The capital gains tax (CGT) implications and taxation of group life and total and permanent disability (TPD) insurance policies held outside superannuation still require clarification ahead of the July 1, 2007, superannuation reforms, according to Centric Wealth’s technical research manager Anne-Marie Esler.
While the focus has been on the $1 million opportunity and the taxation treatment of death benefits to non-dependants, Esler believes the CGT implications have been overlooked.
She said that under the new laws, lump sum payments made on death of a self-managed superannuation fund member could result in CGT, with gains taxed using the original cost base of the asset.
“If purchased five, 10 or even 20 years ago, [this] could be quite significant. Together with the additional 16.5 per cent tax payable on the taxable component when paid to a non-dependant, it could make it a very tax-heavy death benefit,” Esler said.
She pointed out that when employers took out group life and TPD insurance policies external to superannuation funds, they were tax free up to the pension reasonable benefit limit (RBL) of $1,356,291.
However, with the abolition of RBLs under the new rules, they are now classified as employment termination payments and subject to the highest marginal tax rate of 46.5 per cent for amounts over $140,000.
“This enormous hike in tax seems a very unfair way to deal with someone’s life and livelihood,” Esler said.
Another issue she raised related to questions about the tax deductibility of financial planner fees. While investors are able to claim a tax deduction for fees incurred by investments contributing to their personal income, the fees paid on superannuation investments including pensions may no longer be available because of the tax concessions.
“Under the new legislation the tax deductibility of financial planner fees for advice relating to superannuation investments seems to be no longer available. We argue that like accounting fees, financial planning fees should be tax deductible,” Esler said.
