Draft Taxation Ruling (TR) 2010/1DC2 pertaining to income tax and superannuation contributions contains a new method of treating insurance proceeds that was unexpected and has surprised the SMSF industry, a senior executive of a professional body has said.
“[There has been] a new paragraph inserted into the ruling that says if a fund receives insurance proceeds, they may be considered a contribution if they are to benefit a member. [This] really did surprise us because the whole concept or idea behind having an insurance policy is to benefit a member, particularly if we’re talking about TPD (total and permanent disability) and income protection proceeds,” Institute of Financial Professionals Australia (IFPA) head of technical services Natasha Panagis revealed.
“In fact the Income Tax Regulations treat insurance proceeds as investment earnings.
“So this new insertion in the [draft] tax ruling has really got us scratching our heads and we’ve asked the ATO to clarify [the] circumstances [in which this would] happen because it actually goes against the principles of insurance and also conflicts with the Income Tax Regulations definition of what insurance proceeds are, and that is they are investment earnings and not a contribution.”
Panagis also highlighted a clarification the draft tax ruling has made with regard to SMSF asset purchases where an in-specie arrangement is involved.
“[The ATO has stipulated] if a fund acquires an asset under a contract below market value, then the difference [between the purchase price and the commercial value] will not be [considered] an in-specie contribution and that is because the asset was acquired under a contract, not an in-specie arrangement,” she told delegates at the IFPA 2025 Conference and Expo held in Melbourne last Friday.
“So the ATO is saying it’s fine, you can still do a part in-specie contribution [in these circumstances] and you can still acquire the remainder of the asset using fund [resources], but if you want to do that, you need proper documentation that stipulates and explains that situation.”
