House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 3 - Disability superannuation benefits

Outline of chapter

3.1 Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to allow the percentage of insurance costs for certain total and permanent disability (TPD) policies that can be claimed as deductions to be specified in regulations. These changes will apply from the 2011-12 income year.

3.2 This Schedule and Clause 4 of this Bill also extend the current transitional relief for the deductibility of TPD insurance premiums to funds that self insure their liability to provide disability benefits. This transitional relief will apply to the income years 2004-05 to 2010-11.

3.3 These amendments will streamline the operation of the law for superannuation funds and insurance providers.

3.4 All legislative references in this chapter are to the ITAA 1997 unless otherwise stated.

Context of amendments

Background to the issue

3.5 With the Better Super changes in 2007, the provisions allowing deductibility of TPD insurance costs incurred by superannuation funds were rewritten and transferred from the Income Tax Assessment Act 1936 (ITAA 1936) to the ITAA 1997, with effect for the 2007-08 and later income years.

3.6 The ITAA 1997 allows superannuation funds to deduct TPD insurance premiums to the extent the policies have a connection to a liability of the fund to provide disability superannuation benefits. In broad terms, the definition of a 'disability superannuation benefit' requires medical certification that an individual is incapable of being gainfully employed in any occupation for which they are reasonably qualified by way of education, experience or training. This definition can be contrasted with more generous forms of TPD insurance - for example, those which pay a benefit in the event an individual is unable to perform their own occupation, despite being capable of working in an alternative occupation.

3.7 However, the operation of the ITAA 1997 did not accord with industry practice under the ITAA 1936, which was to fully deduct the cost of all policies insuring against some form of permanent disability. This practice continued after the Better Super rewrite.

The transitional relief

3.8 Transitional provisions were enacted in 2010 with a view to allowing lead time for industry practice to be brought into alignment with the ITAA 1997. Specifically, the Superannuation Legislation Amendment Act 2010 amended the tax law to provide transitional relief to complying superannuation funds for deductibility of premiums for TPD insurance policies for the income years 2004-05 to 2010-11.

3.9 Under this transitional relief, superannuation funds can claim tax deductions for a broader range of TPD insurance premiums than would otherwise be allowed for the relevant income years.

3.10 Industry has raised concerns regarding its ability to comply with the relevant provisions of the ITAA 1997 when the transitional arrangements expire on 30 June 2011. Industry's concerns include that actuarial certification required to estimate the deductible portion of certain premiums and self-insurance arrangements may not be obtainable due to a lack of information.

Summary of new law

3.11 These amendments will allow the regulations to prescribe the percentage of premiums for certain TPD insurance policies that can be claimed as deductions.

3.12 Provisions are also enacted and inserted into the Income Tax (Transitional Provisions) Act 1997 (IT(TP) Act) to allow superannuation funds that self insure their liability to provide TPD benefits to their members to claim deductions in respect of a broader range of insurance policies for the income years 2004-05 to 2010-11.

Comparison of key features of new law and current law

Detailed explanation of new law

Proportioning deductibility of insurance costs

3.13 This Schedule provides that the percentage of premiums and costs of certain TPD insurance policies that can be claimed as deductions may be specified in regulations.

3.14 Section 295-465 of the ITAA 1997 allows superannuation funds to deduct the cost of insurance (including self insurance) which is attributable to a liability of the fund to provide benefits referred to in section 295-460. Section 295-460, inter alia , covers benefits which meet the definition of a 'disability superannuation benefit' in the ITAA 1997.

3.15 Item 6 in the table in subsection 295-465(1) allows a fund to claim a deduction for so much of an insurance premium as is attributable to a liability to provide benefits referred to in section 295-460. Partial deductibility can arise, for example, where the TPD definition contained in a particular policy is broader than the definition of 'disability superannuation benefit' in the ITAA 1997, or where it is the same but the insurance policy includes other (non-deductible) types of cover and the TPD component of the premium is not specified. Subsection 295-465(3) requires the fund to obtain an actuary's certificate in order to claim a deduction under item 6.

