SMSF administrators lack a proper understanding of how life insurance premiums can be paid from an SMSF, which may result in a benefit being paid to the wrong phase of the fund, according to an SMSF specialist.
SMSF Alliance principal David Busoli said the lack of understanding was due to administrators being unclear as to when a tax deduction could be applied to life insurance premiums.
“A deduction for term life insurance premiums is allowable, irrespective of whether the premium is paid from an accumulation or a pension interest,” Busoli said.
“Clearly this is irrelevant if the fund is totally in pension mode, however, where a portion of the fund is in accumulation, there is a tendency for administrators to wrongly assume that the premium must be debited against the accumulation account to obtain the tax deduction.”
According to Busoli, the ATO considers the source of the premium payment as an indication of the account that will receive the benefit payment.
“If the accumulation account is intended to be the recipient of the proceeds, then processing the payment in this way is not a cause for concern,” he noted.
“If, however, it is intended that the proceeds be received by a reversionary pension beneficiary, the payment should be debited against the pension account.”
He said this distinction was important when a year after the date of death of the insured, the reversionary beneficiary’s transfer balance account was adjusted to reflect the death benefit pension.
“If life insurance proceeds were subsequently credited to the reversionary pension, they will not affect the reversionary beneficiary’s transfer balance account,” he said.
“In addition, rather than the life insurance proceeds adding to the taxable component, which is the case if they are added to the accumulation account, they will take on the same pro rata tax components as the pension.”
