Claiming a tax deduction for life insurance in super

The fine print on getting a tax deduction for life insurance in super

Anyone who is eligible to make contributions to superannuation now has the opportunity to claim a tax deduction for that contribution, regardless of their employment situation.

Previously, only the self-employed or those earning little or no income as an employee could make tax deductible contributions.

This important change, which came into effect on 1 July 2017, is designed to give individuals greater flexibility so more people can use their concessional contributions cap. It is particularly important in situations where employers place restrictions on a worker’s ability to salary sacrifice into superannuation.

The tax deduction is limited to $25,000 in 2017-2018, minus any amounts that have been contributed by your employer (normally 9.5%) and any salary sacrifice amounts.
Case Study: Barney, age 55
Barney is an employee of XYZ Pty Ltd. His salary is $100,000 per annum and his employer contributes 9.5% to his superannuation ($9,500).
This means that Barney can make up to $15,500 in concessional contributions into superannuation and claim a tax deduction ($25,000 - $9,500).
Barney holds his death cover and TPD via his superannuation fund and pays premiums of $5,000 per annum. Barney claims the $5,000 concessional contribution to the superannuation fund to pay for the premiums as a tax deduction.
This leaves a remaining concessional contribution cap of $10,500 ($15,500 - $5,000).  
Barney must complete a “Notice of intent to claim a deduction form” (often referred to as s290-170 form) and send it to the trustee of the superannuation fund. He must then receive acknowledgement from the superannuation fund in writing.  This must be completed prior to Barney submitting his tax return. 
Any concessional contributions would be tax deductible on Barney’s marginal rate of tax.

Who is eligible?

Many people are eligible but not everyone. The rules that restrict who can receive a tax deduction are listed below.
  1. Age restrictions
  1. Individuals under 18 years at 30 June 2017 may only claim a deduction for personal super contributions if they earned income either as an employee or a business operator.
  2. Individuals aged 65–74 at 30 June 2017 need to satisfy a work test in the financial year they make a contribution to a superannuation fund and claim a deduction. They must work at least 40 hours during a consecutive 30-day period in the financial year they want to claim a deduction for a personal super contribution.
  3. Individuals aged 75 or older may only claim a deduction for contributions made on or before the 28th day of the month following the month in which they turned 75.
  1. Concessional contributions cap
Individuals who claim superannuation contributions as a tax deduction will have those contributions counted towards their concessional contributions cap.  Once the concessional cap is exceeded, individuals will have to pay extra tax. Any excess concessional contributions will count towards their non-concessional contributions cap.
  1. Eligibility rules
Deductions are permitted where individuals make contributions to a complying super fund or retirement savings account. Ineligible funds include:  
  • Defined benefit (DB) Commonwealth public sector superannuation schemes
  • Constitutionally protected funds (CPF) or other untaxed funds that do not include contributions in its assessable income
  • Super funds that notified the ATO before the start of the income year that they elected to treat all member contributions to the super fund as non-deductible or the DB interest within the fund as non-deductible
  1. Fund Membership
It should be noted that a ‘Notice of intent to claim a deduction form’ is only valid if an individual is still a member of the superannuation fund, the fund still holds the contribution and the fund has not started paying a super income stream using any of the contribution.
Where an individual provides a Notice of intent to claim a deduction form after they have rolled over their entire super interest to another fund (closed their account) or withdrawn their entire super interest (paid it out of super as a lump sum), then the notice will not be valid. As such, the individual will not be able to claim a deduction for the personal contributions they made prior to the rollover or withdrawal.
Where an individual has partially rolled over or withdrawn their super interest (including the contribution), the notice will not be valid for the entire contribution.  The individual may only validly deduct the proportion of their contribution that remains in the fund.
For life insurance-only super funds such as ClearView LifeSolutions Super, it is unlikely that any of the contribution will be rolled to another fund as it is applied directly to pay for insurance premiums.

Jeffrey Scott is Head of Product at ClearView.