Self-Managed Superannuation Funds (SMSFs) and Insurance

Self-Managed Superannuation Funds (SMSFs) and Insurance

Key types of insurance available via super

Three types of insurance are usually available within a superfund, including an SMSF. A member can generally purchase the following types of insurance via a super Fund:

  • Life Insurance
  • Total and Permanent Disability (TPD) Insurance; and
  • Income Protection Insurance.

There are a number of issues to consider when insuring via the super environment:

The sole purpose test

A SMSF must be maintained solely for at least one or more core purposes and (optionally) for one or more ancillary purposes.

A core purpose is to provide for:

  • member upon retirement
  • a member upon reaching age 65’s dependants in event of death.

Purchasing life insurance on behalf of a member would typically satisfy the sole purpose test.

An ancillary purpose is to provide for:

  • a member’s temporary or permanent cessation of work as a result of physical or mental ill-health.

Purchasing Income Protection (or salary continuance) and Total and Permanent Disability Insurance on behalf of a member would typically satisfy the sole purpose test.

Tax effectiveness of insurance held through SMSFs

Life insurance premiums payable by the SMSF are generally tax deductible to the fund. Life and TPD premiums on policies held outside of super are not.

The actual payment of insurance premiums by the SMSF can also be tax-effectively funded by using super contributions, as employers can claim a tax deduction for all super contributions (Superannuation Guarantee and Salary Sacrifice).

Potential limitations on accessibility of benefits

As the policy(s) will be owned by the SMSF, proceeds will first be paid to the fund. Payment can only be made to the member once a condition of release has been met. In the case of death or temporary incapacity, this should occur quickly and simply.

Some flexibility and/or the availability of certain options may be reduced as a result of purchasing insurance via a super fund.

Death benefits may only be paid directly to a super dependant or legal personal representative.

Taxation of the benefit on payment

The tax treatment of a benefit payment will depend on:

  • the type/cause of the payment being made (death, TPD, salary continuance)
  • how it is paid (lump sum or income stream); and
  • to whom the benefit is paid (member, dependant or non-dependant).

 

Life Insurance

Life Insurance is typically purchased when a person wishes to provide their dependants with financial security in the event of the person’s death. Special consideration should be given to whether the payment is to be made to a dependant or non- dependent and the tax implications of this benefit.

Payment to a dependant:

Irrespective of whether the Fund has claimed a tax deduction, the payment as a lump sum to a tax dependant will always be tax free.

Where the death benefit is paid as a pension, the tax treatment of the income stream will depend on the age of the deceased and/or the recipient:

  1. provided at least one is aged 60 or over, pension income will be received tax free; otherwise
  2. the taxable portion of income stream payments will be taxed at the beneficiary’s marginal tax rate less a 15% tax offset.

Acquisition of a Life Insurance Policy by an SMSF

Generally SMSFs cannot acquire an existing Life Insurance Policy from a member or a member’s relative. As such, in order to transfer any existing cover into their SMSF, a member may need to apply for a new policy to be issued and may also need to go through the underwriting process again. This could present an issue where a member’s health has deteriorated since first taking out the policy.

However, some life insurance companies have existing processes in place to allow a new (or effectively a replacement) policy to be issued in the name of the fund without the need for additional underwriting. This generally makes transferring existing cover into a fund a much less daunting prospect.

Total and Permanent Disability (TPD) Insurance               

TPD Insurance is usually insurance that is attached to a Life Insurance Policy, with the benefits being released to the Fund (as the policy owner) once the member meets the policy’s total and permanent disability definition. In order for the Fund to then release the proceeds to the member, the member will also need to satisfy a SIS condition of release.

Due to the nature of the SIS condition of release that relates to permanent incapacity, an ‘own occupation’ definition TPD Policy held through an SMSF may create a situation where insurance benefits are released to the Fund, however could not be released to the member. For this reason, own occupation TPD can no longer be applied for in the superannuation environment.

