David Busoli, principal of SMSF Alliance, said that the Future Service Benefit available under Section 295-470 of the Income Tax Assessment Act could considerably benefit an SMSF.
“Provided the eligible requirements are met, an SMSF can choose to take a tax deduction for either the premium or a calculated amount, on the payment of a death, terminal illness or disability,” Busoli explained.
“A significant feature is that the size of the calculated deduction does not depend on the sum insured but on the total benefit paid including the sum insured. In essence, the deduction for a $1,000,000 benefit would be the same if it included $1 or $999,999 of insurance benefits.
“The size of the deduction depends on a number of factors but could easily be in excess of $500,000 in this case.”
Noting that the deduction is also known as the Future Liability deduction, he said the benefit can be paid as a pension, lump sum or combination and can be used to offset current and future SMSF income tax liabilities.
“The result is a reduction in accumulation account earnings tax and contributions tax for any member, including future members, to nil so a $500,000 deduction would save $75,000 in tax,” he said.
“If the fund contains pension members, consideration should be given to rolling them out to a second fund as any amount of exempt current pension income will waste the available tax deduction by reducing it before the nil tax rate is applied.”
The deduction is, in practice, only available to SMSFs because once it has been used, the super fund is unable to revert to claiming premiums again.
“Clearly this would not be practical for APRA funds as they contain significant numbers of members and insurance combinations,” Busoli said.
However, the eligibility requirements for the deduction are subject to “strict rules”.
“The payment must involve a termination of a member’s employment or self-employment. For this reason, it is generally only available if the event occurs prior to the member’s 65th birthday,” Busoli explained.
“A premium must have been paid in the year of the event so, in order to maximise this possibility premiums should be paid as frequently as possible – monthly (on the first of the month), or even fortnightly, if available.
“Caution must be exercised as, though holding an insurance policy is a prerequisite for claiming a Future Service Deduction, it will also cause an untaxed element to be created in the taxable component of the member’s benefit if the beneficiary of the payment is not a tax dependent.”
Typically, Busoli said, this situation will arise when the beneficiary is an adult, independent child.
“Consideration should therefore be given to removing the insurance policy from the fund in this case.”
