Tax deductibility of insurance in SMSF

Thought some others might be interested in this, so decided to ask here. As per this statement:

"Where the life insurance is provided through a superannuation fund, contributions made to fund insurance premiums are tax deductible for self employed persons and substantially self-employed persons and employers."

I understand that insurance is tax deductible if contributions are made to the fund by the self employed person or an employer. That's all good.

BUT, what about if there is a property in the SMSF, which the self employed person runs their business out of and the business pays rent to the SMSF and part of the rent is then used to pay life insurance premiums, are the insurance premiums still then tax deductible to the fund? The self employed person is not making any extra contributions to the SMSF.

Mark

 

Hi Mark

Just my opinion and also from current practice.

We continue to pay my live insurance through the SMSF although we are now no longer making any contributions. The premium is actually paid from the dividends that the SMSF collects. Not much of a tax deduction (only 15%) but none the less we account for it as an expense.

Similarly my son who is a member of the Care super fund continues to have live cover provided through this fund although we have now not contributed (the 9% employee cont) for over a year. This may change ones they determine that this fund is no longer active not sure on this point.

Cheers

 

Life insurance premiums are tax deductible to the Trustee.

Not trauma.

Also, a death benefit ETP paid to non-dependents from the proceeds will be taxed at the higher rate where deductions have been claimed.

If you are not contributing, the premiums will eat into fund balance.

It makes sense if you are making tax deductible contributions to the fund (i.e. salary sacrifice or own contributions), as you get a deduction at your marginal rate on an expense you might have made anyway.

Cheers,

Rob

 

Hi Andy,

Thanks for the reply.

Rob,

I understand all that stuff. What I want to know is 'Are life insurance premiums tax deductible inside a SMSF if there are no contributions being made. That is, the only money going into the fund is the rent being paid by the business to the SMSF.'

Mark

 

As I understand it ...

The Trustee is insuring your life.

This continues even in years when you make no contribution.

I am not so sure about breaching the sole purpose test if you no longer intend to accumulate for super ever again ?

This may drain small balance funds ! However, commercial funds with large membership are able to get significant discounts.

Cheers,

Rob

 

Some great points there, thanks Rob.

Mark

 

Hi Mark,

The original paragraph is badly phrased hence the confusion. They've slapped together two issues which they probably should have left separate.

Lets start with the second one "Contributions made to fund insurance premiums are tax deductible for self employed persons and substantially self-employed persons and employers". Yes this is spot on and correct they probably could have made reference to the 10% relating to substantially self-employed persons.

Issue one, insurance premiums are tax deductible, yes they are. This is TOTALLY separate to the second issue.

Contributions would affect the contributions tax rate (ie, the more concessional contributions going in the more tax to be paid at 15%).

The more insurance premiums would be reducing the taxable income of the fund at a maximum of 15%.

Yes. The deduction is used against the rental income which is taxed at the earnings rate of 15%. (Not the contributions rate as there are no contributions).

Um, sorry Rob, you'll find that a trustee can claim a tax deduction for trauma cover as it is a legitimate expense. The reason no one offers trauma cover inside superannuation is that if a member does have a trauma event the money will be paid to the superannuation/smsf though they member may not meet a condition of release (SIS Act) so the lump sum trauma is stuck inside superannuation until meeting a condition of release, which doesn't really help you if you have cancer and can work 10 hours a week.

It sort of defeats the whole purpose of trauma cover to help pay for medical expenses, debts, reduction in income, etc.

Cheers,

Dan

PS This is all general information, speak to your SMSF adviser before making a SMSF decision.

 

Hi Dan,

Are you referring to permanent disability cover - which is deductible, even if it is a logistic nightmare ?

Trauma is mere payment on occurrence of a list of events, whether disabling or not.

Cheers,

Rob

 

No permanent disability is Total and Permanaent Disability (note the word PERMANENT), which basically means your extremely unfortunate any NEVER EVER going to work again.

Trauma insurances pays a lump sum on the event of a trauma, eg, cancer, heart attack and stroke, etc. As having a trauma you may be able to still work. Hence, not meeting the SIS definition of permanently disabled which would release funds from your superannuation fund.

Eg, if I was unfortunate enough to suffer and meet the TPD definition of NEVER EVER being able to work again and (generally) two doctors confirm this with the insurer. I would be classified as Total and Permanently Disabled which is a condition of release from superannuation. My super fund would pay my insurance plus the proceeds in my super fund to me in either a lump sum or an income stream (naturally, still being under age 60 there would be tax to be paid if I did take it funds out of superannuation).

Eg, if I was unfortunate enough to suffer a trauma, eg, heart attack. The insurer would pay the owner of the policy (the insurance trustee) the lump sum of insurance. They would then place the insurance proceeds inside of my superannuation fund. As I could "potentially" go back to work after treatment I would not meet a condition of release from the superannuation environment. My superfund would have an extra couple of hundred thousand dollars but I still have a massive specialist bill to pay and home modifications to make as I might be weaker than originally.

Yes it is and that's exactly my point in my examples

Cheers,

Dan

 

Dan,

I think we are talking of different issues.

You as a planner are interested in getting money out of the fund.

The thread started with deductibility of life insurance premiums paid by a SMSF Trustee.

I just added that trauma premiums are not deductible according to my interpretation (my fault for confusing the issue).

S.279(1) ITAA36 limits deductions claimable by the Trustee to those providing death, temporary disability (i.e. income replacement during disablement) and permanent disability insurance.

See ATO ID 2002/371.

Cheers,

Rob

 

Hi Rob,

I think you are right. We do seem to be talking about different issues

Cheers,

Dan

 

A little bit cheeky, but a potential work around for this problem (if the deed allows) is to NOT let the proceeds from the insurance pay out vest to the members account, rather have the proceeds go to a reserve within the Fund.

If there was another member within the fund who has met a condition of release, then amounts could be allocated from the reserve to that members account who could then access the money (60 plus and tax free preferably) and subsequently give it to the unfortunate insured member. A parent or favourite uncle / aunt might be helpful in this situation.

Amounts allocated from reserves form part of the contributions caps (concessional and then non-concessional - effectively giving $250,000 per annum) - so that needs to be watched.

The deed needs to allow reserves and this kind of treatment of insurance proceeds in the first place however.

I do feel sorry for anyone who suffers a trauma and has to return to work, with medical expenses adding up and all that money just out of reach. If they were a client of mine I would do everything possible to help them out.

 

That topic sidetracked!!

Yes, the premiums you pay are deducted for the income of the SMSF (rental income). This forms the assessable income of the SMSF.

Rob, you did make a valid point re Trauma.. Condition of release the issue which you are 100% spot on.

Regards