SMSF trustees planning on using the future service deduction related to life insurance benefits may be best served making regular premium payments rather than an annual payment to ensure they can claim the deduction, according to an SMSF technical expert.
Heffron managing director Meg Heffron said a future service deduction is possible where an SMSF member, who was working at the time, dies before age 65 and the trustee elects to claim a tax deduction for part of the member’s benefit, rather than for the premium paid in that financial year.
However, Heffron, writing in a blog post, noted this was conditional on the member working at the time of their death and the timing of the life insurance premium payments each year.
“The benefit has to be paid ‘in consequence of the termination of a [deceased] member’s employment’. So it’s only possible if the deceased was still working at the time they died,” she said.
“Perhaps more problematic for SMSFs is the timing of premium payments,” she added, pointing to a recent case the firm put to the ATO that she believed highlighted key issues for SMSFs using the deduction.
She said the case related to a client – Chris, who was working – dying unexpectedly in December 2020 and since he met the work condition, the death benefit was paid for him in June 2021.
Additionally, Chris and his partner, Carole, both had life insurance via the SMSF and the premiums were paid annually in March and January, respectively.
Due to Chris’s death before his annual premium was due in March 2021, no insurance premiums were paid for him in 2020/21, while the normal premium was paid for Carole in January 2021.
Heffron said the ATO denied the future service deduction.
“The rationale was that the trustee can’t ‘choose’ to claim a tax deduction for the future service part of the death benefit paid in 2020/21 rather than the premium in 2020/21 because there was no insurance premium paid for Chris in that year,” she said.
“It didn’t matter that the fund was still paying insurance premiums (for Carole) or that the fund had paid life insurance premiums for Chris over many years. The key was that nothing was paid for Chris in the relevant year.
“This suggests it is important to make sure premiums are paid regularly throughout the year to maximise the chance that a premium is actually paid for the deceased in the year their death benefit is paid.
“[Alternately] if premiums are paid annually, make sure the anniversary date is July and pay the death benefit in that same financial year. Otherwise, most SMSFs will miss out on this benefit.”
