On 30 June 2010, the Super System Review Panel delivered its final report to the Government which suggested a number of changes impacting self-managed superannuation funds (SMSFs). On 1 July 2014, one of the last recommended changes was implemented which limits the kinds of insurance that an SMSF is permitted to take out for its members.Amy Batchelor, Maddocks Lawyers
SMSF members can only access SMSF funds in limited circumstances. Part 6 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) provides a framework to ensure that SMSF benefits are administered in accordance with the conditions of release and any applicable operating standards.
The conditions of release which allow members early access to proceeds from insurance claims are as follows:
Prior to 1 July 2014, if an SMSF held a trauma insurance policy, even though the benefit payable under this policy would not fall within one of the above conditions of release (and therefore the SMSF could not pay the benefit to the member), the funds would still be held by the SMSF and paid to the member upon retirement or when they satisfied some other condition of release.
Regulation 4.07D has imposed a new operating standard, effective from 1 July 2014:
"A trustee of a regulated superannuation fund must not provide an insured benefit in relation to a member of the fund unless the insured event is consistent with a condition of release specified in item 102, 102A, 103 or 109 of Schedule 1."
This means that from 1 July 2014, an SMSF can no longer purchase an insurance policy if the proceeds from a claim under that policy cannot be paid to the member under one of the above conditions of release.
For example, as the benefit payments under a trauma insurance policy cannot be paid out under one of the above conditions of release, the SMSF cannot take out an insurance policy of that type.
Transitional rules will apply to existing insurance policies held at 1 July 2014. Under these rules insurance policies acquired prior to 1 July 2014 will be 'grandfathered' so that SMSFs can continue to hold existing insurance policies, even where they do not align with the new rules. Furthermore, the transitional rules allow a fund to adjust the level of insurance held under an existing policy.
This does not change the fact that the SMSF cannot pay proceeds received under a trauma policy to the member when no condition of release has been satisfied.
The change to insurance provided by SMSFs from 1 July 2014 means a trustee should review:
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.
Also, you can read an earlier ClearLaw article titled "New Compliance Requirements for SMSF trustees — Superannuation Industry (Supervision) Amendment Regulation 2012 (No. 2)".
You can read earlier articles on a wide range of SMSF topics.
Item 102 of Schedule 1 to the SIS Regulations.
Item 103 and Regulation 1.03C of the SIS Regulations.
Item 109 and Regulation 6.01 of the SIS Regulations.
Item 102A and Regulation 6.01A of the SIS Regulations.
Daniel is a Senior Associate in the Maddocks Tax & Revenue team.Daniel advises extensively in the following areas:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Daniel worked at a Big Four Chartered Accounting Firm focusing on tax consulting for mergers and acquisitions.
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