+ Total and Permanent Disablement Proceeds

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Many lawyers and accountants support the latest view in relation to total and permanent disability (TPD) insurance for a business "partner" (whether (i) a common law partner or (ii) a shareholder in a company or (iii) a unit holder in a trust), which is that such insurance to "fund" the "partner’s" equity payout should be held by the partner’s self managed super fund. We are referring to a situation where the TPD insurance policy for the "partner" is held by that partner’s self managed super fund. We are not referring to cross insurance here.

Section 295-465 of ITAA 1997 provides for the policy premiums for this insurance to be tax deductible to the superannuation fund. However, on its face, s118-37 would not seem to exempt from tax, the TPD proceeds in the hands of the trustee of the fund.

The ATO has said in the minutes of a meeting of the CGT subcommittee of the National Tax Liaison Group held 16 November 2005 that the exemption under s118-37 "can be available" to no-life proceeds received by the trustee of a superannuation fund. These comments are unsatisfactory and give rise to considerable uncertainty for practitioners advising their clients.

There should be some provision in the ITAA 1997 to make it clear that TPD proceeds are definitely tax free in the hands of the superannuation fund. We are assisting the Business Law Committee of the Law Society of NSW in agitating the Board of Taxation for this to change.

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