The ATO provided guidance at the beginning of May examining whether certain buy-sell agreements breach the sole purpose test.
Speaking at a seminar in Sydney, DBA Network director Daniel Butler said in ATO ID 2015/10 the ATO concluded that in purchasing and holding such a policy “the SMSF is not being maintained in accordance with the sole purpose requirements of section 62 of the SISA”.
Mr Butler said what ATO ID 2015/10 does not consider, however, is that the sole purpose test is determined objectively.
“Whether a fund complies with the sole purpose test will depend on the facts of each case and will be assessed by the objective facts, not the subjective views of trustees or, in the case of the corporate trustees, the directors,” said Mr Butler.
“Objectively, all the SMSF has done is buy life insurance for a member.”
He also noted that a buy-sell agreement is an “external agreement to which an SMSF is not a party”.
Mr Butler said while he believes the ATO “has missed the point” with this particular interpretive decision, he urged SMSF practitioners to address the decision with their clients.
“My position is that because the ATO says it’s wrong, it would be neglectful of me if I didn’t say, well, you need to jump because the ATO said you’ve got to jump',” he said.
“My advice would be: go to your client, put it in front of them and say this is a misguided missile; things may change, but things don’t generally change quickly with the ATO, so in the meantime you may want to deal with this.”
Mr Butler said it may be difficult for SMSF practitioners to determine which clients are affected by this recent decision.
“You won’t necessarily have the information at your hands to know whether your clients have used their SMSF as an insurance vehicle; you may want to send out a general newsletter to your clients,” he said.
Holding insurance within super was a good thing which the government should be encouraging, Mr Butler said.
“The best thing [SMSF trustees] can have is a decent insurance policy, and what’s the government been trying to do? Squirrel them out of it.”