A financial services firm has warned business owners against holding buy/sell cover inside an SMSF in order to receive a tax deduction for the associated insurance premiums.
Buy/sell insurance is where business owners in a partnership or company take out cover on the lives of each co-owner, meaning in the event of their death the other owner or owners receive a lump sum payment that is passed onto the deceased spouse and family as their monetary share in the business.
“Generally this form of insurance is purchased via an agreement between the business partners and is held personally by each co-owner,” Partners Superannuation Services SMSF consulting and auditing director Martin Murden said.
“However, the Partners Wealth Group insurance division is receiving a growing number of inquiries from business owners about making use of their SMSF funds to purchase the insurance – the key impetus being the fact that a superannuation fund can claim a tax deduction on members’ insurance premiums.”
Having fielded questions on the subject, Murden warned against adopting the strategy for a number of reasons.
The first being it may fail the sole purpose test. This is because having the insurance in the fund to pay out the interest in the business of the owner who has passed away would not satisfy the legal requirement of the SMSF to provide retirement benefits for its members.
Failure to comply with the sole purpose test would result in the SMSF being taxed at 49 per cent rather than 15 per cent.
Secondly, if the beneficiary of the death benefit is not a dependant for tax purposes, the lump sum payment of the benefit will be taxed at 32 per cent.
Finally, paying the premiums from the asset pool of an SMSF means fewer resources will be available for investment.
Murden said individuals needed to concentrate on making sure the appropriate buy/sell cover was put in place rather than making any associated tax deduction from paying the premiums a priority.