SMSF members should not confuse the status of life insurance premiums paid from the fund for a policy held by that fund with premiums paid by the SMSF for a policy held by another superannuation fund, as the latter may be considered a rollover or illegal early access, an SMSF specialist has warned.
SMSF Alliance principal David Busoli said while an SMSF can claim a tax deduction for life insurance premiums for a policy held by that fund, those deductions no longer apply when the SMSF pays the premiums for a policy held by an Australian Prudential Regulation Authority (APRA)-regulated fund.
Busoli pointed out SMSFs can claim a tax deduction, regardless of whether the premium was paid from an SMSF member’s accumulation or pension account, but the retention of an APRA-regulated fund to hold insurance cover created two separate funds.
“It is not uncommon for APRA member accounts, when rolled into an SMSF, to leave a residual fund balance to retain existing insurance cover in the APRA-regulated fund,” he said.
“Under this scenario the member is now in two funds. It is not appropriate to arrange a regular payment from the SMSF to pay the insurance premium as this is not an insurance payment.
“Instead, it’s a rollover and must be processed via SuperStream. If it’s not, then it constitutes a member withdrawal, so in the majority of cases, given the age demographic of most members with life insurance, it represents illegal early access.”
He said given the work involved in processing small SuperStream payments, SMSF members should find other ways to pay for the APRA-regulated fund’s insurance premiums and SMSF auditors should be flagging this issue with their clients.
“Though such ‘rollover’ payments, drawn from an SMSF and tagged as life insurance premiums, should be picked up by the SMSF auditor, we still find that some SMSFs transferring to our service have these arrangements and need rectification,” he said.