Avoid this common life insurance mistake

Avoid this common life insurance mistake

The self-managed superannuation fund (SMSF) sector has grown exponentially in the past decade but some trustees aren’t fully across the rules, especially when it comes to life insurance. Jeff Scott writes.

Superannuation fund members may be surprised to learn that technically it’s the trustees of a super fund that own the fund’s assets on behalf of members.

That’s a lot of money given Australian workers have amassed more than $2.7 trillion in superannuation1 since the introduction of compulsory super in 1992. That includes $755 billion in 596,059 self-managed superannuation funds (SMSFs) on behalf of 1,125,994 members2.

With SMSFs, trustees can be either individuals or a corporation, and a key role of a trustee is to determine whether or not to hold life insurance on behalf of members. (SMSF members are also typically the trustees).
From the perspective of the Australian Taxation Office (ATO), which is responsible for regulating the SMSF sector, members cannot use assets within their SMSF for personal use. 

SMSF trustees are prohibited from providing any financial assistance to members or their relatives using the resources of the SMSF.

Confusion often arises because an SMSF’s trustees and members are typically one and the same.

A common mistake made by SMSF trustees/members is taking out personal life insurance in their own name, rather than in their capacity as a trustee of the SMSF while having premiums deducted from the SMSF. This is prohibited. The ATO provides guidance on this issue by stating that the title of fund assets must be in the name of the current trustees.4

What to do if you discover an SMSF client is non-compliant?

Regretfully, the SIS Act does not permit a simple change of ownership for a life insurance policy under a Memorandum of Transfer. This is deemed an acquisition of an asset from a member or relative.5

There are only two options available to those in this predicament. 
  1. The life insurance company will need to cancel the original policy and then issue a new policy with the trustees being the nominated owners “as trustees for” the particular SMSF.
  2. Keep the existing policy in place and change who is paying the premium from the SMSF to the individual. This effectively makes the policy individually-owned by the life insured. 

In both cases, the trustee may have to reimburse the SMSF for premiums already paid when the SMSF trustee was not the legal owner of the policy.

As part of an ongoing advice relationship, it is important to regularly review a client’s insurance needs and check the ownership of any life insurance policies.

Given the enormous growth and popularity of SMSFs in recent years, it’s likely that some clients will have an SMSF.  Incorrect life insurance ownership could be a costly mistake for SMSF trustees.

Jeff Scott is Head of Product Strategy and Technical Support at ClearView.

1 Australian Government – Productivity Commission.  Superannuation: Assessing Efficiency and Competitiveness – Productivity Commission Inquiry Report Overview – No. 91, 21 December 2018.  pp 3.  https://www.pc.gov.au/inquiries/completed/superannuation/assessment/report/superannuation-assessment-overview.pdf
2 Australian Government – Australian Taxation Office. Self-managed super fund quarterly statistical report – September 2018. https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Super-statistics/SMSF/Self-managed-super-fund-quarterly-statistical-report---September-2018/
3 Australian Government – Australian Taxation Office. SMSFR 2008/1 – Self Managed Superannuation Funds Ruling – Self Managed Superannuation Funds: giving financial assistance using the resources of a self managed superannuation fund to a member or relative of a member that is prohibited for the purposes of paragraph 65(1)(b) of the Superannuation Industry (Supervision) Act 1993. https://www.ato.gov.au/law/view/document?Docid=SFR/SMSFR20081/NAT/ATO/00001&PiT=99991231235958; Australian Government – Australian Taxation Office. SMSFR 2008/2 – Self Managed Superannuation Funds Ruling – Self Managed Superannuation Funds: the application of the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 to the provision of benefits other than retirement, employment termination or death benefits. https://www.ato.gov.au/law/view/document?Docid=SFR/SMSFR20082/NAT/ATO/00001&PiT=99991231235958.
4 Australian Government – Australian Taxation Office, Self Managed Superannuation Funds – QC 23300.  pp 34-36.  https://www.ato.gov.au/misc/downloads/pdf/qc23300.pdf
5 Superannuation Industry (Supervision) Act 1993 (Cth) s 66(2A)(a)(iii)