Can A Smsf Trustee Take Out Trauma Insurance For A Member ?
Firstly, there has been the question of whether or not taking out a Trauma Insurance
policy would actually contravene the sole purpose test, and secondly, if a trauma policy is paid out then how does this interact with the condition of release provisions.In April 2010, the ATO Commissioner released a SMSF Determination that cleared up their thinking on this issue. Specifically, the question was raised:
Can a trustee of a self managed superannuation fund purchase a trauma insurance policy in respect of a member and still satisfy the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 ?
The answer was:
Yes, a trustee can still satisfy the sole purpose test provided any benefits payable under the policy:
* are required to be paid to a trustee of the self managed superannuation fund (SMSF);
* are benefits that will become part of the assets of the SMSF at least until such time as the relevant member satisfies a condition of release; and
* the acquisition of the policy is not made to secure some other benefit for another person such as a member or members relative.
However, the ATO also pointed out that if a trustee purchases a trauma insurance policy that provides for benefits payable under the policy to be paid directly to someone other than a trustee of the SMSF (for example, the policy provides for the insured member or members relative to directly receive benefits payable under the policy) this would be inconsistent with the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA). In these circumstances the trustee would contravene section 62.
So from this, it appears that it is fine to hold a trauma insurance policy within your DIY Superannuation fund, however the proceeds will need to remain within your SMSF and you wont be able to access them unless you satisfy a condition of release (such as retirement, total and permanent disablement, terminal illness etc). Of course, the trauma event could in some situations then cause or lead on to one or more of these events to transpire, but you cannot count on it.
Are the premiums tax deductable ?
The premiums paid by a SMSF trustee for a Trauma insurance policy will generally not be tax deductable to the SMSF. This has been covered previously by the ATO in ATO ID 2002/371. In a nutshell, where a trustee of a complying superannuation fund pays a premium for an insurance policy in respect of the liability of the fund to provide death or disability benefits for the members of the fund, any part of that premium that is specified as being wholly in respect of that liability is allowable as a deduction.
The key here is that for an insurance policy to be tax deductable it needs to provide a death or disability benefit within the meaning of subsection 267(1) of the ITAA 1936, which Trauma insurance does not.
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