From 1 July 2014 SMSFs will not be allowed to provide new insurance cover in respect of a member where the insurance definition is not in line with one of the following Conditions of Release under SIS:
- Terminal Medical Condition
- Permanent Incapacity
- Temporary Incapacity
In short – no new policies which don’t match a Condition of Release.
However a fund can continue to provide cover under policies existing prior to 1 July 2014, though such a policy cannot be changed to provide a type of cover that wasn’t provided prior to 1 July 2014. The SIS regulation 4.07D, makes this requirement part of the Operating Standards, with the associated fine of up to $ 17,000, based on current rate per Penalty Unit.
Of particular issue are going to be Trauma and TPD insurance, especially where the TPD cover is Own Occupation as opposed to Any Occupation.
As set out in the Explanatory Memorandum, the level of cover of an existing policy may be increased or decreased, along with the resulting premium. Also if a member moves from one fund to another the new fund will be able to provide a new policy that is grandfathered under the Successor Fund Transfer Rules. Where there is a conflict between the deed of the fund and these new regulations the regulations deem the conflicting parts of the governing rules to be omitted.
This has been part of the move over several years towards aligning insurance in SMSFs with the Conditions of Release. A history lesson here may be helpful: Prior to 2007 industry practice was to deduct the full amount of TPD policies under the ITAA 1936, however as part of the Simpler Super reforms the section was moved to the ITAA 1997 and in doing so was re-written. The result was the following table.
|Deductions of Complying Superannuation Funds|
|Item||The fund can deduct this amount:|
|1||30% of the premium for a *whole of life policy if all individuals whose lives are insured are members of the fund|
|2||10% of the premium for an *endowment policy if all individuals whose lives are insured are members of the fund|
|3||30% of the part of an insurance policy premium (for a policy that is not a *whole of life policy or an *endowment policy) that is specified in the policy as being for a distinct part of the policy, if that part would have been a whole of life policy had it been a separate policy|
|4||10% of the part of an insurance policy premium (for a policy that is not a *whole of life policy or an *endowment policy) that is specified in the policy as being for a distinct part of the policy, if that part would have been an endowment policy had it been a separate policy|
|5||The part of a premium that is specified in the policy as being wholly for the liability to provide certain benefits, if those benefits are benefits referred to in section 295-460|
|6||So much of other insurance policy premiums as are attributable to the liability to provide benefits referred to in section 295-460|
A deduction for TPD may either be claimed under part 5 of the table where it has been determined that the policy aligns sufficiently with the Conditions of Release, or by obtaining an Actuarial certificate to determine the deductible portion. The details of the application of Part 5 are beyond the scope of this article, but are considered in detail in the ATOs ruling TR 2012/6.
Due to the complexities of this change a transition period of 2007/08 to 2010/11 was inserted into the Income Tax (Transitional Provisions) Act 1997 by the Superannuation Legislation Amendment Act 2010. After the end of the transition period regulation 295.465(1) of the Income Tax Assessment Regulations 1997 allowed a simpler method of determining the deductibility of TPD policies, though still requiring more information than the pre-2007 or transitional methods, by the use of the following table:
|Type of TPD Cover||Deductibility of Premiums|
|TPD – Any Occupation||100%|
|TPD – Own Occupation||67%|
|TPD – Own Occupation, with inclusions||67%|
|TPD – Own Occupation, Bundled with Death Cover||80%|
|TPD – Own Occupation, Bundled with Death Cover, with inclusions||80%|
So from 1 July 2014 some TPD policies will be fully deductible, some will be partially deductible and some a SMSF wont be able to hold at all. In order to determine a funds’ tax liability and whether it complies with the operating standards the funds’ Accountants and Auditors will have to know the type of insurance, the type of coverage, when the policy was taken out and if there have been any change to the policy – which is a much greater amount of information than previously required. This increase in administration will increase the annual costs of an SMSF which holds insurance.
There is a conflict here with the desire to ensure that insurance policies are aligned with the conditions of release so that benefits are not trapped in the fund, while not placing such an administrative burden on the fund, and its advisors, that insurance is not taken out – especially given the already low levels of insurance in SMSFs. Hopefully the insurance companies will be of assistance in this transition.
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