Advantages 

  • insurance premiums tax deductible to the Fund
  • improved personal cash flow – can use existing accumulated superannuation benefits to pay for premiums
  • creates a tax-effective option of funding insurance via salary sacrifice
  • benefit can be paid in the form of a concessionally taxed income stream; and
  • tax deduction for premiums can offset “contributions tax” in the Fund.

Disadvantages 

  • benefits may be subject to tax
  • access to benefits may present a problem – criteria for release of TPD benefits may differ between super Fund/law and insurance provider
  • some product features may not be available; and
  • time delays occur as a result of Trustee process.

Income Protection Insurance

Income protection insurance  provides a regular income stream in the event of a member’s temporary disability.

Advantages

  • insurance premiums tax deductible to the Fund
  • tax deduction for premiums can offset “contributions tax” in the Fund; and
  • Income Protection Insurance held outside super is also tax deductible with no impact on contribution limits.

Disadvantages

  • policies held inside super may not offer all features of non-super due to sole purpose test
  • super contributions made to pay for premiums will count toward contribution limits
  • group rates provide for cheaper premiums; and
  • improved personal cash flow – can use existing accumulated superannuation benefits to pay for premiums.

 

Trauma Insurance

As of July 2014, Trauma policies cannot be held inside the superannuation environment. There are grandfathering rules for policing held inside superannuation prior to this time, however no new policies can be applied for.

As a trauma event is not in itself a condition of release, holding trauma cover inside a superannuation fund would create a situation where insurance benefits are released to the fund, however cannot be released to the member. Hence the decision to no longer allow for Trauma policies to be held in superannuation.

What to do?

It is recommended that specific advice be sought as to each member’s personal circumstances and whether any of the above types of insurance available within SMSFs should be acquired inside or outside a Fund. Particular attention should be given to whether a deduction is able to be claimed for the insurance premiums and also the potential tax implications for both members and beneficiaries if and when an insurance benefit becomes payable.

 

McQueen Financial Group is a corporate authorised representative of Total Financial Solutions Limited. AFSL No. 224 954, ABN 94 003 771 579. This information is of a general nature only and does not consider your investment objectives, financial situation or particular needs. You should not act on any information in this report without first consulting a professional investment adviser in order to ascertain whether the information and any investment decision is appropriate. This information is believed to be accurate however no warranty of accuracy or reliability is given in relation to any advice or information contained, and neither TFSA or its Representatives and officers, agents or employees of either of the aforementioned shall not be held liable for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any persons by reason of negligence).

Self-Managed Superannuation Funds (SMSFs) and Limited Resourse Borrowing Arrangements

Self-Managed Superannuation Funds (SMSFs) and Limited Resourse Borrowing Arrangements

 

Since late 2007, a Self-Managed Superannuation Fund (“SMSF” or “Fund”) has been allowed to borrow money for investment purposes following the introduction of an additional exception to the general borrowing prohibition – one that continues to exist under superannuation law.

This additional exception to the borrowing prohibition is provided in the form of a limited recourse type of borrowing.

In essence, the relevant asset is held on trust to provide limited security for the outstanding loan, but the benefits of the ownership (such as rent or dividends) flow directly to the Fund. If the Fund defaults on the loan, then the rights of the lender are limited to the asset which is the subject of the borrowing, and the Fund’s loss is limited to the loss of the beneficial interest in the asset and any payments made prior to the default.

Arrangements entered into on or after 24 September 2007 and before 7 July 2010, allowed a Fund to invest in certain borrowing arrangements involving borrowing money to acquire a permitted asset. Those arrangements must meet the conditions stipulated by the law in former subsection 67(4A) of the superannuation law – referred to as Instalment Warrants.

Those conditions continue to apply to limited recourse borrowing arrangements that were entered into before 7 July 2010, however new rules apply to new arrangements entered into on or after 7 July 2010 – referred to as Limited Recourse Borrowing Arrangements (“LRBAs”).