3.16 For the purpose of deducting amounts under item 6 in the table in subsection 295-465(1), new subsection 295-465(1B) provides that the regulations may specify the proportion of a premium for a specified insurance policy that may be treated as being attributable to the liability to provide benefits referred to in section 295-460. If an insurance policy held by a superannuation fund is of a type specified in the regulations, the fund may deduct the specified proportion of the premium. Where the fund claims a deduction in accordance with the regulations, an actuary's certificate will not be required. [Schedule 3, items 1 and 2, subsection 295-465(1B) and item 3, subsection 295-465(3A)]

3.17 A superannuation fund will retain the ability to deduct an amount under item 6 in the table in subsection 295-465(1) without recourse to the regulations. In that case, the requirement to obtain an actuary's certificate will continue to apply.

Example 3.2

Pandora Super Fund pays premiums to an insurance company for TPD insurance cover for its members. The definition of permanent disability contained in the insurance policy covers members for the inability to perform their own occupation. The own occupation definition of TPD specified in the policy is broader than the definition of 'disability superannuation benefit' in the ITAA 1997 - that is, it allows for a payout to be made in a broader range of circumstances. Pandora can only deduct the part of the insurance policy premium that relates to the liability to provide disability superannuation benefits.

For the purposes of this example, assume that own occupation TPD insurance is a type of policy specified in the regulations. Under these amendments Pandora can deduct the percentage of the premium it pays for own occupation insurance that is specified in the regulations. If Pandora claims a deduction in accordance with the regulations, there is no requirement for it to obtain an actuary's certificate.

3.18 New subsection 295-465(1A) clarifies the link between items 5 and 6 in the table in subsection 295-465(1). Specifically, it clarifies that a deduction can be claimed under item 6 for the remaining part of an insurance premium for which a partial deduction has been claimed under item 5 (because part of the premium is specified in the policy as being wholly for the liability to provide benefits referred to in section 295-460). For example, if part of an insurance premium is specified in the policy as being wholly for the liability to provide superannuation death benefits (which are referred to in section 295-460), and the rest of the premium does not wholly relate to section 295-460 benefits, the rest of the premium falls under item 6 in the table. In such circumstances, if some of the remaining part of the premium is attributable to the liability to provide benefits referred to in section 295-460, the fund can claim a deduction under item 6 in the table. The fund can determine the amount of the deduction with reference to the regulations or by obtaining an actuary's certificate. [Schedule 3, item 2, subsection 295-465(1A)]

3.19 Subsection 295-465(2) allows superannuation funds that self insure their liability to provide disability benefits to deduct the amount the fund could reasonably expect to pay in an arm's length transaction to obtain insurance to cover the liability to provide benefits referred to in section 295-460. An actuary's certificate must be obtained in order to claim a deduction under subsection 295-465(2).

3.20 These amendments allow self-insuring funds to determine the amount they can deduct under subsection 295-465(2) by using percentages specified in the regulations. For example, where an actuary has calculated the arm's length cost of an insurance policy which covers a broader class of benefits than is referred to in section 295-460, and the insurance policy is of a kind specified in the regulations, the fund can apply the percentage specified in the regulations in respect of the policy to calculate the amount it can deduct under subsection 295-465(2). This will avoid the need for the fund to obtain further actuarial certification. However, the amendments do not entirely remove the need for self-insuring funds to obtain an actuary's certificate under subsection 295-465(3) in order to claim a deduction. [Schedule 3, items 5 and 6, subsections 295-465(2A) and (2B)]

Example 3.3

Medusa Super Fund self insures its liability to provide TPD benefits to members in accordance with its trust deed. Medusa's trust deed uses the own occupation definition of permanent disability. This definition is broader than the meaning of 'disability superannuation benefit' contained in the ITAA 1997.

Medusa has engaged an actuary to determine the amount it could reasonably expect to pay in an arm's length transaction to obtain insurance to cover its liability to provide own occupation TPD benefits under its trust deed. However, Medusa cannot claim a deduction for this amount, as subsection 295-465(2) of the ITAA 1997 requires that the amount must relate to the fund's liability to provide disability superannuation benefits.

For the purposes of this example, assume that own occupation TPD insurance is a type of policy specified in the regulations. Under these amendments, Medusa can deduct a percentage of the amount the actuary has determined it could expect to pay in an arm's length transaction for own occupation insurance. The percentage is specified in the regulations.

Transitional relief for self-insuring funds

3.21 This Schedule and Clause 4 of this Bill provide transitional relief for deductibility of notional TPD insurance costs incurred by superannuation funds that self insure their liability to provide disability benefits. The transitional relief will provide these superannuation funds with greater scope to deduct the notional cost of insurance cover commonly regarded as TPD insurance for the income years 2004-05 to 2010-11.

