Tax tip: Is a member income protection proceeds taxed in the SMSF?

Is a members income protection proceeds taxed in the SMSF? The short answer is no.

When a member takes income protection insurance in the SMSF, the insurance premiums are deductible however when the member receives proceeds from an income protection policy the income is considered a capital gain and is disregards to for tax purposes.

In practical sense this means that the income proceeds are not taxable to the fund. However, when the insurance proceeds pass through to the member as a non-commutable income stream the member does not receive a 15% tax rebate on the taxable component as the full amount is considered assessable income.

Effectively the SMSF acts as a pass-through vehicle as the members income protection proceeds flow in and then flow out of the fund. The fact that the SMSF can claim a deduction on the membersincome protection premiums is irrelevant.

When preparing the relevant paperwork the fund should withhold taxes and prepare a PAYG Payment Summary at year as if the payment to the member was normal salary and wages.