 

How The Arrangement Works

  1. An SMSF arranges to borrow money on a limited recourse basis, which it then transfers to a Holding Trust, along with its contribution to the purchase price.
  2. The Holding Trust would then arrange to purchase and hold the asset on trust for the SMSF.
  3. In this case, the SMSF would receive the beneficial interest in the asset and would be able to instruct the Trustee in relation to the asset.
  4. Once the SMSF repays the loan it can then arrange for the legal ownership of the asset to be transferred from the Holding Trust to the Fund.

 

 

What Can The Holding Trust Invest In?
Any investment that the superfund could hold itself can be purchased by the Holding Trust i.e. residential property, business real property, shares, managed funds.


What Can The Holding Trust Invest In?

The usual rules apply:

  • Must be purchased on arm’s length basis
  • Restrictions apply for assets purchased from a related party in the normal way (e.g. can’t buy residential property from the member or a related party).

Who Can The Lender Be?

  • A Bank
  • A Margin Lender
  • The member or a Related Party (i.e. the member can be their own lender either as an individual or a trust)
  • If the lender is a related party lender the loan should have a commercial interest rate. You should seek some advice about what is applicable in your situation.

 

Arrangements entered into on or after 24 September 2007 and before 7 July 2010

An SMSF is not prohibited from borrowing money, or maintaining a borrowing of money, providing the arrangement entered into satisfies each of the following conditions:

  • The borrowed monies are used to acquire an asset which the Fund is not otherwise prohibited from acquiring.
  • The asset acquired (or a replacement asset) is held on trust (the holding trust) so that the Fund receives a beneficial interest in the asset.
  • The SMSF has the right to acquire legal ownership of the asset (or, if applicable, the replacement asset) by making one or more payments after acquiring the beneficial interest.
  • Any recourse that the lender has under the arrangement against the SMSF Trustee is limited to rights relating to the asset acquired (or, if applicable, the replacement asset). For example, the lender can have the right to recover outstanding amounts where there is a default on the borrowing by repossessing or disposing of the asset being acquired under the arrangement, but cannot have the right to recover such amounts through recourse to the Fund’s other assets.

 

Arrangements entered into on or after 7 July 2010

An SMSF is not prohibited from borrowing money, or maintaining a borrowing of money, providing the arrangement entered into satisfies each of the following conditions:

  • The borrowed monies are used to acquire a single asset, or a collection of identical assets that have the same market value (that are together treated as a single asset), which the Fund is not otherwise prohibited from acquiring (called the ‘acquirable asset’). The new law makes it explicit that borrowed money applied to expenses incurred in connection with the borrowing or acquisition (such as loan establishment costs or stamp duty), or expenses incurred in maintaining or repairing the acquirable asset, is allowed.
  • The borrowed monies are not applied to improving an acquirable asset.
  • The acquirable asset is held on trust (the holding trust) so that the SMSF Trustee receives a beneficial interest in the asset.
  • The SMSF Trustee has the right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest.
  • Any recourse that the lender or any other person has under the arrangement against the SMSF Trustee is limited to rights relating to the acquirable asset. This limitation applies to rights directly or indirectly relating to a default on the borrowing and related charges or directly or indirectly relating to the SMSF Trustee’s rights in respect of the acquirable asset (for example, rights to income from the asset).
  • The acquirable asset is not subject to a charge other than as provided in relation to the borrowing by the SMSF Trustee.
  • The acquirable asset can be replaced by another acquirable asset that the SMSF is not otherwise prohibited from acquiring, but only in very limited circumstances as listed in the super law.

 

Self-Managed Superannuation Funds Ruling SMSFR 2012/1

The Australian Taxation Office released on 23 March 2012 its views on the limited recourse borrowing arrangement provisions. The Final Ruling explains the key concepts of what is a ‘single acquirable asset’, maintaining or repairing the acquirable asset (as distinguished from improving it); and when a single acquirable asset is changed to such an extent that it is a different (replacement) asset.

