You work hard and you want to make sure your Self-Managed Superannuation Fund provides you with the most financial benefit. Stacks can help you set up and run your SMSF so that it complies with the regulations and serves to protect your wealth.
There are some great advantages to running a Self-Managed Superannuation Fund (SMSF). Among other things, an SMSF gives you control over how your assets are invested and more flexibility when it comes to investment options. An SMSF allows you to convert your super to an income stream when you retire, and provides tax benefits such as lower income tax.
A member of the Stacks Wealth Protection team will explain the issues that need to be considered when setting up a SMSF and help you to determine what is right for you.
Holding insurance via your SMSF
There are many types of insurance that can be owned by superannuation funds including:
- Life insurance
- Total and Permanent Disablement ('TPD') insurance
- Income Protection insurance
- Trauma insurance
A number of factors need to be considered for each of these types of insurance before deciding whether a superannuation fund is an appropriate vehicle for ownership, such as the deductibility of premiums and Estate planning considerations.
Whilst the tax deductibility to the superannuation fund may be of attraction, there are other considerations that may factor into the decision. Therefore the decision to hold insurance via superannuation should not be made without careful consideration.
Deductibility of Premiums
One of the main reasons that ownership of insurance in superannuation is common is because the premiums are tax deductible, where they may not otherwise be under other forms of ownership.
Deductions apply for premiums paid by a complying superannuation fund for life insurance and Total Permanent Disablement insurance (TPD). These premiums are not deductible to individuals.
Income protection insurance
A deduction is also available for premiums in relation to income protection insurance (ie, benefits payable under an income stream because of the person's temporary inability to engage in gainful employment). Premiums for this type of insurance were only previously deductible if the income stream was payable for a period of no longer than two years. This meant superannuation funds did not generally provide benefits exceeding two years. This differed from individual ownership.
Superannuation funds can hold trauma insurance however, it is rarely done. This is because the premiums are not tax deductible, there are issues as to whether the sole purpose test is able to be met and more importantly, there may be issues in a member accessing the proceeds of the policy. For example, the insurance company may pay the proceeds to the superannuation fund, however the member may not be able to satisfy one of the conditions of release in Schedule 1 of the Superannuation Industry (Supervision) Regulations 1994 (Cth).
Estate Planning Considerations
Removal of Reasonable Benefits Limits has led to an increasing amount of life insurance held in superannuation. Notwithstanding the RBL removal, a person's objectives in relation to whom they want to benefit on their death and their potential beneficiaries may influence the decision on whether holding life insurance in superannuation is appropriate.
If a fund has claimed a tax deduction in respect of an insurance premium, the death benefit will generally include an element untaxed in the fund which is part of the taxable component. This is because the deductibility of the premiums results in no contributions tax having being paid on this part of the benefit. The untaxed element of a death benefit is calculated in accordance with section 307-290 of the ITAA 1997.
Death benefits paid to death benefit dependants
Lump sum death benefits paid to persons who are death benefits dependants (ie, spouse, children under 18, a person who was in an interdependency relationship with the deceased or financially dependent on them) are received tax-free whether they comprise the taxable or tax-free component. They are not assessable income or exempt income.
Death benefits paid to non-death benefit dependants
Where, however death benefits are paid to non-death benefits dependants (eg, children over 18 who cannot satisfy financial dependency or an interdependency relationship), the tax-free component will be tax-free and the tax on the taxable component will depend on whether the benefit comprises the element taxed in the fund, the element untaxed in the fund or both. We may be all aware that the element taxed in the fund entitles an offset so that the rate of tax on this component is 15% (plus Medicare levy). However, not all may be aware that the element untaxed in the fund is taxed at 30% plus Medicare.
In relation to the untaxed element of the fund where a death benefit is paid as a pension, a tax offset equal to 10% of the element untaxed in the fund is available where either the deceased died over 60 or the recipient is 60 years or over and is a death benefits dependant. There is no tax offset if the deceased died under 60 and the death benefits dependant is also under 60.
Need advice about setting up and running a Self-Managed Superannuation Fund? Speak to the specialist wealth protection lawyers at Stacks