Tax effectiveness income protection insurance inside/outside Super

Looking at the difference between having income protection insurance held within Super vs outside of Super.

Assumptions
Premium cost $1,000 per year
Assessable income $100,000 thus marginal tax rate 37%
No other Personal contribution into Super (i.e. within limits)

Within Super
Personal contribution of $1,176 into Super less 15% contribution tax resulting in $1,000 [1,176 x (1-15%]
Use Super to pay premium $1,000
Submit Notice of intent to claim a deduction for $1,176
Tax rebate $435 [1,176 x 37%]
Effective cost of insurance $741 [1,176 - 435]

Outside of Super
Pay premium with after tax $1000 and claim premium as tax deductible expense.
Tax rebate $370 [1,000 x 37%]
Effective cost of insurance $630 [1,000 - 370]

Is my thinking correct? Understand all comments provided is general and advice.

 

I think you need to check what level of cover is provided - start with waiting period and period of cover - and you may find it difficult to make a valid comparison because the cover outside of super may be better & more expensive.

Apart from that issue:
- the cover in super - you only need to contribute $1000 in as the fund can claim the $1000 deduction - net super tax is Nil. Personal cost should be $630 ($1000-370 tax reduction).

 

Agree but for this exercise, assume insurance policy is identical in both cases

From this <Link> on the ATO website,

The effects of claiming a deduction

Personal super contributions you claim as a tax deduction are included in your fund's assessable income and are taxed at the rate of 15%. Your fund will withhold this amount from your super account.

My understanding of that is if you claim the deduction a 15% contribution tax applies. Have I misunderstood the way it works?

 

I think you are doing the calcs correct.

But can the superfund claim a deduction for the premium? I am not sure but don't think so.
And what are the tax consequences of payment of the benefit?
And how do get access if the insurance is paid to the fund if you have not met a condition of release?

 

Thanks Terry.

It's a TAL product I'm considering after discussing with a Financial Planner. I'm struggling to understand why they suggest to have the income protection inside super and claim it is the same tax effectiveness. I've asked questions but just not getting their explanation and feeling a little silly.

Deduction is claimed using the Notice of intent to claim or vary a deduction for personal super contributions <Link>.

As always, you have great questions. From the PDS, Income Protection benefits will be taxed similar to normal income i.e. at marginal tax rate + medicare. I'm not sure about the details of releasing funds, but it is a Super fund setup by TAL specifically for insurance purposes. Policy holders maintain their usual Super fund for investment use.

I have noticed there are some limitations when having the IP policy within Super. If on an Agreed Value, release is limited to average monthly earnings in the 12 month period immediately prior to the start of the waiting period. There is also no benefits for unemployment period immediately prior to Total Disability or Partial Disability.

 

Are they licenced to give tax advice?

 

i think this is for you making a contribution to super, not the superfund claim the premium as a deduction. Same as salary sacrifice.

 

No they aren't. Technically they haven't advised which is the most tax efficient way. But I'm assuming it'd be expensive to get tax advice just for this. Is it usual to request such small pieces of advice as I feel the admin overhead for the adviser would make it not worthwhile providing.

 

I don't think the TAL superfund claims it as a deduction, they just pay it. The policy holder contributing to the TAL super, claims that contribution as a deduction so it has the same effect. How it works is there's an automatic transfer to the value of the premium, from the policy holders usual super fund (e.g. Unisuper) to the TAL super. TAL super then pays the IP insurance. So policy holder contributing to the usual super fund, can claim that as a deduction.

 

You could pay it yourself outside of super and also make another contribution into super and claim a deduction for that. You would get 2 deductions for this way instead of one.

 

Haha Terry! If only the aim of life was solely to not pay any tax. That way we'd just have a whole lot of loss making IPs and never take pay raises as it means paying more tax.

 

All discussion of insurance and income protection requires a AFSL - Its licensed financial advice.
PC is not an appropriate place for general information or personal financial advice. The financial planner is the best person to advise.

All insurance premiums paid by a member in a fund is a FUND tax deduction and not eligible for personal deductions. And subject to conditions of release. A member cant claim income protection inside super and outside super and double dip.

 

I think you missed the point of my message/

 

The tax aspects don't need an AFSL though and it seems the planner being used cannot advise on the tax aspects.

 

Financial planners should be registered with the TPB to give limited financial tax advice. And the insurer may give general advice specific to the product. However not specific to the members tax affairs

 

Sorry Terry, maybe I misunderstand how it works. Paying the premium directly will cover the premium and be tax deductible. A contribution can also be deductible, but the premium is already been paid so it's just an extra contribution into super which could be done with/without the insurance.