What Types of Insurance Can Be Held in Self Managed Superannuation Funds

Self Managed Superannuation Fund (SMSF) Trustees’ are required to consider whether to hold insurance cover for members of the fund and to document their considerations in the fund’s investment strategy.

The Trustee will determine whether insurance is appropriate by assessing each member’s needs in terms of age, income, health and dependants.

Rules came into effect on 1 July 2014 which aimed to ensure that where members hold insurance policies within super, they are able to access the insurance proceeds from their fund in the event of a claim. Therefore, the terms and conditions of the insurance policy must align with one of the following conditions of release:

• death (including a terminal medical condition),
• permanent incapacity, or
• temporary incapacity.

Trustees can consider multiple forms of Life Insurance, including Life Cover, Total and Permanent Disability insurance, and Income Protection.

Life Cover

Life insurance provides a lump sum to dependants in the event of death or diagnosis of a terminal illness. It can help increase the funds available to cover for loss of earnings and ongoing financial commitments.

The premiums are tax deductible to the SMSF, but not to an individual.

Please be aware that when proceeds from life insurance is paid from a super fund to non dependants, an untaxed element i.e 30% tax, is applicable in some circumstances where premiums are claimed as a tax deduction.  If no deduction is claimed there is no untaxed element. The closer the deceased is to retirement the smaller the untaxed element.

Should you require further information on the definition of a non dependant, please contact our office.

Life insurance is available on its own or commonly, along with Total and Permanent Disability (TPD) insurance.

Total and Permanent Disability (TPD) insurance

Permanent Disability Insurance provides a lump sum if the insured person suffers Total and Permanent Incapacity.

Permanent incapacity, under Super Legislation conditions of release, means ill health (whether physical or mental), where the trustee is reasonably satisfied that the member is unlikely, because of the ill heath, to engage in gainful employment for which the member is reasonably qualified by education, training or experience.

An insurer generally defines total and permanent disability as:

• Any occupation – circumstances which leave a person unable to engage in gainful employment in any occupation for which the member is reasonably qualified by education, training or experience, or
• Own occupation – circumstances which leave a person unable to work again in their own occupation they held just prior to TPD.

Under Super Legislation the definition of permanent incapacity is for ‘any occupation’.

From 1 July 2014, super funds are generally prohibited from taking out ‘own occupation’ TPD policies on behalf of their members as a benefit may become payable under the policy, despite the fact that the member may still be able to engage in some other employment for which they were qualified by education, training or experience, and therefore would not qualify to have the payment released from superannuation.

‘Any-occupation’ TPD policy premiums are generally fully deductible to the SMSF.

For ‘own-occupation’ TPD policy premiums, the proportion of premium used to fund ‘any occupation’ component is generally deductible to the SMSF with the remainder not deductible.

Total and Permanent Disability Insurance can be Linked with Life Insurance or it can be a Standalone Policy.

Income protection insurance

Income protection insurance generally pays an income stream for the purpose of continuing (in whole or part) the gain or reward which the member was receiving immediately before the temporary incapacity.

From 1 July 2014 only ‘standard’ Income Protection insurance policies are able to be purchased by SMSFs and these must comply with the conditions for temporary disability payments under Super Legislation.

While policies purchased by a SMSF will generally provide cover where a member is unable to work at all due to sickness or injury, they will not be able to offer some of the additional features and benefits which policies held outside of super can, such as redundancy benefits and nursing and housekeeper care.

Also, income protection policies offered within SMSFs requires the member to be gainfully employed (including self-employed) at the time of suffering the incapacity.

Income protection premiums are generally deductible to the SMSF provided that the benefits payable under the terms of the insurance policy comply with the requirements of Super Legislation.

There is no tax advantage to holding income protection in an SMSF, as premiums are tax deductible both inside and outside of super.  The benefit of a tax deduction is limited to 15% inside super, whereas it can be up to 45% outside of super.

Trauma insurance

Trauma insurance policies within the SMSFs are generally prohibited from 1 July 2014 as their terms and conditions do not align with one of the specified conditions of release under Super Legislation.

Prior to 1 July 2014

Prior to 1 July 2014, members of complying super funds were generally able to take out a range of life and disability insurance policies issued by a life insurance company within their fund.

The only requirement was that a trustee needed to ensure the acquisition of the policy would not cause the fund to breach the acquisition from related party rules and would be permitted under the sole purpose test and the fund’s governing rules.

Deciding whether to have insurance inside an SMSF will depend on a member’s individual circumstances and needs.

Please contact our Superannuation Manager Helen Cooper on 08 9316 7000 should you wish to discuss your specific circumstances in more detail.

Any information provided in this article is general in nature and does not take into account your personal objectives, situation or needs. The information is objectively ascertainable and was not intended to imply any recommendation or opinion about a financial product. This does not constitute financial produce advice under the Corporations Act 2001.

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Are your Investment returns treated as Revenue or Capital?

The distinction between accounting for investment returns as revenue or capital is not always clear and the characterisation of a receipt will ultimately be subject to the circumstances that apply to the taxpayer.

Generally speaking, an income receipt is regarded as an amount that is regular, recurring and has income tax applied to the net amount of income. The main example of this would be a dividend received from a shareholding.

However, what may appear to be a capital gain for example may in fact be classified more correctly as income where the taxpayer has been undertaking a profit-making operation. The relevant factors to consider whether a gain is to be treated as revenue or capital are the intention of the taxpayer when the asset is acquired, and any subsequent change of intention, as well as the length of the time the asset was owned. Importantly, where the amount is a capital return, the investor may have access to the CGT discount provisions which may end up being better tax result than would if the amount received were to be treated as assessable income.

Likewise, the treatment of an outgoing expense is important to determine whether an immediate deduction is allowable or whether the outgoing forms part of the cost base of a CGT asset.

Points to be consider when deciding whether an outgoing expense should be treated as revenue or capital:

• the advantage sought by the taxpayer
• the character of the advantage sought by the outgoing and,
• how the advantage comes about (recurrent or one-off payments).

Generally speaking, investors will fall into one of two categories – traders or long-term investors.

Investors on revenue account:

Where the holder of an investment product carries on activities for the purpose of earning income from buying and selling investments, that holder will be in the business of trading. Generally, a trader:

• holds investment products as trading stock
• includes gross receipts from the sale of investment products as income
• recognises expenses incurred in relation to trading activities as allowable deductions, and
• includes in assessable income investment returns such as interest, dividends and distributions.

Note that where the holder of an investment product enters into an isolated transaction with a profit making intention, they will not be in the business of trading. However, any net profit from the transaction will be assessable on revenue account.

Investors on capital account:

Where the investment is held with the intention of earning regular income from those investments, the investor may be seen as generally not carrying on a business. This type of investor generally:

• does not include gross receipts from the sale of investments as income. Any net gain is assessable under the capital gains tax provisions
• cannot include capital losses from the sale of investments against income from any other sources except current or future capital gains (quarantining these losses)
• cannot include expenses incurred in relation to buying and selling investments as a deduction when incurred. These are taken into account in determining the amount of any capital gain or loss instead, and
• includes investment returns such as interest, dividends and distributions in assessable income.

The above information is very general in nature and the nuances of each taxpayer’s situation needs to be fully considered before either method is applied for tax purposes, so if you think any the above applies to you please contact us.

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