The source of payment for life insurance premiums does not determine the eligibility of a tax deduction for a fund, an SMSF specialist has reminded trustees.
SMSF Alliance principal David Busoli clarified that contrary to popular belief, a fund can claim a tax deduction for life insurance premiums without the requirement for them to be paid from a member’s accumulation account.
“Life insurance premiums are deductible to the fund irrespective of the member account debited. The deduction is generally 100 per cent of the premium unless the policy contains an element of grandfathered, non-deductible cover types or is a whole-of-life (30 per cent) or endowment (10 per cent) policy,” Busoli said.
Considering the scenario where a member possesses both an accumulation account and a pension account, he pointed out that while the deduction may originate from the pension account, the ATO allows for this approach without affecting the fund’s tax obligations.
“The ATO expects the proceeds to be paid to the account from which the premium has been drawn so it is possible for all of the premium to be sourced from the pension interest without affecting the fund’s tax deduction,” he said.
He added distinct tax implications arise from the allocation of insurance proceeds to different account categories within the SMSF and likewise non-reversionary pensions undergo a comparable form of treatment.
“Insurance proceeds are tax-exempt to the fund and generally increase the value of the deceased member’s account. If proceeds are paid to an accumulation interest, they will add to the taxable component of the interest,” he said.
“If they are paid to a non-reversionary pension, they will also increase the death benefit and be similarly treated, but if they are paid to a reversionary pension interest, they will be treated as if they are income – though tax-free.
“That means that the tax components will mirror those of the pension and, most importantly, they will not be counted against the beneficiary’s transfer balance cap a year after death – though they will be counted against the beneficiary’s total super balance.”
