There are several circumstances where the total and permanent disability insurance will be subjected to the Fringe Benefit Tax (FBT). The TPD insurance FBT normally applies when the employer purchases group TPD insurance outside the superannuation fund. In such a case, the employer can claim the cost of the insurance cover as a tax deduction, but if the employees have absolute entitlement to the TPD benefits, then the employer will have to pay FBT. The employer will also have reporting obligations on the FBT paid.
TPD Within Super
An employer can decide to make contributions to the superannuation fund on behalf of the employees. If these contributions go towards paying for TPD insurance premiums, then the contribution made by the employer will be tax deductible and will not be subjected to TPD insurance FBT. A maximum amount of contribution is allowed for you as the employee per year, and if the maximum contribution is exceeded, you will have to pay tax for the extra contributions made on your behalf by the employer.
The superannuation fund is allowed to claim a tax deduction for any amount paid for TPD premiums and the benefits that they get from this claim can be passed to the members.
TPD Outside Super
If your employer decides to take out a TPD group insurance policy for employees outside the superannuation fund and this policy is owned by the employer, then the policy will not be subjected to TPD insurance FBT. This is because the employees in this case do not have any rights under this policy, and any claims made are by the employer, so the benefits will be paid out to the employee as per the employer's directive. If on the other hand the employee has an absolute entitlement to the benefits, the TPD cover will be subjected to FBT.
Individually Owned TPD
If as an employee you decide to take out a TPD insurance policy outside the superannuation fund, you can request your employer to pay the premiums for this policy from your pre-tax salary. In this case, your employer may be allowed to claim the premiums paid towards this policy and any FBT that the policy has been subjected to as a tax deduction. Usually, your employer will deduct the cost of this policy from your salary.
There may be cases in which your employer pays premiums on your behalf, not as an employee benefit, but as a shareholder directive or under other circumstances. Whether this policy will be subjected to FBT has to be analyzed by a financial expert. This is because the payment may be considered a loan repayment or dividend as opposed to a staff benefit and may therefore be treated differently.
In case you have taken out a TPD insurance policy on your own behalf and you are paying for the premiums individually without a contribution from your employer, your premiums will not be subjected to TPD insurance FBT.
TPD insurance FBT is viewed as a tax deduction and employers are allowed to claim the deduction. However, when FBT is involved, the employer ends up paying almost double the amount of premiums that he or she normally pays for employees.
Kerrie Peacock is a personal insurance researcher who is dedicated to providing accurate information on insurance matters in Australia. Visit www.mecovered.com.au/tpd-insurance-fbt for more information on personal insurance.