Understanding The FBT Implications of Your TPD Policy
TPD (total and permanent disability) insurance is a policy that provides a lump sum amount to the insured in case of total permanent disability that prevents the insured from ever working again.
Essentially, this is a form of life insurance for the living and can be used to clear your debts, mortgage and family expenses as well as pay for the structural modifications needed in your home.
There are several options for obtaining your TPD insurance in Australia and it is important to understand the TPD insurance FBT (fringe benefits tax) implications of each option.
What is fringe benefits tax?
Fringe benefits tax (FBT) is a tax on employers that provide benefits to their employees apart from their wages or salaries. Typically, fringe benefits include employee perks such as company cars, car parking, meals and entertainment, computers, mobile phones and even cheap loans. If an employee receives a benefit that is obviously personal, it is probably a fringe benefit. The employer has the responsibility to pay FBT at the top marginal income rage of 46.5 percent. Once the employer pays FBT, the amount incurred may be deducted from an employee’s salary in certain cases.
FBT could be applied when an employee obtains TPD insurance though the employer. This is usually when the employee owns a TPD insurance policy but the premiums are paid by the employer. The premiums will be subject to FBT, but the employer has the option of reducing the employee’s salary by the amount of FBT paid.
You can also obtain a TPD insurance policy through a complying superannuation fund owned by your employer. The contributions made are considered to be employer contributions under an effective salary sacrifice arrangement. In a salary sacrifice arrangement, you forego a portion of your salary in return for the employer making this contribution. Essentially, you would be making pre-tax premium contributions for your TPD policy. In such a case, the TPD premiums would not be considered fringe benefits and would therefore not be subject to FBT. Note that FBT is not payable on TPD premiums paid by your employer if you (the employee) are not party to the insurance contract.
You could also get TPD insurance through a group fund that is not a superannuation fund. FBT would not be payable on premiums in this case either. However, contributions paid to a non-complying superannuation fund are considered fringe benefits and are subject to FBT. Read: How to get out of a car loan?
When deciding how to obtain your TPD insurance, it is important to consider all the pros and cons of each available option more information here. For instance, if you intend to get your policy through superannuation for the tax benefits, you should also consider the requirements provided for receiving your benefits in case you become disabled. This can be especially difficult in an own occupation TPD policy because you would have to meet the disability definition of your insurer as well as that of the superannuation. Ideally, you should speak to your financial advisor before you take out your TPD policy.