While the borrowings under the limited recourse borrowing arrangements cannot be used to improve an acquirable asset, the ATO says money from other sources could be used to improve (or repair or maintain) that asset. However, any improvements must not result in the acquirable asset becoming a different asset.

 

Single acquirable asset

Factors relevant in determining that what is being acquired is a single object of property, include:

  • the existence of a unifying physical object, such as a permanent fixture attached to land, which is significant in value relative to the overall asset value; or
  • whether a State or Territory law requires the two assets to be dealt together.

The following do not meet the ‘single acquirable asset’ provisions:

  • two or more adjacent blocks of land wanting to be sold together;
  • farmland with multiple titles; or
  • apartment with separate car park (unless titles cannot be assigned or transferred separately).

 

Repairs maintenance and improvements

Money other than borrowings can be used to fund improvements (or for repairs or maintenance).

An SMSF can use the cash within the fund to undertake improvements. Any improvements must not result in the acquirable asset becoming a different asset (replacement asset).

It will be important to consider the asset’s qualities and characteristics at the time the SMSF entered into limited recourse borrowing arrangement. The ATO has clearly indicated that restoration or replacement using modern materials will not amount to an improvement.

 

Replacement asset

Any alterations or additions that fundamentally change the character of the asset will result in a different asset being held on trust.

An asset becomes a different asset for example through subdivision, a residential house built on land, and change of zoning (residential to commercial).

There are various examples outlined in the Ruling that demonstrate where such improvements don’t create a different asset, including:

  • one bedroom of house converted to home office
  • house burnt down in a fire and rebuilt (regardless of size) using insurance proceeds and SMSF
  • funds
  • compulsory acquisition by government on part of property; and granny flat added to back of property

 

As borrowing is not treated as a contribution, there is no age restriction on who can use the strategy. However, borrowing is not for everyone and each member should seek advice on the appropriateness of a gearing strategy for their risk profile.  It is important to remember that if you borrow money you have to pay it back.

At McQueen Group, we have a specialist team that can provide you with legal and taxation advice on the structures involved and help you to understand both current and future tax implications if your Fund is considering to borrow money on a limited recourse basis.

 

 

McQueen Financial Group is a corporate authorised representative of Total Financial Solutions Limited. AFSL No. 224 954, ABN 94 003 771 579. This information is of a general nature only and does not consider your investment objectives, financial situation or particular needs. You should not act on any information in this report without first consulting a professional investment adviser in order to ascertain whether the information and any investment decision is appropriate. This information is believed to be accurate however no warranty of accuracy or reliability is given in relation to any advice or information contained, and neither TFSA or its Representatives and officers, agents or employees of either of the aforementioned shall not be held liable for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any persons by reason of negligence).

Self-Managed Superannuation Funds (SMSFs) and Insurance

Self-Managed Superannuation Funds (SMSFs) & Derivatives


Under super law, derivative means ‘a financial asset or liability the value of which depends on, or is derived from, other assets, liabilities or indices’. A derivatives contract means ‘an option contract or futures contract relating to any right, liability or thing’.  They are an allowable investment for a SMSF, subject to certain conditions.

Super law outlines very few restrictions on exactly what type of investments Fund Trustees are able to invest in, however the law as how those assets are structured can be very prescriptive. In the case of a Fund’s investment in derivatives the main issue is the fact that some derivative contracts have a margin, or collateral requirement, and hence may fall foul of Regulation 13.14. In other words the Trustee must not give a charge over, or in relation to, an asset of the Fund.

 

Anyone considering derivatives within a an SMSF  should read Regulation 13.15A of the Superannuation Industry (Supervision) Regulations 1994, for some background on the use of collateral and derivatives.

However there is an exception when it comes to derivatives. Regulation 13.15A states that a Trustee may give a charge over an asset of the Fund if:

  • the charge is given in relation to a derivative contract
  • the Fund has in place a derivative risk strategy
  • the charge is given in order to comply with the rules of an approved body (such as options clearing house)
  • the investment to which the charge related is made in accordance with the derivatives risk strategy

It may be concluded therefore that under super law, derivatives are a legitimate and allowable investment for a SMSF providing the above are satisfied.

