Explanatory Statement

Issued by the authority of the Minister for Financial Services and Superannuation

Income Tax Assessment Amendment Regulations 2011 (No. 5)

Subject - Income Tax Assessment Act 1997

Section 909-1 of the Income Tax Assessment Act 1997 (the Act) provides that the Governor-General may make regulations prescribing matters that the Act requires or permits to be prescribed or are necessary or convenient to be prescribed for carrying out or giving effect to the Act.

The Regulations amend the Income Tax Assessment Regulations 1997 to support recent amendments to the Act contained in the Tax Laws Amendment (2011 Measures No. 4) Act 2011, which received the Royal Assent on 27 June 2011.

These amendments streamline the process for claiming tax deductions for the cost of total and permanent disability (TPD) insurance provided through superannuation. In particular, the amendments allow the deductible proportion of TPD insurance premiums to be specified in regulations. This will assist superannuation funds by avoiding the need to engage an actuary to determine the deductible portion of premiums in many cases.

The Regulations prescribe the deductible percentages and associated insurance policy descriptions necessary to give effect to these amendments to the Act.

Details of the Regulations are set out in the Attachment .

The Act specifies no conditions that need to be met before the power to make the Regulations may be exercised.

The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.

The Regulations commence on the day after registration on the Federal Register of Legislative Instruments.

Consultation on the content of the Regulations occurred in June 2011 through the release of a discussion paper. Consultation on a draft of the Regulations occurred in August 2011.

Authority : Section 909-1 of Income Tax Assessment Act 1997

ATTACHMENT

Details of the Income Tax Assessment Amendment Regulations 2011 ( No . 5 )

Regulation 1 provides that the name of the Regulations is the Income Tax Assessment Amendment Regulations 2011 (No. 5).

Regulation 2 provides that the Regulations commence on the day after they are registered.

Regulation 3 provides that the Regulations amend the Income Tax Assessment Regulations 1997 (the ITAR).

Schedule 1 - Amendment

Item 1 - After Subdivision 295-F

Item 1 inserts into the ITAR a new Subdivision 295-G. This Subdivision contains new regulation 295-465.01 which specifies the deductible proportion of premiums for certain types of TPD insurance policies. Superannuation funds which hold the relevant insurance policies will have the option of claiming deductions in accordance with this regulation.

Section 295-465 of the Act 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 Act.

Superannuation funds may claim a full or a partial deduction for the cost of an insurance policy. In particular, item 6 of the table in subsection 295-465(1) of the Act 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. Subsection 295-465(1B) provides that the regulations may specify the proportion of a premium for a particular insurance policy that is deductible under item 6.

The table in new subregulation 295-465.01(1) sets out the deductible proportion of premiums for certain types of TPD insurance policies. The terms used in the table, including the descriptions of the various insurance policies, are defined in new subregulation 295-465.01(5).

New paragraph 295-465.01(1)(a) provides that, for the purposes of subsection 295-465(1B) of the Act, a proportion specified in the table in subregulation 295-465.01(1) in respect of an insurance policy may be taken as being attributable to a superannuation fund's liability to provide benefits referred to in section 295-460 of the Act.

Subsection 295-465(2) of the Act 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.

Subsection 295-465(2A) of the Act allows self-insuring funds the option of determining the amount they can deduct under subsection 295-465(2) by using percentages specified in the regulations.

New paragraph 295-465.01(1)(b) provides that, for the purposes of subsection 295-465 (2A) of the Act, a proportion specified in the table in subregulation 295-465.01(1) in respect of an insurance policy may be treated as being the amount the fund could reasonably be expected to pay in an arm's length transaction to obtain insurance to cover its liabilities to provide benefits referred to in section 295-460 of the Act.

New subregulations 295-465.01(2), (3) and (4) clarify the circumstances in which the deductible proportions in the table in subregulation 295-465.01(1) apply to TPD insurance policies held by superannuation funds.

Subregulation 295-465.01(2) provides that an amount will only be deductible in accordance with a percentage specified in the table in subregulation 295-465.01(1) in circumstances where the terms of the TPD policy held by the superannuation fund are either more restrictive than or have substantially the same meaning as the definition of the same type of policy in subregulation 295-465.01(5).

Subregulation 295-465.01(3) provides that additional conditions or criteria that a member is required to meet in relation to a TPD insurance policy that would otherwise be consistent with a definition in subregulation 295-465.01(5) can be disregarded for the purpose of applying the relevant deductible proportion specified in the table in subregulation 295-465.01(1).

Subregulation 295-465.01(4) provides that the inclusion in an insurance policy of a benefit payable to a member because the member has a terminal medical condition, will not affect the ability to use a deductible proportion specified in the table in subregulation 295-465.01(1).

Example 1

Apollo Super Fund has purchased 'TPD own occupation' insurance on behalf of its members. 'TPD own occupation' insurance is a type of insurance specified in the table in subregulation 295-465.01(1).

The terms of the 'TPD own occupation' insurance policy held by Apollo are as restrictive as the associated definition contained in subregulation 295-465.01(5).

Accordingly, Apollo is entitled to claim a deduction for the proportion of the premium it pays for 'TPD own occupation' insurance that is specified in the table in subregulation 295-465.01(1). This proportion is 67 per cent.

