A sector specialist has reminded practitioners to consider the wider tax implications of holding life insurance inside an SMSF instead of focusing solely on whether the premiums for the cover will constitute a tax deduction for the fund.
To this end, Accurium senior SMSF educator Anthony Cullen pointed out holding life insurance inside an SMSF could have an adverse tax outcome for children of the fund members.
“If benefits from the insurance payout upon the death of a member are going to go to a non-tax dependant, there is an element that is going to be untaxed,” Cullen told attendees at SMSF Professionals Day 2024 co-hosted by selfmanagedsuper and Accurium in Brisbane last week.
This untaxed element can undermine this strategy if the key motivation for employing it is to generate a tax saving because it may result in a significant tax liability for the individuals who receive the death benefit, he said.
He also took the opportunity to dispel a myth commonly held within the sector.
“There is a common misconception you need to pay your insurance premiums from your accumulation account to claim the tax deductions for them. That is not correct. It does not matter where the premiums are paid from if a fund has both an accumulation and pension interest, you get a tax deduction for them,” he noted.
According to Cullen, a careful decision as to the account from which the premiums are paid can be very advantageous for the death payment beneficiaries.
“So if I have the insurance premiums paid from my reversionary pension, for example, if there is ever a payout on that policy, this amount should go to the account or the interest that the premiums were paid from,” he noted.
“So if all of the proceeds from the insurance payout go into my reversionary pension, which is 100 per cent tax-free, guess what, those proceeds are also 100 per cent tax-free.
“If they go to an accumulation account or a non-reversionary pension, which technically cease when I die, the proceeds are going to be taxable.
“So in terms of not having a taxable component, where you’ve paid the insurance premium from may actually have an impact on the tax-free and taxable component that your adult children get.”
