Insurance, SMSF, Tax

Tax restricts insurance advantages

Life insurance SMSF Self-managed superannuation

The advantages of holding life insurance inside super are offset by the limits as to who can receive benefits and the tax they may pay as a result of the payment.

While SMSF members can derive tax benefits from paying for life insurance through their fund, they will be limiting who it can be directed to as an income stream and what tax they will pay, according to a technical specialist.

BT technical consultant Tim Howard said one of the disadvantages of holding life insurance via super was that any beneficiaries of a life insurance policy that forms part of an income stream drawn from a super death benefit will be limited to those defined in the Superannuation Industry (Supervision) (SIS) Act.

Speaking during a recent adviser briefing, Howard noted those who can receive a lump sum benefit include spouses or de facto partners, former spouses, children under 18, dependent children over 18, non-child financial dependants and non-child interdependants, but this list was smaller for those eligible to receive an income stream.

“What the SIS Act does highlight is the tax difference between a benefit received as a lump sum versus who can receive a death benefit as an income stream payment,” he said.

“It’s only spouses, dependent children or someone who you’re in an interdependent relationship with or who is financially dependent on you who are in a position to receive the benefit as an income stream from super and be able to keep those proceeds in superannuation.”

He also noted where a lump sum benefit was paid to a non-tax dependant, which was most commonly adult children, they may also have to pay tax upon its receipt.

“When we have a payment paid as a lump sum death benefit, not as a pension, and it goes to a non-tax dependant, we have an untaxed element created if a deduction for the premium has been claimed by the trustee of the super fund at any point in the past,” he said.

He noted the tax rate was 30 per cent and was not dealt with by the fund, but had to be picked up by the beneficiary themselves.

“If the trustee paid the lump sum death benefit directly to a beneficiary, and they were a SIS dependant, in that case the trustee would withhold the tax,” he said.

“Where that lump sum death benefit is paid to a non-tax dependant, it is an assessable payment to the individual themselves and it would go on their tax return and they will also pay the Medicare levy on any taxable income.”

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