Superannuation law requires SMSF trustees to consider the need to hold insurance cover for members of the fund. However, a trustee may decide not to hold any insurance policies for members as the members of the fund may have adequate insurances in place elsewhere, such as insurance owned in their own name (outside of superannuation) or cover held in another superannuation fund.
Thus, where insurance cover is owned outside of an SMSF, it is important that the SMSF does not pay for insurance premiums for a policy that is either personally owned by a member or owned by another superannuation fund.
If a client uses their SMSF bank account to pay for a personally owned or non-SMSF owned policy (whereby the premium cost should have been funded by them personally), the SMSF will be in breach of the superannuation law and regulations (e.g. providing financial assistance to members and early release of benefits) since the fund started paying the premiums (i.e. a personal expense) on their behalf. Therefore, all the money would need to be paid back to the SMSF by the SMSF member in order to rectify the contravention.
The SMSF will need to submit a contravention report to the ATO (their auditor, accountant or financial adviser can assist with this), outlining the breach and the fact that it has been remedied, ideally all in the one notification. If any tax returns have been completed since this happened, these may also need to be rectified.
On the other hand, if the policy is owned by the SMSF (i.e. the SMSF trustee/s or director/s), then the fund is not in breach as it is paying the premium for its own policy on the members.
It is important to note that if the policy is owned by the AIA Insurance Superannuation Scheme and the client wishes to pay for their premiums using their SMSF, this can only be done by way of rollover. When doing a rollover from their SMSF the client will need to provide a cheque or pay via EFT and send a Rollover Benefit Statement (RBS) to the AIA Insurance Superannuation Scheme in order to receive the upfront 15% premium rebate. This process must be followed until 31 March 2021, which is when SuperStream takes effect for SMSFs. SMSFs can start using SuperStream anytime from 31 March 2021 but from 1 October 2021, all SMSFs must use SuperStream in order to rollover any superannuation to and from their SMSF.
Help your SMSF clients avoid breaching the law by making sure their insurance policies are structured correctly and premiums are paid from the right entity.
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