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Self Managed Super Fund (SMSF) Article
Changes mooted for trauma insurance inside super
By Tony Negline.
This article may be out of date.
2nd December 2009
Trauma insurance is a very important life insurance benefit.
It typically pays a lump sum when the insured suffers some sort of medical trauma such as heart attack, stroke, various cancers and brain tumours.
Increasingly these medical traumas are not life threatening. In fact in most cases the insured is not totally and permanently disabled but returns to work after a period of medical treatment and recuperation.
Normally the purpose of the insurance is to cover medical bills and the loss of income whilst being away from work.
A key question has always been whether this type of life insurance can be purchased in a superannuation fund.
Until now the general view has been that this type of insurance could not be purchased by a super fund trustee for several interconnected reasons.
Firstly as the super fund member is often not permanently disabled and will return to work at some stage. OFTEN A SUPER FUND will only be ABLE to PAY THEM a temporary disability benefit.
Secondly SUPER FUND temporary disablement benefits have tight LEGISLATIVE restrictions on them including that they cannot be paid as a lump sum but must be paid as income (limitations also apply on how much income A SUPER FUND can PAY).
Thirdly trauma insurance PROCEEDS will only ever be paid TO A SUPER FUND as a lump sum. This means that in many cases the lump sum trauma insurance policy proceeds received by a super fund may have no connection with the temporary incapacity income benefits which A SUPER FUND can PAY to A MEMBER WHO HAS TEMPORARILY STOPPED WORK BECAUSE OF A MEDICAL TRAUMA. The regulator of large super funds – the Australian Prudential Regulation Authority made this point in February 2001.
APRA has also said that super fund trauma benefits might not meet a major super rule known as the Sole Purpose Test. This test says that at all times super fund trustees must exclusively run their fund to satisfy certain requirements such as the provision of retirement benefits.
In news that will be welcomed by many people, the Tax Office has published information which suggests that trauma insurance could be owned by a Self Managed Super Fund.
In early November the Tax Office released a Draft Self Managed Super Determination (SMSFD 2009/D1) which says that a SMSF can own trauma insurance as long as certain conditions including the following are satisfied:
- Any policy proceeds must be paid to a trustee of the Self Managed Super Fund
- Any benefits paid out of the super fund only occurs when the super laws permit it and in the manner allowed by the super laws (for example, temporary disablement or total and permanent disablement)
The Tax Office wants the policy proceeds to be paid to the super fund's trustee because it's possible to have a life insurance "policy owner" and a "nominated beneficiary". Under life insurance law all policy proceeds are paid to the nominated beneficiary which can be any person or entity. Policy proceeds are only paid to the policy owner when there is no nominated beneficiary.
Technically a super fund might own a trauma insurance policy but any policy proceeds might be paid directly to the fund member in breach of the super laws because they are the nominated beneficiary.
The ATO are saying that they want the policy proceeds paid to the super fund and only released to the member if they are eligible by the super laws to receive them.
Any contributions made to a super fund which are then used to pay the trauma insurance policy premiums are tax deductible in the normal way. Many people who are eligible for any tax concession on their super contributions (for example, a tax deduction, a tax offset or the co-contribution) will most likely look at owning their trauma insurance in their SMSF. Such people need to think carefully about how they might access their trauma insurance proceeds once it's received by a super fund.
It's important to note that ordinarily a super fund cannot claim the trauma insurance premiums it pays as a tax deduction.
Before a super fund trustee purchased a trauma insurance policy it would be wise to check that fund's trust deed permits the super fund to own such a policy and also allows the payment of a temporary incapacity benefit out to a fund member.
It would unwise to rely on a clause which said the super fund trustee can do anything which the super laws allow. This is especially the case when one super regulator says one thing and another regulator, on one reading, permits greater flexibility.Finally this announcement by the Tax Office is a draft only and may be changed before it's finalised sometime in 2010.
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