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Overcharged insurance premiums

When a super fund receives compensation from an insurer for overcharged premiums.

Last updated 18 July 2019

Where a super fund has a right to seek compensation against an insurer, the insurer may pay the super fund compensation (in satisfaction of that right) that reflects any of the following:

  • a refund of incorrectly charged premiums
  • an amount corresponding to a loss of investment earnings arising from the incorrectly charged premiums
  • interest.

In these circumstances, the following income tax, GST and superannuation consequences apply.

Income tax

Refund of insurance premiums

An amount of a death or disability insurance premium that is refunded to a super fund, where the super fund was allowed a deduction in respect of the original premium, will be assessable income of the fund for the year in which the refund is received.

Compensation for loss of earnings or interest

Compensation for earnings and interest will normally be assessable income to the super fund. However, if a compensation amount received by a super fund for loss of earnings or interest is part of the capital proceeds received in relation to a CGT event involving a CGT asset of the fund (including a right to seek compensation), the amount received will reduce the cost base of any underlying investment. If the investment has been disposed of, the amount is considered to be additional capital proceeds in relation to any relevant CGT event.

If the trustee determines that the amount cannot be attributed to any particular asset(s) of the fund, the compensation amount will be capital proceeds for the ending of the right to seek compensation. The super fund may be eligible to apply the CGT discount if the asset has been held for 12 months or longer.

GST

Refund of insurance premiums

The GST treatment of any refund of premiums will depend on the GST treatment of the original insurance. Typically it will be a partial refund of premiums for a group policy that covers multiple fund members.

If the refund relates to an insurance policy that was input-taxed, such as life, total and permanent disability (TPD) or a policy covering life, TPD and income protection issued by a life insurance business, then there will be no GST implications on refund of the premiums.

If the refund relates to a taxable insurance policy, such as income protection (which was not issued as part of a life insurance business), then the super fund will need to make an increasing adjustment and repay reduced GST credits previously claimed in relation to the refunded premiums. The adjustment will need to be reflected in the BAS that covers the period in which the super fund becomes aware of the adjustment (likely to be the period in which the refund is received).

Compensation for loss of earnings or interest

If a compensation amount received by a super fund includes a component of interest, or compensation for loss of earnings, this component will not be subject to GST. This is because such a payment is not consideration for a supply.

Super contributions

The compensation amount received will not be a super contribution for the benefit of a member of the super fund if the trustee of the super fund allocates an amount to the member's super interest in respect of the compensation. This is because the compensation amount does not result in the capital of the super fund being increased – the right to compensation has been satisfied by the compensation amount.

Example: Refund of insurance premiums

HIJ Super Fund has a group insurance policy with KLM Insurance to provide income protection cover for its members, including those who opt to have additional insurance cover.

HIJ Super Fund claimed a deduction for the insurance premiums paid to the insurance provider, and also claimed reduced GST credits (as the supply of the insurance policy was a taxable supply to HIJ Super Fund).

HIJ Super Fund reviewed their members' super interests and determined that ten members, whose premiums had been paid, were not entitled to be covered under the insurance policy due to a pre-existing condition that was excluded under the policy. Nine of those members commenced the insurance cover on joining the fund in 2017 or earlier. One member commenced the insurance cover on joining the fund in late 2018.

In early 2019, HIJ Super Fund enters into a settlement with KLM Insurance to refund the premiums for the members who were not entitled to be covered ($12,000) and pay compensation for lost earnings and interest ($4,000).

HIJ Super Fund allocates amounts to the affected members' super interests in respect of the compensation payments.

No amount of the $16,000 is a super contribution.

HIJ Super Fund includes the $12,000 refund of premiums as assessable income in its income tax return for the income year it receives the refund. It also includes the $4,000 compensation for loss of earnings and interest as capital proceeds received on the ending of its right to seek compensation.

As the right to seek compensation in relation to nine of the members arose in 2017 or earlier, and ended with payment of compensation in early 2019, the relevant asset was held for longer than 12 months in those cases. Accordingly HIJ Super Fund can apply the CGT discount to a capital gain resulting from the capital proceeds which are referrable to the ending of its right to seek compensation in relation to those nine members.

The right to compensation in relation to the tenth member is not an asset that has been held for 12 months. Accordingly, HIJ Super Fund cannot apply the CGT discount to a capital gain resulting from capital proceeds that are referrable to the ending of its right to seek compensation in relation to the tenth member.

The fund will also need to make an adjustment and repay reduced GST credits previously claimed with respect to the insurance policy. The $4,000 component representing lost earnings and interest is not consideration for a taxable supply made by HIJ Super Fund.

End of example

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