When can an insurance premium rollover become illegal early access?
SMSF members are being warned to look carefully at the way their insurance premium is handled when rolling over funds from an APRA fund as it could constitute illegal early access if not done correctly.
SMSF Alliance principal and mentor, David Busoli, said life insurance premiums are deductible to an SMSF irrespective of the member account debited and the deduction is generally 100 per cent of the premium unless the policy contains an element of grandfathered, non-deductible cover types or is a whole of life (30 per cent) or endowment (10 per cent) policy.
“The ATO expects the proceeds to be paid to the account from which the premium has been drawn so it is possible for all of the premium to be sourced from the pension interest without affecting the fund’s tax deduction,” he said
“It is not uncommon for APRA member accounts when rolled into an SMSF, to leave a residual APRA fund balance to retain existing insurance cover in the APRA fund.
“Under this scenario, the member is now in two funds. It is not appropriate to arrange a regular payment from the SMSF to pay the insurance premium as this is not an insurance payment.
“Instead, it’s a rollover and must be processed via SuperStream. If it’s not, then it constitutes a member withdrawal so, in the majority of cases – given the age demographic of most members with life insurance – it represents illegal early access.”
He said these types of rollover payments from an SMSF which are tagged as life insurance payments, should normally be picked up at the time of auditing, but some are slipping through the cracks.
“We still find that some SMSFs transferring to our service have these arrangements and need rectification,” he said.
“Given the amount of bother involved in processing such a relatively small, regular, SuperStream payment, consideration should be given to satisfying the ongoing APRA fund contribution obligations from other sources.
“On a related matter, members are prone to believe that the SMSF’s BDBN includes the life insurance payout from the APRA fund. Naturally, it does not.”
