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Insurance in super

Taxation of insurance benefits

Section: 13.5

Taxation of insurance proceeds received by trustees

Exemptions apply to ensure that insurance proceeds for cover held on a member's behalf through super are not assessable income, or an assessable capital gain of, a super fund trustee who receives them.

Life insurance, TPD insurance and trauma insurance held on a member's behalf through super are all capital in nature and proceeds are therefore not ordinary assessable income. In addition, any capital gain that would apply where these proceeds are paid to a fund trustee is ignored.

Income protection insurance held on a member's behalf through super is not assessable income, and the fund trustee cannot claim a tax deduction for proceeds paid on to a member.

Tax components and insurance proceeds

Where life insurance, TPD insurance or trauma insurance proceeds are received by a trustee in respect of a member, the tax components that the proceeds take are determined by the superannuation interest into which they are paid and the type of insurance held.

If paid into an accumulation account (in a taxed super fund), these proceeds will initially be allocated to the taxable component (taxed element). If TPD or trauma proceeds are paid into a member's existing pension instead, they will be allocated according to the existing proportions of the pension interest.

Where life insurance proceeds are paid into a deceased pensioner's account, proceeds will be allocated according to the existing proportions of the pension interest if the existing pension automatically reverts to a dependant. Where the deceased instead has an existing pension that is not automatically reversionary, life insurance proceeds will form part of the taxable component.

Importantly, these tax components may be modified where a lump sum death or disability benefit is paid or rolled.

Income protection insurance proceeds do not generally form part of a member's balance and are not allocated to one or more tax components. When paid out to a member under the temporary incapacity condition of release, income protection proceeds are not considered a superannuation benefit.

Taxation of insurance proceeds paid from super

For specific taxation rates on insurance benefits paid from super, see the following sections:

  • 1.9 - Taxation of life benefit termination payments
  • 1.12 - Death benefit termination payments

Last modified: Tuesday, May 2, 2017