Are you an SMSF trustee who is looking to acquire buy/sell insurance policy through your SMSF instrument? You better think twice before you do.
SMSF trustees may see a spike in their fund’s tax rate from 15 per cent to 49 per cent if they purchase buy/sell insurance policies through their SMSF. Many investors enter into such arrangement because it provides them with tax deductions. However, such benefit is easily outweighed by the huge risks involved.
Downsides defeat the upsides
Buy/sell policies purchased via SMSF can result in the fund failing its sole purpose test under the SIS. This can happen when the insurance policy requires partners to hold each other’s SMSF and the proceeds stemming from the insurance claim are used as payment for the deceased/disabled partner’s interest in the business.
A 49 percent fund tax rate will also be implemented.
Furthermore, difficulties may arise in requiring the beneficiary to fork over the interest of the business if the agreement does not specifically state that the proceeds of the insurance claim be used to finance and allow the agreement to be completed.
He added that deductions from the insurance premiums will adversely affect the fund’s capability to invest. As the contributions to the fund are decreased, the amount available for invest is greatly reduced. Thus, it will lead to lower retirement benefits for other members.
Additional tax applies to the insurance portion of the death benefit if the beneficiary is not tax-dependent.
Personally cover your insurance
Financial experts tell partners to personally cover their insurance policies and to get professional expertise from a specialist risk writer and a solicitor to ensure that they are adequately insured and the buy/sell agreement addresses all concerns.
It is imperative that you discuss with SMSF adviser if you plan to purchase buy/sell insurance policies with your SMSF instrument. You can do that, but it does not hurt if you huddle with your adviser and weigh all factors, the benefits, and the risks.
