ATO waves another red flag about insurance in superannuation

Posted by: Kylie Wilson

On 1 May 2015 the ATO released ATO ID 2015/10.  This interpretative decision further illustrates the ATO's views about an SMSF acquiring a life insurance policy over the life of a member where the acquisition of the life insurance is a condition of a business succession/buy-sell agreement.

The ATO had previously expressed its view, that this was a breach of the sole purpose test under Section 62 of the Superannuation Industry (Supervision) Act (SISA), in a private SMSF Specific Advice issued on 12 March 2014.

In the case that was the subject of the ATO ID, the terms of the relevant buy-sell agreement required the SMSF to purchase a life insurance policy over the life of the member based on an agreed value of shares owned by the member in a company in which the member and the member's brother were the only shareholders.  In the event of the member's death, the terms of the agreement directed the proceeds of that life policy to the member's spouse and the member's shareholding in the company to the member's brother.

The ATO took the view that this arrangement:

1. breached the sole purpose test in section 62 SISA;
2. constituted the provision of financial assistance to a relative of the member in breach of section 65 SISA; and
3. was not in accordance with the relevant SMSF investment strategy.

It is not uncommon for life insurance to be held in superannuation.  When life insurance is owned by an SMSF it will be important to ensure that the terms of any buy-sell agreement that is entered into by members of that SMSF do not result in the SMSF breaching the sole purpose test which can result in significant compliance issues for the SMSF.

If you have any questions about this issue you should contact our superannuation team for further information.