Example 2

Athena Super Fund holds 'TPD any occupation' insurance for its members. The policy that Athena holds includes provision for a payment to be made under the policy in the event a member of the fund:

•

is disabled to the extent that they cannot perform certain activities of daily living specified in the policy; or

•

loses the use of two limbs, the sight in both eyes, or a combination of loss of sight in an eye and the loss of use of a limb.

These additional features of Athena's insurance policy correspond to the 'activities of daily living' and the 'loss of limb' inclusions contained in the table in subregulation 295-465.01(1) and as defined in subregulation 295-465.01(5). The descriptions of these features in the insurance policy are as restrictive as the corresponding definitions contained in subregulation 295-465.01(5).

Accordingly, Athena can deduct the proportion of the premium it pays for 'TPD any occupation' insurance with inclusions that is specified in the table in subregulation 295-465.01(1). This proportion is 100 per cent.

Example 3

Poseidon Super Fund is a self-insuring fund. Poseidon's trust deed uses the 'own occupation' definition of permanent disability. The 'own occupation' definition of TPD specified in the trust deed is broader than the definition of 'disability superannuation benefit' in the Act.

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

The definition of 'TPD own occupation' benefits described in Poseidon's trust deed is as restrictive as the corresponding definition contained in subregulation 295-465.01(5). Accordingly, Poseidon can deduct the proportion specified in the table of the amount the actuary has determined it could expect to pay in an arm's length transaction for 'TPD own occupation' insurance. This proportion is 67 per cent.

Example 4

Orpheus Super Fund has purchased insurance that provides combined death and TPD cover for its members. The policy is bundled within the meaning of subregulation 295-465.01(5). The TPD cover provided under the policy corresponds to the definition of 'TPD own occupation' insurance in subregulation 295-465.01(5).

Accordingly, Orpheus is entitled to claim a deduction for the proportion of the combined death and TPD premium that is specified in the table in subregulation 295-465.01(1). This proportion is 80 per cent.

Example 5

Dionysus Super Fund has purchased insurance that provides combined death and TPD cover for its members. The insurance policy specifies that 40 per cent of the premium is attributable to death cover and 60 per cent is attributable to TPD cover. The TPD cover provided under the policy corresponds to the definition of 'TPD own occupation' insurance contained in subregulation 295-465.01(5).

Dionysus is entitled to claim a deduction for the part of the premium that relates to death cover under item 5 of the table in subsection 295-465(1) of the Act. This is because this part of the premium is specified in the policy as being wholly for the liability to provide benefits referred to in section 295-460 of the Act (which includes a 'superannuation death benefit').

Under subsection 295-465(1A) of the Act, a portion of the remainder of the premium may be deducted under item 6 of the table in subsection 295-465(1) of the Act. For this purpose, the fund may claim a deduction in accordance with the table in subregulation 295-465.01(1).

As the terms of the 'TPD own occupation' insurance policy held by Dionysus are as restrictive as the corresponding definition in subregulation 295-465.01(5), Dionysus can deduct the proportion specified in the table of the remainder of the premium which relates to TPD cover. This proportion is 67 per cent.

Example 6

Hera Super Fund holds disability insurance for its members. For members who are not in the workforce, the insurance policy that Hera holds allows for a payment to be made only in the event a member is disabled to the extent that they are unable to perform two or more 'activities of daily living' specified in the policy.

The definition of 'activities of daily living' in Hera's insurance policy corresponds to the 'activities of daily living' inclusion in the table in subregulation 295-465.01(1) and as defined in subregulation 295-465.01(5).

The conditions to which Hera's insurance policy for members not in the workforce are subject are more restrictive than those which relate to the insurance policy (TPD any occupation insurance with 'activities of daily living' and other inclusions) specified in Item 2 of the table in subregulation 295-465.01(1). This is because Hera's insurance policy allows for a payment to be made on the basis of inability to perform 'activities of daily living' but not on any other grounds.

Consequently, due to the operation of subregulation 295-465.01(2), Hera can claim a deduction for the proportion of the premium it pays for 'activities of daily living' insurance in accordance with the proportion specified in Item 2 of the table. This proportion is 100 per cent.

Example 7

Hyperion Super Fund holds disability insurance on behalf of its members. The particular policy that Hyperion holds provides insurance against a disability that:

•

is the result of the member suffering from one or more of the medical conditions specified in the insurance policy; and

•

is consistent with the disability described in the definition of 'TPD any occupation' in subregulation 295-465.01(5).

In order to be eligible for a benefit under Hyperion's insurance policy, a member is required to meet criteria in addition to those specified under the 'TPD any occupation' definition in subregulation 295-465.01(5) - namely, the member must also be suffering from one or more of the medical conditions specified in the policy. Under subregulation 295-465.01(3), these additional criteria may be disregarded in applying the proportions specified in the table in subregulation 295-465.01(1).

After disregarding these additional criteria, the insurance policy held by Hyperion corresponds to 'TPD any occupation' insurance as defined in subregulation 295-465.01(5). Accordingly, Hyperion can deduct the proportion of the insurance premium it pays that is specified in Item 1 of the table. This proportion is 100 per cent.