SMSFs: Life insurance and buy-sell agreements
Gavin: The ATO has now issued guidance in relation to its stance taken in ID 2015/10, regarding whether an SMSF contravenes super laws by purchasing a life insurance policy that covers the life of a member where the purchase is dependent on a buy-sell agreement.
The advice contained the following case study.
Scenario
John is a member of an 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.
So if John dies:
- the proceeds are paid to the SMSF and added to his benefits;
- all of his benefits are paid to Robin; and
- his shareholding in the company is transferred to Kate and Robin relinquishes all claims on his shareholding in the company.
Result
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 even of John’s death, from having to fund the purchase of his share of the company.
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 S.62 of the SIS Act, 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 and 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 also the ATO’s view that, because some of the benefits of the arrangement flow to Kate (i.e., John’s sister), financial assistance has been provided to a relative of a member of the SMSF and a contravention of S.65 and SIS Act has also occurred.
Ref: ATO website – Super – Case study – Life insurance and buy-sell agreements
Interested in joining our team? Why not apply today?
About Our Traineeships:-
Join the Market Leader in 2016 – Accounting Traineeships
Looking to study a B.Com at University of Newcastle in 2016?
Bottrell Business Consultants are a Multi Award Winning Firm
We have 2016 Traineeships available – work 3 days Study part-time 2 days
Apply now to Tara Skippen on tara@bottrellaccounting.com.au – send resume & cover letter
www.bottrellaccounting.com.au or check us out on Facebook, Twitter, Instagram or LinkedIn
Offices – East Maitland | Newcastle | Sydney | Melbourne | Brisbane | Gold Coast
Bottrell Business Consultants Pty Ltd – Chartered Accountants and Business Advisors.
The Bottrell group incorporates Bottrell Business Consultants, Bottrell Accounting & Taxation, Maitland Accounting & Taxation, East Maitland Accounting Services and Mobile Bookkeeping & Recruitment.
Our group of businesses & links include the following companies (& our websites);-
- Bottrell Accounting & Taxation – Visit out website
- Bottrel Business Consultants Pty Ltd – Visit our website
- Maitland Accounting & Taxation – Visit our website
- East Maitland Accounting Services – Visit our website
- Mobile Bookkeeping & Recruitment – Visit our website
Comments are closed.