Other conditions that must be satisfied for a Fund to be able to invest in derivatives include ensuring that the

Fund’s investment strategy (and trust deed) permits the Fund to invest in derivatives.

As mentioned above in relation to regulation 13.15A, a Derivatives Risk Statement, a statement that explains the SMSF’s risk management policies when using derivatives is also required where the Trustees are entering into derivatives contracts where collateral (i.e. margin) is held. This applies for all futures contracts and ‘sell to open’ options contracts.

 

A word from the ATO

The main issue that the ATO (the regulators of SMSFs)  have with Trustees using derivatives in a

SMSF (apart from having all of the above documentation in place) is to be able to show compliance with regulation 4.09 of the super law as below:

 

Regulation 4.09 Operating Standard – Investment Strategy

4.09(2) [Considerations in formulating strategy]

The Trustee of the entity must formulate and give effect to an investment strategy that has regard to all the circumstances of the entity, including in particular:

(a)    the risk involved in making, holding and realising, and the likely return from, the entity’s investments, having regard to its objectives and expected cash flow requirements;

(b)   the composition of the entity’s investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification;

(c)    the liquidity of the entity’s investments, having regard to its expected cash flow requirements; (d)    the ability of the entity to discharge its existing and prospective liabilities.

 

What to do?

Derivatives are a legitimate and allowable investment inside a SMSF. A super Fund might use derivatives for a variety of purposes.  For example derivatives can improve portfolio returns – via more income – or limit potential losses if a Trustee is concerned about the value of an asset falling.

There are however regulatory challenges and any investment by a Fund will require research and careful consideration. Financial advice should be sought prior to considering an investment in derivatives in your SMSF.

 

McQueen Financial Group is a corporate authorised representative of Total Financial Solutions Limited. AFSL No. 224 954, ABN 94 003 771 579. This information is of a general nature only and does not consider your investment objectives, financial situation or particular needs. You should not act on any information in this report without first consulting a professional investment adviser in order to ascertain whether the information and any investment decision is appropriate. This information is believed to be accurate however no warranty of accuracy or reliability is given in relation to any advice or information contained, and neither TFSA or its Representatives and officers, agents or employees of either of the aforementioned shall not be held liable for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any persons by reason of negligence).

 

 

About Self-Managed Superannuation Funds

About Self-Managed Superannuation Funds

 

Overview

A Self-Managed Superannuation Fund (“SMSF” or “Fund”) is in simple terms a regulated superannuation fund controlled by you, as trustee, for your retirement. For nearly two decades SMSFs have been the fastest growing sector of superannuation.

An SMSF gives its members the ability to invest their superannuation assets directly into a wide variety of assets, which can include:

• cash
• shares
• managed funds
• term deposits
• private assets (direct residential and commercial properties, art, antiques, collectables, business real property, private companies).

SMSF’s also allow members more influence over the way their superannuation is managed, and the benefits it provides. However, an SMSF comes with a number of obligations that need to be fulfilled, including the primary obligation that the SMSF be operated for the sole purpose of providing retirement benefits to its members.

We have a specialist team dedicated to advise you on these obligations and what you need to do to fulfil them.

The Fund

An SMSF must have the following characteristics:

• Up to four members
• All members of the Fund are trustees of the Fund or directors of the corporate trustee and there are no other trustees or directors (certain exemptions are available for single member funds)
• No member is an employee of another member unless they are related
• The trustees or directors are not paid for performing their duties as trustees or directors

Certain people may be disqualified from acting as a trustee under the law. Minors (under 18 years old) and other people who are under a legal disability cannot be fund trustees however their personal legal representative can act in their place.

A trust will need to be established for your Fund that meets the SMSF rules under the law.

