"Own Occupation" TPD in super

Note: this is a technical article regarding a form of Total and Permanent Disablement inside super that was written and produced by Zurich Financial Services Australia.  

Should “own occupation” Total and Permanent Disability (TPD) insurance be recommended through superannuation? There are some issues you should consider.

The first issue is that a member who suffers a TPD under an “own occupation” definition may not be able to access benefits from super immediately. The reason for this is that the "own occupation" definition does not automatically match with the Superannuation Industry (Supervision) Act 1993 (SIS) definition of permanent incapacity. Essentially, this means that when an insurer pays a super fund under an “own occupation” definition, unless the narrower SIS definition (“any occupation”) is also satisfied, the money may be preserved in the member's account. In this situation, the member can only access the benefits when he/she meets a future condition of release (e.g. reaching preservation age and declaring permanent retirement).

Another issue to consider is the deductibility of the premiums in super. For a number of years the industry has been debating whether TPD premiums for both “any occupation” and “own occupation” definitions are deductible to the trustee of a super fund. The industry’s practice has generally involved treating a premium for a TPD policy as fully deductible regardless of the TPD definition. Under the Better Super changes, the rules dealing with deductibility of TPD insurance premiums paid by superannuation funds were rewritten and transferred from the Income Tax Assessment Act 1936 (ITAA36) to the Income Tax Assessment Act 1997 (ITAA97). 

Since then, there has been much confusion in the industry as to whether the new rules: 

- were simply a re-write of the old rules and, therefore, based on the industry’s general view, super funds could continue to claim a deduction for the total cost of the TPD premiums, or

- meant that only the portion of the TPD premium attributable to liabilities to provide permanent incapacity benefits in the ITAA97’s “any occupation” definition would be deductible.

This was clarified on 13 October 2009 when the Government announced that TPD insurance premiums are deductible only to the extent the policies have the necessary connection to the liability of a fund to provide “any occupation” benefits.

To minimise the disruption to the superannuation industry and to provide superannuation funds with time to make any necessary changes to their insurance policies and processes, the Government announced that it will amend the tax law for the period starting 1 July 2004 and ending 30 June 2011. For the transitional period the proposed law aligns with current general practice. From 1 July 2011, TPD insurance premiums will be deductible to a super fund only to the extent the policies are attributable to liabilities of the fund to provide “any occupation” permanent incapacity benefits.

This may mean that the cost of “own occupation” TPD premiums in super will significantly increase. When recommending “own occupation” TPD to be held in super advisers must not only be aware of the preservation issues but also realise that the tax-inclusive costs are likely to rise.

(Zurich Financial Services Australia - 18th December 2009)