Life insurance premiums on a policy held by an SMSF are likely to be considered a specific expense under the non-arm’s length expenditure (NALE) rules as the cost is related to a single asset that will not benefit the whole fund, legal experts have noted.
DBA Lawyers principal Dan Butler and lawyer Fraser Stead noted the issue of life insurance premiums paid from an SMSF and the application of the NALE rules were not specifically addressed in the revised draft guidance contained in ATO Law Companion Ruling (LCR) 2021/2DC.
However, speaking during a recent briefing, Butler pointed out that who benefits from the insurance would influence whether the premiums paid on a term life policy owned by a fund were a specific or general expense.
“It’s a specific expense because I don’t see how it’s going to be a general expense. Typically, these policies are related to a particular member or members and therefore I do not see it as a general expense of the fund,” he said.
Stead added the LCR only made references to indemnity insurance policies for trustees and that their premiums were considered to be general expenses under the NALE rules and further information regarding term life cover was unavailable.
Butler pointed out it was unlikely people would consider NALE in respect of insurance unless there was some discount a trustee or members were receiving from an insurer, but highlighted the narrow connection to the costs of the whole fund.
“I can give you another example from a case where an investment adviser was getting a discount on a portfolio which was was about 80 or 90 per cent of the fund’s assets,” he said.
“For the discount on the overall fees for that portfolio, the adviser was arguing that it was a general expense, but I disagree, but they are specific assets.
“The adviser said the discount was for 80 to 90 per cent of the portfolio and I said: ‘Well, that’s it. They are specific assets which have the discount applied.’”
