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The issues of trauma insurance and non-concessional contribution members nearing age 65

Q: Can the trustees of an SMSF purchase a trauma policy on behalf of a member?

A:The first point to consider is whether the current trust deed of the fund allows for the purchase of a trauma policy.

A trauma insurance policy normally pays out a lump sum to the policy owner if the injured person is diagnosed with one of a range of critical illnesses or suffers injuries that are defined in the policy. These can include cancer, stroke, coronary bypass and heart attack. Payment is made regardless of whether the insured person ceases work or becomes permanently disabled because of the illness or injury suffered. Payment made to an SMSF will be preserved benefits and cannot be released until a ‘condition of release’ is satisfied. It cannot be assumed a trauma payment event will mean the injured member has automatically satisfied the ‘permanent incapacity’ condition. ‘Temporary incapacity’ may be satisfied, but there are cashing restrictions to consider. 

The Australian Taxation Office’s (ATO) SMSFD 2010/1 deals with this issue and whether the purchase of a trauma policy breaches the sole purpose test under section 62 of the . The tax commissioner states in this determination that the trustee can still satisfy the sole purpose test provided any benefits payable under the policy:

are required to be paid to a trustee of the SMSF, 

are benefits that will become part of the assets of the SMSF at least until such time as the relevant member satisfies a condition of release, and 

the acquisition of the policy is not made to secure some other benefit for another person such as a member or member’s relative.

The sole purpose test in section 62 requires ‘exclusivity of purpose’. Current day benefits provided before a member’s retirement, employment termination or death are likely to raise questions around this test.

The commissioner states in SMSFD2010/1 that where benefits under a policy are payable to a person other than the trustees of the fund, the underlying object of the sole purpose test remains ‘unqualified’. The trustee has sought out a current day benefit for the member. The member has benefited by not having to personally pay for the premiums and the payout under the policy is payable to them. 

However, this situation is soon to change. Superannuation Legislation Amendment Regulation 2013, released on 1 March, outlines changes to the ability of trustees to purchase a trauma policy on behalf of members in the fund. Section 4.07D of schedule 3 states a “trustee of a regulated superannuation fund must not provide an insured benefit in relation to a member of the fund unless the insured event is consistent with a condition of release specified in item 102, 102A, 103 or 109 of schedule 1”. This regulation does not apply until 1 July 2014 and hence does not affect the continued provision of benefits to members who joined a fund before this date.

Q: I have a client who will be turning 65 during the financial year and would like to maximise his non-concessional contributions during the year. I have always interpreted section 7.04 of the Superannuation Industry (Supervision) Regulations (SISR) to mean that any non-concessional contribution made in the entire year that the member turns 65 in is not subject to the work test. Is this right?

A: Two different acts need to be referred to in this situation. In terms of SISR you need to look at item 2 – SISR 7.04(1). This regulation refers to the acceptance of contributions.

From age 65, a member must meet the work test at some point in the financial year prior to making member contributions or receiving voluntary employer contributions. In terms of the , subsection 292-85(2) outlines the non-concessional caps for the relevant financial year. Subsection 292-85(3) stipulates the rules around the bring-forward rule. People under the age of 65 time in the financial year may bring forward two years of entitlements of non-concessional contributions for that year.

If the contribution is made during that year but post the 65th birthday, the member will need to have satisfied the work test as mentioned above. 

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