3.22 Under section 295-466 of the IT(TP) Act the terms 'disability superannuation benefit' in the ITAA 1997, and 'death or disability benefits' in the ITAA 1936 have an expanded meaning for the period 2004-05 to 2010-11. Specifically, the meaning of these terms is broadened to cover a benefit that is conditional on the disability of the member, and the disability to which it relates is described as a permanent disability in regulations made for the purpose of section 295-466.

3.23 New section 295-467 is inserted into the IT(TP) Act to allow self-insuring funds to use the expanded meaning of the term 'disability superannuation benefit' in section 295-466 of the IT(TP) Act for the income years 2007-08 to 2010-11. [Schedule 3, item 11, section 295-467 of the IT(TP) Act]

3.24 Similarly, the stand alone provisions in this Schedule allow self-insuring funds to use the expanded meaning of the term 'death or disability benefits' for the income years 2004-05 to 2006-07. [Schedule 3, item 8]

3.25 The expanded meanings of 'disability superannuation benefit' and 'death or disability benefits' apply for the purposes of subsection 295-465(2) of the ITAA 1997 and subsection 279(2) of the ITAA 1936 which allow self-insuring superannuation funds to deduct the notional cost of TPD insurance. [Schedule 3, item 11, subsection 295-467(3) of the IT(TP) Act and subitem 8(3)]

Example 3.4

Zeus Super Fund self insures its liability to provide TPD benefits to members in accordance with its trust deed. Zeus's trust deed uses the own occupation definition of permanent disability. This definition is broader than the meaning of 'disability superannuation benefit' in the ITAA 1997.

Zeus has engaged an actuary to determine the amount it could reasonably expect to pay in an arm's length transaction to obtain insurance to cover its liability to provide own occupation TPD benefits under its trust deed. Zeus can claim a deduction for this entire amount for the income years 2004-05 to 2010-11. This is because the inability of a member to perform their own occupation is described as a 'permanent disability' under the regulations made for the purpose of section 295-466 of the IT(TP) Act.

Amendment of assessments

3.26 Section 170 of the ITAA 1936 limits the time period within which the Commissioner of Taxation can amend tax assessments to four years. By the time this extension of the transitional arrangements receives Royal Assent, the four-year time limit on amending assessments will have expired for certain years to which the amendments apply. Section 170 would therefore operate to prevent self-insuring superannuation funds, which have claimed a deduction for past years in accordance with the current law, from accessing the broader deduction allowed under the transitional provisions.

3.27 The effect of the amendments in this Schedule is that section 170 does not prevent the amendment of a tax assessment in a previous year, where the purpose of the amendment is to allow funds to take advantage of the extended transitional relief provided in this Bill and the amendment is made within two years of this Bill receiving Royal Assent. [Clause 4, Schedule 3, item 11, subsection 295-467(4) of the IT(TP) Act]

Minor amendments

3.28 The note in paragraph 295-460(b) of the ITAA 1997, alerting the reader to transitional provisions in the IT(TP) Act, is amended to reflect the extension of these provisions to self-insured funds. [Schedule 3, item 9, paragraph 295-460(b)]

3.29 A note is inserted at the end of section 295-466 of the IT(TP) Act alerting the reader to the fact that this provision will be repealed on 1 January 2017. [Schedule 3, item 10, section 295-466 of the IT(TP) Act]

Application

3.30 The extension of the transitional relief applies to a superannuation fund that is subject to current or contingent liabilities to provide disability benefits to its members in any of the income years 2004-05 to 2010-11. [Schedule 3, subitem 8(1 ), item 11, subsection 295-467(1)]

3.31 The transitional relief will benefit self-insured funds by providing them with greater scope to deduct the notional cost of insurance cover commonly regarded as TPD insurance for the relevant income years.

3.32 The amendments allowing superannuation funds to deduct the cost of specified insurance policies in accordance with the regulations apply to insurance policy premiums, or current or contingent liabilities, in respect of the 2011-12 and later income years. [Schedule 3, items 4 and 7]

Commencement

3.33 These amendments commence on Royal Assent. [Clause 2, items 1 to 3 in the table]

Repealing provision

3.34 The amendments to the IT(TP) Act will be repealed on 1 January 2017. [Clause 2, item 4 in the table, Schedule 3, item 12]