Home

 

Publications and Documents:

Publications and Documents

 

Adviser Tips:

Adviser Tips

 

Adviser Updates:

Adviser Updates

 

Individual Updates (Most Recent First):

Adverse ATO Advice on Super Buy/Sell Cover

Partnership and Trust Loan Accounts

Effect of Debt Reduction Cover on Buy/Sell Cover

Prioritising Needs

Simultaneous Deaths

Mutual Will Strategies

Joe Hockey on Trusts

Tax Treatment of Self-Ownership Agreements

Vested and Indefeasible Interest

Gross or Net Value?

Henry Report

Deemed Dividends

Super Buy/Sell Cover

Bamford in the High Court

Trauma Cover in Super

Origins of Self-Ownership

Fact-Finding

Methods of Aggregation

Valuing the Business

Duty to Give Tax Advice

Equity vs Loan Capital

Horses for Courses

Commercial Debt Forgiveness

Choice of Trustee

Simplifying the Valuation Issue

Hybrid Succession Strategy

Hedge and Wedge Strategy

Sole Proprietors and Families

Free Teleconference

Simple or Complete Succession?

Contemporaneous Agreement

Geared Premium Funding

Super Fund Ownership

Business Family Will

 

 

 

 

 

 

 

Trauma Cover in Super

 

There have always been questions as to whether it is appropriate to hold Trauma Cover in Super.

The two main reasons have been:

  • the failure to expressly mention the deductibility of the Premium for a Trauma Benefit.

  • the question whether it is a breach of the Sole Purpose test, if the Insurance Proceeds aren't able to be distributed to the Member upon the occurrence of an Insured Event.

 

Deductibility

The deductibility issue is likely to need legislative action to clarify the position.

 

Sole Purpose Test

However, it seems that the ATO is moving towards acceptance of Trauma Cover in Super from a Sole Purpose test point of view.

On 4 November, 2009, the ATO issued SMSFD 2009/D1.

In summary, the Draft Determination states as follows:

  1. A trustee can still satisfy the sole purpose test provided any benefits payable under the policy: ·

    • are required to be paid to a trustee of the self managed superannuation fund (SMSF); ·

    • are benefits that will become part of the assets of the SMSF at least until such time as the relevant member satisfies a condition of release; and ·

    • the acquisition of the policy is not made to secure some other benefit for another person such as a member or member's relative.

  2. However, if a trustee purchases a trauma insurance policy that provides for benefits payable under the policy to be paid directly to someone other than a trustee of the SMSF (for example, the insured member or member's relative is the beneficiary of the policy) this would be inconsistent with the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA).2 In these circumstances the trustee would contravene section 62.

21 April Update: The Draft Determination has now been released as SMSFD2010/1.

The wording of the above summary has been changed slightly after submissions from IGS:

  1. A trustee can still satisfy the sole purpose test provided any benefits payable under the policy: ·

    • are required to be paid to a trustee of the self managed superannuation fund (SMSF); ·

    • are benefits that will become part of the assets of the SMSF at least until such time as the relevant member satisfies a condition of release; and ·

    • the acquisition of the policy is not made to secure some other benefit for another person such as a member or member's relative.

  2. However, if a trustee purchases a trauma insurance policy that provides for benefits payable under the policy to be paid directly to someone other than a trustee of the SMSF (for example, the policy provides for the insured member or member's relative to directly receive benefits payable under the policy) this would be inconsistent with the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA). In these circumstances the trustee would contravene section 62.

This places Trauma Benefits in a similar position to Own Occupation TPD Benefits.

 

Practical Implications

The possible inability to distribute the Insurance Proceeds to the Member questions the commercial purpose of including them in the Super environment.

If the Insurance Proceeds do not satisfy a Condition of Release, they cannot be released to satisfy a financial need of the Member, such as the need to:

  • fund medical treatment;

  • fund Living Expenses; or

  • reduce Debts and Liabilities (so that the lack of income does not cause a default under a Loan Agreement or Security).

Relationship with Income Protection Strategy

The Life Insured's Trauma Strategy needs to be carefully coordinated with their Income Protection Strategy.

The Trauma Cover can address lump sum needs, while the Income Protection Cover can address recurring needs.

It is possible that some of the recurring needs could be met by the Income Protection Benefit, assuming it becomes payable.

However, if it is anticipated that access to the Trauma Benefit would still be needed by the Member to fund lump sum needs, Super Fund Ownership might not be appropriate from a practical point of view (rather than a legal or tax point of view).

Split Trauma Cover

Alternatively, the total Trauma Cover could be split between the Super and Personal environments.

This would allow some Trauma Cover to be available for immediate needs, while the rest could be held in Super and form part of an accumulation strategy after the payment of the claim (pending the satisfaction of a Condition of Release).

Geared Superannuation Investments

If the Super Fund has a geared investment, the Fund itself might take out Trauma Cover, which would allow it to reduce the Debt upon the occurrence of an Insured Event with respect to the Member.

If the Debt relates to a property which has been leased to a Business in which the Member has an interest, an alternative strategy would be for the Business to obtain Key Person Income Cover, which would allow it to continue paying the rent upon the occurence of an Insured Event.

The Premium with respect to this Cover would be deductible, without having to be held in the superannuation environment.

 

Copyright: Ian Gray Solicitor

 

 

Adviser Tip

The One Page Strategy is designed to help you simplify Succession Planning.

It helps you understand your needs, it helps you quantify them, it helps you cost them, and it helps you prioritise them.

See more Adviser Tips

 


Current Marketing Schedule

Current Marketing Schedule

Ian Gray travels to most capital cities regularly throughout the year and is available for Meetings.

Please click here to see his availability in Brisbane, Sydney, Melbourne, Adelaide and Perth.

Please contact us to arrange an appointment or teleconference.