SMSF members holding insurance within their fund may need to revisit that decision if they are concerned a potential payment could result in being caught by the proposed Division 296 tax, according to a legal expert.
DBA Lawyers director Dan Butler said insurance cover funded by an SMSF will be paid back to the fund, but in some cases those payments will be included in a member’s total super balance (TSB) for the purposes of calculating a Division 296 tax liability.
He noted this would be the case for income protection and partly for total and permanent disability (TPD) insurance, but not for life cover.
To illustrate how this might happen he gave the example of Roger, who has a TSB at 30 June 2026 of $4 million, but six months earlier suffered a sporting injury for which he receives an income protection payment of $10,000 a month.
“Is that subject to Division 296? The answer is yes because his fund is getting $10,000 and then it’s paid to him so that is likely to be added back to Roger’s TSB for the adjusted TSB,” Butler told attendee of a recent webinar.
He added a TPD benefit was treated differently and used the example of Steve, who receives a $2 million payment that pushes his TSB past $3 million to $5 million.
“The TPD amount is treated as a contribution and it is deducted from Steve’s adjustable TSB as there is a carve-out [in the Division 296 bill] for an amount that is included in your super interest during the year because of an amount paid to the superannuation plan under an insurance policy because of the death, TPD or terminal medical condition of the insured person,” he explained.
“Steve would have an adjusted deduction to his TSB on account of the $2 million and because he withdrew his money in May that year, that’s added back. In calculating his adjusted TSB, it’s $3 million minus $2 million plus $2 million to get us back to where we started from.”
He highlighted there was less confusion around a life insurance benefit and gave the case of Jane, who had a TSB of $3 million, but on death her fund received a $1.75 million payment.
“Jane has passed away, but does she pay any Division 296? No, she doesn’t,” he said, noting there was an exemption in section 296-30 of the bill to pay any form of the proposed tax if you die during the income year.
“If Jane’s spouse benefits from her insurance by way of a fresh pension, that should also not be deducted from his adjusted TSB under section 296-55(1)(e).
“What I’m saying is those SMSF members [with insurance in their fund] should really be going over their strategies. Are these strategies still intact? Are they still appropriate, given the impact of Division 296?”
