduction for this amount. Outcome under the new arrangements Under the changes contained in the Tax Laws Amendment (2011 Measures No. 4) Bill 2011 and this discussion paper, Persephone Super can deduct the percentage of the premium paid for own occupation insurance that is specified in the regulations, without the need to obtain an actuary s certificate. Because the insurance policy offered by Persephone Super is own occupation insurance (without a loss of limb add-on), Persephone Super can claim a deduction for 60 per cent of the policy premium. Alternatively, Persephone Super can choose to engage an actuary to calculate the deductible portion of the premium. These arrangements will apply to the 2011-12 income year and later income years. Page 6