Insurance ownership trapping trustees

SMSF asset insurance

SMSF trustees who have insured fund assets in their own name will be unlikely to be able to return insurance payments to their fund due to cap limits, an auditor has warned.

SMSFs that have insured assets in the name of the trustees and not of the fund risk being unable to keep any payouts within the superannuation environment due to contribution cap limits, according to an SMSF auditor.

Reliance Auditing Services managing director Naz Randeria said some SMSF trustees were unaware of the need to have insurance over assets held by their fund or the need for the fund to be the owner and beneficiary of that insurance policy.

“SMSF assets, whether they be residential or commercial properties, vehicles or collectible assets, must be adequately insured before acquisition to avoid any surprises,” Randeria said.

“However, if the insurance policy is held in the trustee’s name rather than ‘on behalf of’ the fund, in the event of a claim any subsequent payout made out to the trustee will end up in their personal bank account.”

She said while the insurance payment could be transferred from the trustee’s personal account into the SMSF, there was a high probability this transfer would breach the non-concessional contribution caps of $110,000 a year or even the $330,000 allowed under the three-year bring-forward rule.

“If your insurance payout is higher than this amount depending upon your claim and circumstances, and you are having to make a transfer to replace the destroyed or damaged asset, it could potentially result in a significant tax bill, all as a result of three missing words,” she said.

“It’s a simple mistake to make and it’s one that often occurs because trustees don’t realise why it’s necessary for insurance policies to be held on behalf of the SMSF, and also because people believe they’re unlikely to ever need to call on their insurance.

“Should you need to make a claim, it’s a fair assumption to make that you’ll be under a high level of stress at the time.

“It’s therefore worth ensuring the insurance policy is held correctly with the super fund being the beneficial owner to avoid placing yourself under any extra stress and finding yourself in an undesirable tax situation.”

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