A technical mentor has warned advisers standard administration software being used for SMSFs contains a fundamental weakness that has the potential to impact salary continuance insurance strategies.
“There is a problem from a record keeping perspective as no super software applications record salary sacrifice contributions,” SMSF Alliance principal David Busoli revealed.
“Preservation and tax components are recorded but, in the event that you need to identify salary sacrifice contributions, that data is not easily available and generally has to be calculated manually,” he added.
According to Busoli, this information has importance if trustees wish to pay a salary continuance benefit from their SMSF due to the fact there are only three ways of doing so.
“It might have been sourced from reserves previously, but this strategy has been effectively removed from the SMSF environment except in unusual situations,” he explained.
“Disability insurance policies are an effective solution, but not generally for partial disablement benefits. In any case there is a reasonable argument that such policies should be maintained external to super as their premiums are tax deductibility in the higher taxed non-super environment.
“Where there is no alternative, trustees may look to pay salary continuance benefits from the member’s accumulation account. The problem is that partial disablement is not a trigger of release. This means only benefits that are not designated as member minimum benefits can be accessed.”
Member minimum benefits are effectively any benefits, including earnings, resulting from contributions that do not involve a salary sacrificing arrangement.
“For this reason we need to be able to determine how much of a member’s benefit is due to salary sacrifice before we can pay salary continuance from a member’s account,” Busoli said.
He suggested if trustees know the extent to which salary continuance benefits can be paid from the member’s account, the insurance cover waiting periods can be increased that will in turn result in lower premiums.