A technical specialist has suggested the considerations with regard to the tax implications of holding risk insurance inside an SMSF need to be multifaceted and encompass a number of important factors.
“[Client conversations regarding] the taxation impact of holding [risk] insurance inside the SMSF versus holding the insurance outside the fund, that conversation shouldn’t always just be about [the] deductibility of tax versus no deductibility [of the associated premiums],” SuperGuardian education manager Tim Miller told practitioners attending a technical webinar held today.
“It should be more about who [the] beneficiaries [will be].”
Miller illustrated his point using a situation where an SMSF member does not have a spouse who will automatically receive a death benefit upon the member’s death and has health issues.
“If somebody doesn’t have a spouse and they only have non-tax dependants, then [it must be determined if] it is valuable to hold their insurance inside the superannuation fund if, particularly due to their health, there is a greater likelihood that they are going to pass away [before the age of] 65 and therefore have an untaxed element [in their benefit balance],” he said.
According to Miller, recent changes to superannuation legislation have also added a different dimension with regard to managing the payout of a death benefit from life insurance cover that advisers and their clients must take into account when deciding if the policy should be held by the SMSF.
“Historically when we looked at a death benefit payment and the capacity to recontribute that amount [to super] subject to the age of the member, if they were over 67 it was a fait accompli that there was no capacity to put that money back in,” he noted.
“But if we’ve got somebody where their spouse is under 75 now and they’re nowhere near their [total super balance contribution threshold], and if we’re talking $1.9 million, that’s going to be a fairly significant portion of our industry post 1 July this year, well then [it must be determined if] they have the time to make contributions back into the fund after [receiving] the death benefit.”
