Annie Dawson, senior SMSF technical specialist for Heffron, says the most obvious of these issues is how the insurance proceeds should be handled.
“If the SMSF has received the proceeds as the owner of the policy, the good news is that the proceeds are generally not treated as assessable income of the fund,” Dawson said.
“Any capital gain will be disregarded for policies insuring against an individual suffering an illness or injury provided the SMSF is a complying superannuation fund.”
Under super law, insurance proceeds form part of the fund’s investment return, and in line with the requirement to take a fair and reasonable approach, trustees would usually allocate them to the member account from which the premiums have been deducted, including any refund of insurance premiums as well.
However, she said, the money can not necessarily be paid out to the member straight away.
“Just because the insurer has accepted and paid the fund’s claim, doesn’t mean the member will be able to access benefits. The trustee will need to determine if a member has met a condition of release before cashing a benefit.”
“If the member hasn’t yet retired or reached age 65, they will need to determine whether the member’s injury or illness has caused them to be permanently or temporarily incapacitated for super law purposes.”
Dawson added that this is an important distinction as it will impact whether the member can access some or all of their benefits, the payment options available and how the benefits will be taxed in the hands of the member.
“For example, to qualify for a temporary incapacity benefit under the super rules, a member must [satisfy a number of criteria].”
“They must cease to be gainfully employed as a result of ill-health or temporarily stop receiving income meaning they can’t work, have had all their personal leave paid out but are still regarded as an employee by their employer, and must not be permanently incapacitated.”
Additionally, the trustee must generally only pay the insurance proceeds and not the member’s accrued benefits to the member as an income stream benefit (at least monthly), and to replace the gain or reward the member was receiving from gainful employment before ceasing work due to the injury.
Dawson advised that asking for evidence of a member’s pre-incapacity earnings is a good starting point for a trustee to work out what benefit they will be permitted to pay.
“And if a temporary incapacity benefit is payable, be warned – the taxation of benefits is a little unusual.”
“For tax purposes, the benefit received by the member is taxed like salary and wages and any tax-free component is ignored. The fund will need to [do a number of things] register for PAYGW, withhold tax using the tables applicable to salary/wages as it’s not a super lump sum benefit, and issue an ordinary payment summary, not a super one.”
She concluded that despite the super rules requiring the temporary incapacity benefits to be paid as a non-commutable income stream, this will not qualify as a retirement phase pension.
“This means the fund will not be entitled to exempt current pension income when cashing this benefit nor is there any reporting for TBAR purposes, which is why in practice we leave the member’s account in ‘accumulation’ phase if their benefits are preserved.”
