Home

 

Welcome:

Welcome

Site Map:

Site Map

Adviser Updates:

Adviser Updates

Publications and Documents:

Publications and Documents

 

Business Succession Planning:

Business Succession Planning

Need for Succession Plan

Need for Asset or Buy/Sell Strategy

Need for Liability or Key Person Strategy

Negotiating a Succession Plan

 

Simple Succession Plan:

Simple Succession Plan

 

Complete Succession Plan:

Complete Succession Plan

Strategy

Financial Needs

Insurance Funding

Retirement Funding

 

One Page Strategy:

One Page Strategy

Asset Needs

Liability Needs

Personal Needs

Who Pays the Premiums?

Valuing the Business

Simplifying the Valuation Issue

Equity vs. Loan Capital

 

One Policy Strategy:

One Policy Strategy

Flexibility

Dual Role of Personal Cover

Dual Role of Debt Red'n Cover

Security & Tax-Effectiveness

Cost Savings

Pre-Agreed Purchase Price

Apportionment of Premiums

Methods of Aggregation

 

Multiple Policy Approach:

Multiple Policy Approach

Super Fund Ownership

Tax Disadvantages

Cost Disadvantages

Other Disadvantages

Geared Premium Funding

Super Buy/Sell

 

One Page, Two Policy Strategy:

One Page, Two Policy Strategy

 

Other Issues:

Tax Deductibility

Inadequate Insurance Proceeds

Vendor Finance

Changing Needs

Future Growth of Equity

Trauma Buy/Sell Strategy

 

Sole Proprietors and Families:

Sole Proprietors and Families

Overview

Family Ownership

Sale Strategies

Third Party Buy/Sell Strategies

Estate Equalisation Strategies

Family Buy/Sell Strategies

Second Generation Strategies

Debt Reduction Strategies

 

 

Tax Disadvantages of Super Fund Ownership

 

This page focuses on the tax implications and disadvantages with respect to Super Fund Ownership of Insurance Cover.

Overview of Super Fund Ownership

Click here for an overview with respect to Super Fund Ownership.

Cost Issues

Click here for an analysis of some of the cost implications and disadvantages with respect to Super Fund Ownership of Insurance Cover.

Other Issues

Click here for an analysis of some of the commercial, personal, family and other implications and disadvantages with respect to Super Fund Ownership of Insurance Cover.

 

Personal Cover Held Outside a Superannuation Fund

Personal Cover held outside the Superannuation environment will be:

  • non-assessable; and

  • immediately available to the intended Recipients.

 

Income Tax Liability of Super Fund Cover (Post-1 July, 2007)

Unlike Personal Cover owned outside the Super environment , some of the Cover held in the Super environment will be assessable, if:

  • the Life Insured is disabled before attaining the age of 60; or

  • the Death Benefit is paid to a Non-Dependant.

Click here to see the ATO's overview of the tax treatment of Lump Sum Benefits from a Taxed Super Fund.

Medicare Levy

The Medicare Levy of 1.5% would be payable in addition to the underlying income tax liability.

The Levy has been taken into account in this summary.

This liability would also affect the cost of the "gross-up" strategy discussed below.

Tax Rates

The Tax Legislation divides the Benefit into a "tax-free" component and a "taxable" component.

Only the taxable component is subject to tax at any rate.

The Tax Legislation then charges tax on the taxable component at a rate of tax that depends on whether the element is "taxed" or "untaxed" in the Super Fund.

The tax rate applicable to untaxed elements can be significantly higher than the rate applicable to taxed elements.

However, in reality, the distinction is most relevant to Death Benefits paid to Non-Dependants.

On the other hand, TPD Benefits are taxed in more situations than Death Benefits.

In general, the tax rate applicable to TPD Benefits is dependent on the age of the Life Insured.

 

Death Benefits Paid to Non-Dependants (Untaxed Element)

Under section 307-275 of the 1997 Act, all of the taxable component is treated as a taxed element, unless another section deems otherwise.

The main example of an untaxed element is a payment from a Super Fund that is a public sector superannuation scheme: section 307-295.

This section will not normally apply to Business Proprietors.

However, section 307-290 deems part of the the taxable component of Death Benefits to be untaxed, if the Super Fund has claimed a deduction for the Premium.

This approach is only relevant if the Benefit is:

  • a Death Benefit; and

  • paid to a Non-Dependant.

The future service component of the Death Benefit is treated as untaxed and is subject to a tax rate of 31.5%.

The past service component of the Death Benefit is treated as taxed and is subject to a tax rate of 16.5%.

Under this approach:

  • the younger the Life Insured, the greater the amount that is taxed at the rate of 31.5%; and

  • the older the Life Insured, the greater the amount that is taxed at the rate of 16.5%.

If the Life Insured is married and has young children, the likelihood that the Death Benefit will be paid to a Non-Dependant is relatively low.

As the Life Insured gets older, the likelihood that they might be divorced or their children might no longer be dependent increases.

However, at the same time, more of the Death Benefit would be taxed at the lower rate of 16.5%.

The tax liability of the Death Benefit would not apply if the Cover was held outside Super.

Thus, Members need to consider whether the benefit of tax deductibility of the Premium is outweighed by the risk of assessability of the Benefit.

 

TPD Benefits (Tax-free and Taxable Components)

TPD Benefits are treated differently to Death Benefits.

In the case of most Business Proprietors, the TPD Benefit will be treated as taxed.

As a result, the tax rates will depend primarily on the age of the Life Insured.

In the case of TPD Benefits, the tax-free component is attributable to the period the Member could have been expected to be gainfully employed (i.e., up to their date of retirement).

As the Member gets older, the number of days to retirement reduces and the tax-free component gets smaller.

