ATO practice is generally to disregard any capital gain made on the payment of a TPD insurance benefit to the super fund trustee. It is worth noting that the Government has proposed to change the law to address technical issues with the aim of ensuring the law reflects ATO practice.
However, any benefit subsequently paid from the superannuation fund may be taxable.
Special tax treatment applies to lump sum and pension payments made from superannuation as a result of a client’s permanent incapacity.
The actual tax payable can depend on the age of the client and whether the benefit is paid as a lump sum or pension.
Lump Sum Payments:
TPD insurance proceeds are generally added to the taxable component of a client’s superannuation account. However a lump sum disability superannuation benefit may include an additional tax free component – see below.
Income Stream Payments:
Calculating the tax free component:
To work out the tax-free component of a disability lump sum benefit, add together:
- the tax-free component worked out under the general proportioning rule
- the amount worked out under the formula in subsection 307-145(3) of the ITAA 1997 (the modification formula):
The following example (courtesy of Macquarie Mastech) illustrates calculation of the modified amount:
Please note that calculation of these benefits are a complex are and all necessary care should be taken. Advisers are recommended to liaise with our team prior to the payment of any disability or death benefit payments to ensure correct calculation of taxation liabilities.
Additional tax deduction for the SMSF:
Provided the SMSF doesn't claim a deduction for any premiums in the year of payment of the benefit, it may be able to claim a substantial tax deduction based on the future liability of the fund to pay out those disablement (or death) benefits.
Please contact us if you would like more information on this strategy.