When looking to hold risk cover inside an SMSF, advisers must ensure the ownership of the policy rests with the super fund itself and not with the individual members, two industry experts have said.
“We have to ensure the fund owns the policy in order for it to pay the premiums and, of course, that when the cheque comes with the proceeds, or the electronic transfer, it actually goes into the super fund’s bank account,” Supercorp policy director Mark Ellem told the 2014 SMSF Professionals’ Association of Australia National Conference in Brisbane yesterday.
Ellem suggested care needed to be taken regarding insurance linked to limited recourse borrowing arrangements too.
“With limited recourse borrowing arrangements you’ve got the legal ownership in the name of the custodian and you’ve got the beneficial owner, so which name does the policy go in?” he said.
“Lawyers I’ve spoken to say it will be dictated by the insurer.”
However, Colonial First State technical services manager Craig Day warned relying on insurers for guidance on the subject could be fraught with danger.
“I’ve actually seen a letter from one of Australia’s largest insurers to say ‘Mr Trustee, it’s all right for you to own this policy in your own name and for the super fund to pay the premiums so long as the super fund is the nominated beneficiary’,” Day said.
“So I’m looking at it and going: ‘Let me run an analogy past you Mr Adviser. If I had an electricity bill in my own name, can I get my super fund to pay for it, because that’s the same thing that’s going on here?’
“If you own the policy and you’re getting the super fund to pay for it, money is coming out of the fund to support your personal liability. That is financial assistance and that is a breach of the sole purpose test.
“So be aware of it; the trustee owns the policy in the fund’s name, the trustee pays the premiums, the trustee receives the proceeds and pays the benefits.”
