On 30 June 2014, the Super System Review Panel delivered its final report to the Government which suggested a number of changes impacting self-managed superannuation funds (SMSFs). On 1 July 2014, one of the last recommended changes was implemented which limits the kinds of insurance an SMSF is permitted to take out for its members.
SMSF insurance requirements prior to 1 July 2014
SMSF members can only access SMSF funds in limited circumstances. Part 6 of theSuperannuation Industry (Supervision) Regulations 1994 (SIS Regulations) provides a framework to ensure SMSF benefits are administered in accordance with the conditions of release and any applicable operating standards.
The conditions of release which allow members early access to proceeds from insurance claims are as follows:
- permanent incapacity2
- temporary incapacity3
- terminal medical condition. 4
Prior to 1 July 2014, if an SMSF held a trauma insurance policy, even though the beneft payable under this policy would not fall within one of the above conditions of release (and therefore the SMSF could not pay the benefit to the member), the funds would still be held by the SMSF and paid to the member upon retirement or when they satisfied some other condition of release.
SMSF insurance requirements after 1 July 2014
Regulation 4.07D has imposed a new operating standard, effective from 1 July 2014:
'A trustee of a regulated superannuation fund must not provide an insured benefit in relation to a member of the fund unless the insured event is consistent with a condition of release specified in item 102, 102A, 103 or 109 of Schedule 1'.
This means that from 1 July 2014, an SMSF can no longer purchase an insurance policy if the proceeds from a claim under that policy cannot be paid to the member under one of the above conditions of release.
For example, as the benefit payments under a trauma insurance policy cannot be paid out under one of the above conditions of release, the SMSF cannot take out an insurance policy of that type.
Transitional rules will apply to existing insurance policies held at 1 July 2014. Under these rules insurance policies acquired prior to 1 July 2014 will be 'grandfathered' so that SMSFs can continue to hold existing insurance policies, even where they do not align with the new rules. Furthermore, the transitional rules allow a fund to adjust the level of insurance held under an existing policy.
This does not change the fact that the SMSF cannot pay proceeds received under a trauma policy to the member when no condition of release has been satisfied.
The change to insurance provided by SMSFs from 1 July 2014 means a trustee should review:
- the SMSF's current insurances: good practice means regularly reviewing fund insurance cover. However a decision in relation to an existing trauma policy - including whether to discontinue the policy - needs to be made with these new rules in mind. For example, a decision to discontinue an existing trauma policy should take into account the fact that the SMSF will not be able to take out a new or replacement policy in the future
- the SMSF's deed: if an SMSF deed specifically refers to trauma insurance as a permissible insurance for the fund (which would be unusual), then the new rules would obviously prevail over the terms of the deed.
The SMSF investment strategy information above should be considered general in nature and should not be interpreted as financial product advice.