In a sense, the tax-free component is largest when the Member is young (and the Premiums are lowest), while the tax-free component is lowest when the Member is older (and the Premiums are highest).

Thus, as the Member gets older, the taxable amount increases.

At the same time, the statistical likelihood that the Member will die or become disabled increases with age.

Thus, as the Member gets older and the taxable amount increases, the statistical likelihood of a claim (and therefore a tax liability) increases.

Members should therefore regularly review whether their Cover should be held outside Super.

One implication of a change of strategy is that, while the Premium might therefore be non-deductible, all of the Member's Contributions could be used for the accumulation strategy within the Super Fund.

They would still need to fund the Premium outside Super.

However, this strategy can be combined with Geared Premium Funding to minimise any negative cash flow implications (see below).

 

Taxation of Death Benefit

Payment to Dependant

A Death Benefit is not taxable if it is paid to a Dependant (i.e., the tax rate is nil).

Payment to Non-Dependant (Taxed Element)

In contrast, the taxable component of a Death Benefit could be subject to income tax at a rate of 16.5% if it is distributed to a Non-Dependant.

Payment to Non-Dependant (Untaxed Element)

The tax rate is higher if the Benefit is an un-taxed component under section 307-290 (i.e., if the Super Fund has claimed a deduction for the Premium).

In this case, the rate would be 31.5%.

In each case, the tax liability would reduce the Net Proceeds available for distribution to your Beneficiaries.

ATO Overview

Click here to see the ATO's overview of the tax treatment of Lump Sum Death Benefits paid from a Taxed Super Fund.

When Might There Be Payments to Non-Dependants?

One situation where there is a risk that the Member will have no Dependants is where their children are no longer Dependants and their Spouse predeceases the Member.

If the Spouse's death did not result from an accident in which the Member was also injured, normally the Member would have time to adjust the ownership of their Cover.

However, in the case of an accident in which both people died as a result of the same accident, then a tax liability would arise, unless all of the Beneficiaries were Dependant children.

Fortunately, this situation will not arise frequently.

However, it is important that the Member's Estate Planning Strategy be taken into account in determining whether it is appropriate to hold some or all of the Life Cover in the Superannuation environment.

There might be situations in which it is desirable to pay Insurance Proceeds to Non-Dependants in order to achieve the goals of the Member, even if their Spouse is still alive.

This might occur if:

  • the Member wishes to pay a cash benefit to a child or friend who is not a Dependant;

  • the Member wishes to repay a debt owing with respect to an asset of the Estate (such as a home, a farm or a Business) which the Member wishes to gift to a Non-Dependant child; or

  • the Member wishes to use Insurance to help achieve an Estate Equalisation Strategy (e.g., where one child is to inherit a farm or Business, while the other children are to receive Insurance Proceeds of an equivalent value).

In these cases, the Life Insured should consider the merits of holding the Cover outside the Super environment (or grossing-up the Sum Insured to allow for the tax liability).

 

Taxation of TPD Benefit

Taxed Element (Under 55)

If you are under 55, the taxable component of a TPD Benefit will be subject to income tax at the rate of 21.5%.

Taxed Element (Between 55 and 60)

If you are between 55 and 60, the rate applicable to the taxable component is 16.5%.

Un-taxed Element (Under 55)

The tax rate is higher if the Benefit is an un-taxed element:

  • 31.5% up to the untaxed plan cap of $1 million; and

  • 46.5% above the untaxed plan cap of $1 million.

However, it appears that these tax rates will rarely apply to Business Proprietors.

Un-taxed Element (Between 55 and 60)

The tax rate is higher if the Benefit is an un-taxed component:

  • 16.5% up to the low cap of $140,000;

  • 31.5% from the low cap up to the untaxed plan cap of $1 million; and

  • 46.5% above the untaxed plan cap of $1 million.

Again, it appears that these tax rates will rarely apply to Business Proprietors.

N.B. In both cases, part of the TPD Benefit might be tax-free under section 307-145 of the Simplified Superannuation Legislation. The tax-free amount will reduce over time.

ATO Overview

Click here to see the ATO's overview of the tax treatment of Disability Lump Sum Benefits paid from a Taxed Super Fund.

Click here to see the ATO Employment Termination Payment Calculator.

 

ATO Employment Termination Payment Calculator

Click here to see the ATO Employment Termination Payment Calculator.

 

Grossing-Up the Sum Insured and the Premium

Click here to read about the cost of "grossing-up" the Sum Insured and the premium to allow for the tax liability.

 

Other Disadvantages

Cost Issues

Click here for an analysis of some of the cost implications and disadvantages with respect to Super Fund Ownership of Insurance Cover.

Other Issues

Click here for an analysis of some of the commercial, personal, family and other implications and disadvantages with respect to Super Fund Ownership of Insurance Cover.

 

The "Geared Premium Funding" Alternative

Please see here for an alternative cash flow strategy ("Geared Premium Funding"), which is designed to overcome most (if not all) of the disadvantages of Super Fund Ownership (in particular, the potential taxation of the Insurance Proceeds in the hands of the Super Fund or the Beneficiaries).

 

Copyright: Ian Gray Solicitor

 

 

Adviser Tip

A Volume Discount on 100% of the total Sum Insured held by the Insurance Trust might be worth more than a tax deduction for 50% of the Sum Insured, even though none of the Cover held by the Insurance Trust might be held in the superannuation environment.

.

See more Adviser Tips

 

 

 

Current Marketing Schedule

Current Marketing Schedule

 

Ian Gray travels to most capital cities regularly throughout the year and is available for Meetings.

Please click here to see his availability in Brisbane, Sydney, Melbourne, Adelaide and Perth.

Please contact us to arrange an appointment or teleconference.