Placing income protection in superannuation tax deduction is probably the most cost-effective way to obtain coverage. The cost of insurance is affordable because the policies are obtained in bulk from the insurer. In addition, you may get to enjoy tax deductions on your premiums. However, it is important to understand that in certain cases, premiums for income protection inside super may not qualify for tax deductions.
Individuals paying for income protection insurance both inside and outside superannuation are eligible for tax deductions on their premiums. However, one of the main differences is that the contributions made into superannuation funds are capped. Making contributions above your contribution cap leads to penalties, and you may even be worse off than someone who is paying the same amount for income insurance outside superannuation.
Income protection insurance is offered as an ancillary benefits that is added to a core benefit such as a death cover or your retirement benefits. This may affect the deductibility of your insurance premiums. You cannot claim tax deductions if a lump sum benefit is paid should you make a claim. Income protections premiums are generally tax deductible, but only if the benefit can be considered an income. Lump sum benefits are not considered incomes by the ATO.
Temporary incapacity definition
Your income protection premiums are only tax deductible to the extent that the terms of the policy aligns with the definition for temporary incapacity as provided in super law as a condition of release. If this condition of release is not satisfied, only a portion of the premium may be tax deductible. It is therefore important to ensure that the definition for temporary incapacity in your policy aligns with that of the super.
Many income protection policies do not offset your sick leave benefits. If this is the case when you have income protection insurance cover inside a super fund, you may not be eligible for your full benefits. The fund trustee may have to retain a portion of the benefits in the fund. In such a case, your premiums may also not qualify for full tax deductions. In addition, you may also not qualify for full tax deductions if your policy allows you to continue receiving benefits after you have resumed work on a part-time basis.
Note that when your premiums are fully paid by the super, the premiums are deductible to the fund and not to the individual super member. When your premiums are only partially tax deductible, the portion that is tax deductible can be determined in a number of ways. The first is to obtain an actuarial certificate indicating the premium related to the tax deductible portion of the premium. A private binding ruling from the ATO could also be obtained. Alternatively, the super fund trustee may choose not to claim the tax deduction.
It is important to consider all the implications of holding income protection inside super and compare this to policies outside super. You should also seek professional advice from an insurance expert or your financial planner when deciding the most appropriate option for you. It is also advisable to visit SUPER SA for more experts advice to your insurance plans.