On 17 November, the Australian Taxation Office (ATO) quietly published a succinct but significant QnA on their website that appears to prohibit the use of cross-insurance arrangements inside Self Managed Superannuation Funds (SMSFs). The QnA can be found here. The reason provided is that insurance proceeds received by a particular member’s super account are not released to that same member. While the ATO have not provided formal guidance (ie SMSFR), if confirmed; the QnA has huge implications for SMSFs with liquidity issues. Cross-insurance arrangements are commonly used by SMSF trustees to address liquidity issues if a member dies or becomes disabled. This enables death or disability lump sums to be paid to the member (or their beneficiaries), and/or loans to be extinguished; without having to sell the lumpy asset within the SMSF (usually property). Cross-insurance arrangements are widely promoted as the most suitable strategy to address liquidity issues as other strategies, such as funding premiums from investment returns, can result in large concessional contributions tax liabilities for members of the fund. If you’ve attended one of our LifeTech workshops previously about Insurance and SMSFs, you would be aware that this was previously our preferred structure. A cross-insurance arrangement for a four-member SMSF is structured as follows: - premiums for insurance on member A are deducted from member B, member C and member D’s accounts - premiums for insurance on member B are deducted from member A, member C and member D’s accounts - premiums for insurance on member C are deducted from member A, member B and member D’s accounts, and - premiums for insurance on member D are deducted from member A, member B and member C’s accounts. Proceeds are allocated to each member according to the how premiums are deducted. Note that every other member except the insured person receives a portion of the proceeds into their super account. Prior to the ATO’s QnA, industry commentators have varied in their interpretation of how regulations effective from 1 July 2014 would affect cross-insurance arrangements. However, the most common view was that new arrangements were allowable after 1 July 2014. Industry is seeking clarification from the ATO in relation to what their formal view is. Advisers should wait for formal guidance to be issued if considering a cross-insurance arrangement for their clients. FAQs What happens to existing funds with cross-ownership insurance arrangements? The rationale for the decision is that cross-ownership breaches the restrictions on insurance inside super that were introduced on 1 July 2014. As policies which are pre-1/07/14 are grandfathered, that is the new restrictions do not apply, there should be no concern in regards to those policies. However, where a trustee acquired a new policy from 1 July 2014, the new rules will apply and you will need to consider alternative structures for the insurance cover. This will not effect the policy ownership from an insurer perspective as cross-ownership is operated at fund level, rather than policy level. Can I continue to use the other liquidity/insurance strategies? Cross ownership was one of three common ownership structures for liquidity strategies inside an SMSF, the others being a ‘Reserve Strategy’ or ‘Pooled Earnings’. While the ATO’s announcement only mentions cross-ownership, the other strategies could also be impacted. The rationale provided in the QnA is that ‘the insured benefit will not be consistent with a condition of release in respect of the member receiving the benefit.’ This is also the case for any other strategy as the purpose is to create liquidity within the fund, rather than a benefit to be paid to the member. Without specific guidance, it would be worthwhile for Trustees to seek advice from the ATO before implementing an insurance liquidity strategy. For further assistance please contact BT LifeTech at lifetechnical@btfinancialgroup.
Posted on: Fri, 21 Nov 2014 00:28:34 +0000
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