SMSF auditors and trustees should check the source of any life insurance held within a fund as purchasing a restricted policy will negate any tax deductions available and breach payment standards, an advice specialist has noted.
Life insurance and superannuation consultant Jon De Fries said it has been common practice for SMSF trustees to take out life insurance via another superannuation fund, but this approach was not open to them under law.
“Some life insurers have a stand-alone retail insurance fund which is a retail superannuation fund with no investments in it, and what often happens is SMSF trustees will be paying a premium directly from the SMSF to this fund,” De Fries said during a presentation hosted by The Auditors Institute today.
“Effectively, what we are seeing is an SMSF trustee taking out insurance through another super fund, however, in general SMSF trustees must take out ordinary or non-super policies.
“What this means is the premiums will have been incorrectly claimed as a tax deduction under that section 295 of the Income Tax Assessment Act and the payments of the premiums were in breach of the Superannuation Industry (Supervision) (SIS) Regulations payment standards.”
He said trustees purchasing life insurance in a retail superannuation fund should fund it from their own pockets or using an enduring rollover from the SMSF to do so or find appropriate policies suited to SMSFs that are consistent with the specific requirements of the SIS Regulations.
“Most insurers have ordinary insurance policies tailored to SMSFs that align with the conditions of release and cashing restrictions [that apply to SMSFs] in the regulations,” he said.
“This includes split policies for holding a death and total and permanent disability (TPD) any occupation policy with an attached own occupation TPD policy that is held outside the SMSF, with the latter premium paid for by the member or their business.”
He added auditors and trustees should also check the ownership and registration details of any policy in SMSF documentation are correct.
“For SMSF trustees, insuring with a non-super ordinary policy, it should be taken out in the name of John and Jane Smith, for example, as trustee for The Smith Family Super Fund, and if there is a corporate trustee, it would be J and J Smith Propriety Limited, for example, as trustee of The Smith Family Super Fund,” he said.
