Recently the ATO published a case study similar to the agreement described in  ATO ID 2015/10 Superannuation Self-managed super fund: Life insurance – Buy sell agreement – financial assistance – sole purpose.

Often superannuation can be an attractive way to fund life insurance premiums for cash flow and tax deductibility reasons. The ATOs ID confirms that the Sole Purpose test will be contravened where a SMSF purchases a life insurance policy that covers the life of a member where the purchase is dependent on a buy-sell agreement. There are also issues around breaching Section 65 of the SIS Act which deals with providing assistance to a relative of a member of the fund.

This highlights again, the need to seek professional advice when formulating these agreements in conjunction with an SMSF.

The details of the case study:

John is a member of a SMSF. The only other member of the SMSF is his wife, Robin. John and his sister Kate own and run a separate company. John and Kate enter into a buy-sell agreement where the SMSF buys a life insurance policy covering John’s life with the insured amount based on an agreed market value of his interest in the company. The company makes contributions that are allocated to his member account. Under the terms of the buy-sell agreement, these amounts are used to pay the premiums on the policy.

If John dies, the terms of the insurance policy stipulate:

  • the proceeds are paid to the SMSF and added to his benefits
  • all of his benefits are paid to Robin
  • his shareholding in the company is transferred to Kate and Robin relinquishes all claims on his shareholding in the company.

The fund has been utilised by an external agreement which effectively relieves Kate from providing money to pay premiums on the policy and, in the event of John’s death, from having to fund the purchase of his share of the company.
Significantly, the policy would not be purchased at all if it cannot be purchased in accordance with the terms of the agreement.
By purchasing and holding a life insurance policy under this type of arrangement, the fund is not being maintained in accordance with the requirements of section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA) and would breach the sole purpose test.
The terms of the agreement also allow Kate to obtain total ownership and control of the company upon John’s death without the need to pay any consideration either in the way of insurance premiums or as a direct sum to Robin for her expected inherited share of the company.
It is our view that because some of the benefits of the arrangement flow to Kate, financial assistance has been provided to a relative of a member of the SMSF and a contravention of section 65 of the SISA has occurred.

The link to the case study:

This information is general information only. You should consider the appropriateness of this information with regards to your objectives, financial situation and needs.