Trauma Cover in Super

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:

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.
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 Clover Law:

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.
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.

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