The Trustee

As trustee, you have sole responsibility for the operation, management and compliance of your Fund, including the lodgement of tax and other regulatory returns and the preservation and payment of benefits. This is a complicated task, with serious implications if you get it wrong. As trustee of your Fund, you are required to understand your responsibilities and ensure that they are properly discharged.

There are a number of covenants contained in superannuation law that impose minimum requirements on trustees and are deemed to be included in the trust deed of every regulated fund. These covenants reflect the duties imposed on a trustee under trust law in general.

The covenants bind trustees to:

• Act honestly in all matters
• Exercise the same degree of care, skill and diligence as an ordinary prudent person would exercise when dealing with the property of another
• Ensure their powers and duties are exercised in the best interests of the Fund members
• Keep the assets of the Fund separate from other assets (e.g. the trustee’s personal assets)
• Retain control over the Fund so that the trustee’s powers and functions are not hindered
• Develop and implement an investment strategy that meets certain standards
• Allow members access to certain information

Who cannot be a trustee of an SMSF?

The criteria for determining the eligibility of being a trustee includes:

Not be a disqualified person

A disqualified person includes individuals who:
• have convicted of an offence involving dishonesty under a Commonwealth, State, Territory or foreign law
• have received a civil penalty order under the Superannuation Industry (Supervision) Act 1993 (SIS Act)
• are undischarged bankrupts
• have been disqualified by the regulator, the Australian
• Tax Office (ATO).

A company cannot act as a trustee of a superannuation fund if:
• a responsible officer of the company is a disqualified person (a responsible officer includes a director, secretary or executive officer); or
• a receiver, official manager, administrator or provisional liquidator has been appointed to the company; or
• action to wind up the company has commenced.

Residency

The central management and control of the SMSF must remain in Australia. This means that the trustees, or a majority of trustees, must be Australian residents or satisfy the temporary absence rule. Generally, the temporary absence rule requires that the majority of the trustees (including the majority of the directors of a company that acts as the trustee of the fund) must not be permanent non-residents or temporary non-residents for more than two years.

The Member

You must operate in two capacities, one as trustee of your Fund and the other as a member.

The key difference between SMSF’s and other private superannuation funds is that all of the members of an SMSF must also be the trustees, except in the case of single member funds.

Special rules apply to single member funds, who must be:

• The sole director of the trustee company; or
• One of only two directors of that company and the member and the other director are relatives; or
• One of only two directors of that company and the member is not an employee of the other; director.

If the single member SMSF does not have a corporate trustee, the Fund must have two individuals as trustees. The member must be the trustee with:

• Another person who is a relative of the member or
• Any other person provided the member is not an employee of that person.

Administrative Requirements

It takes work to run an SMSF, but the benefits of this structure can be worth the extra effort.

An outline of some of the administrative requirements involved are as follows.

• You must keep the Fund’s records for 10 years
• You must keep the Fund’s investments separate from personal investments
• You must prepare and keep accurate accounting and administrative records
• The Fund must continue to meet the definition of an “Australian superannuation fund”
• You must lodge the Fund’s income tax return and prepare regulatory financial statements
• You must appoint an approved auditor to audit the Fund’s financial statements, compliance requirements and overall compliance with the law

Having your own Fund generates a mountain of paperwork and, because of the growing number of these types of funds, the Australian Taxation Office (ATO) is more rigorously monitoring compliance. Breaching any of the regulatory obligations can result in financial penalties. Therefore, it is important to keep on top of the Fund’s administration and paperwork – and that’s where we can help.

 

 

McQueen Financial Group is a corporate authorised representative of Total Financial Solutions Limited. AFSL No. 224 954, ABN 94 003 771 579. This information is of a general nature only and does not consider your investment objectives, financial situation or particular needs. You should not act on any information in this report without first consulting a professional investment adviser in order to ascertain whether the information and any investment decision is appropriate. This information is believed to be accurate however no warranty of accuracy or reliability is given in relation to any advice or information contained, and neither TFSA or its Representatives and officers, agents or employees of either of the aforementioned shall not be held liable for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any persons by reason of negligence).