Written by:
Mark Ellem
Head of Education (SMSF)

Understanding the intricacies of income protection insurance within a self-managed superannuation fund (SMSF) is crucial to navigate the compliance requirements and taxation rules effectively. While income protection insurance is typically held outside of superannuation due to tax deduction advantages, some opt to include it in their SMSF for various reasons. However, doing so requires careful consideration of temporary incapacity benefit regulations. 

Income protection insurance proceeds received by an SMSF are not assessable income but fall under Capital Gains Tax provisions, ensuring tax-free treatment for the fund. When paying a temporary incapacity benefit to a member, the SMSF must adhere to strict compliance standards, including defining temporary incapacity, payment limits, and tax withholding obligations. 

The common mistakes I see in relation to an SMSF paying a temporary disability payment are: 

  • Including the insurance proceeds as assessable income of the fund. 
  • Simply passing the full amount of the monthly insurance proceeds to the member. 
  • No PAYG withholding registration; withholding or reporting. 
  • Disclosing only the taxable component of the payments from the superannuation fund in the individual’s tax return as a superannuation pension and claiming a 15% tax offset (Item 7 of the individual tax return). 


In addition to non-compliance with the SIS payments standards, this can result in the individual being assessed incorrectly for tax purposes. Where an SMSF member wants to have their fund hold income protection insurance, rather than in their own name, be sure to educate them on the rules, restrictions and administration requirements, not to mention the potential additional administration and audit costs. 

Join us for an exclusive webinar discussing the complexities of income protection insurance and the temporary incapacity condition of release within SMSFs. Mark Ellem, our Head of SMSF Education will delve into compliance requirements, taxation nuances, and best practices to ensure your SMSF operates smoothly while providing essential benefits to members. Don't miss this opportunity to gain valuable insights and avoid costly mistakes. Register now to secure your spot and empower your SMSF management journey.

Search by keywords


This information is general information only and not intended to be financial product advice, investment advice, tax advice or legal advice and should not be relied upon as such. As this information is general in nature it may omit detail that could be significant to your particular circumstances. Scenarios, examples, and comparisons are shown for illustrative purposes only. Certain industry data used may have been obtained from research, surveys or studies conducted by third parties, including industry or general publications. Accurium has not independently verified any such data provided by third parties or industry or general publications. No representation or warranty, express or implied, is made as to its fairness, accuracy, correctness, completeness or adequacy. We recommend that individuals seek professional advice before making any financial decisions. This information is intended to assist you as part of your own advice to your client. Use of this information is your responsibility. To the maximum extent permitted by law, Accurium expressly disclaims all liabilities and responsibility in respect of any expenses, losses, damages or costs incurred by any recipient as a result of the use or reliance on the information including, without limitation, any liability arising from fault or negligence or otherwise. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision.