Natasha Panagis, head of technical services for the Institute of Financial Professionals Australia, said during the association’s annual conference in Melbourne that the inclusion of the paragraph was a “surprise” as the idea behind having an insurance policy is to benefit a member, particularly with total and permanent disability and income protection proceeds.
“[This new paragraph] is a major concern because, firstly, TPD and IP insurance claim proceeds are arguably for the benefit of a fund member,” Panagis said.
“Additionally, death and disability insurance proceeds typically count as investment earnings in super funds. The ruling contradicts existing regulations, like ITAR97 reg 307.125.02, which confirms that super insurance payouts on the life of the deceased are part of a fund’s investment returns.”
Panagis said to try and get clarity on the issue, the joint bodies have sought clarification as to why an insurance payment may be treated as a contribution if its purpose is to benefit a member.
Furthermore, Panagis said the update to the ruling confirms the application of the NALE rules, particularly in relation to in-specie contributions within an SMSF.
“The update states if an SMSF acquires an asset under a contract below market value, the ATO considers the difference not to be an in-specie contribution but a NALI trigger. This is because the asset is acquired under the terms of the contract and not via an in-specie contribution,” she said.
“If part of the asset is purchased, and part is contributed, for example, 50 per cent paid with fund cash, 50 per cent transferred as an in-specie contribution, proper documentation is needed to confirm the arrangement is a part sale/part contribution ensuring both are at market value as is indicated in paragraphs 25A to 25C.”
She said the update also addresses the issue of contributions made by way of value shifting, which occurs when trustees are not dealing at arm’s length by doing services that increase the value of the fund.
“The ATO says that the NALI rules may apply to ordinary or statutory income derived with respect to the asset to which the contribution relates,” she said.
In relation to LCR 2021/2DC, which deals with how NALI provisions apply to SMSFs where parties do not deal with each other at arm’s length, Panagis said that despite the updates from the ATO, issues such as trustee versus individual capacity and establishing market value remain.
