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Trustees Duty to Consider Insurance Cover in SMSF Investment Strategy

January 24, 2014 by alan

Following an amendment to the superannuation regulations, SMSF trustees must from the 2012/13 year onwards, give consideration to whether the SMSF should hold insurance cover for the members.

The new regulation means that trustees, who are also normally the members, must now consider insurance in order to discharge their obligations under the SIS Act. For newly established trustees, insurance should be considered when formulating the initial investment strategy. For existing SMSF’s, this practice should form part of the regular investment strategy review.

What the legislation requires

Paragraph 4.09 (2) (e) of the SIS Regulations now requires that a trustee of a superannuation fund must formulate,review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the fund, including whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.

There is no rule on how often trustees need to consider the insurance needs of members, but it is prudent to document this at least annually.

If no changes to insurances in the SMSF are required at least annually, it is preferable not to simply state that the current arrangements have been reviewed and are appropriate for the members. The trustees should document the reason(s) why the decisions were made. This will provide evidence the new requirement has been addressed.

The level of cover is not stipulated in the Regulations, but rather the trustees are expected to be self-reliant in determining the type and level of insurance that members may require.

The Explanatory Memorandum to the new regulation states that in meeting this requirement, trustees should have regard to the personal circumstances of the members. For example, if a member holds insurance cover outside of the SMSF, this should be considered in determining how much, if any. Insurance the SMSF should hold for the member.

Trustees may evidence this requirement by documenting decisions in the fund’s investment strategy or annually in minutes of trustee meetings if no changes are made to the investment strategy.

Types of insurance that should be considered

Trustees should consider whether fund members need additional life, total and permanent disability (TPD) and income protection (or salary continuance) insurance.

It’s important to note that from 1 July 2014, it will no longer be possible to take out new policies in super that don’t align with the conditions of release in superannuation law. This includes TPD policies that pay a benefit if the member is unable to work again in their own occupation and insurance that pays a benefit if the member suffers a critical illness specified in the policy.

Trustees may therefore want to consider these types of insurance before this window of opportunity closes and address them in the investment strategy.

Some reasons why a member may not require insurance cover

· when the member has indicated that they have no need for cover as their debts are low and needs are fully funded;

· the member has sufficient insurance cover in other super funds (members often keep employer or industry funds open to avail themselves of lower group rates);

· the member has other insurance arrangements outside of the super;

· that due to illness or injury the cost of premium is too high for the cover provided;

· the member has been declined for cover due to occupation or pre-existing conditions; and

· the member does not believe in insurance or is unwilling to pay the cost of the premium.

As mentioned above, the actual reasons should be documented each year in the investment strategy or annually in minutes of trustee meetings if no changes are made to the investment strategy.

SMSF trust deed

The governing rules of the SMSF must allow the trustees to hold insurance for fund members and should specify the types of insurances that can be held.

The governing rules may therefore need to be amended to cater for the new requirements, especially if own-occupation TPD or trauma insurance is warranted.

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Division 293 Tax

January 23, 2014 by alan

We advise that the government has introduced an additional layer of contributions tax of 15% on concessional contributions of individuals who are high income earners.

The tax was proposed in the 2012 budget.

The new Division 293 tax will apply to individuals whose level of income exceeds $300,000 in any financial year.

Division 293 tax is being introduced from the 2012–13 year to reduce the tax concession on superannuation contributions for individuals with income greater than $300,000 a year. Division 293 tax will be charged at 15% of an individual’s taxable concessional contributions above the $300,000 threshold (which are capped for 2012–13 at $25,000).

Individuals will be liable for Division 293 tax if they have taxable contributions for an income year and their income for surcharge purposes plus their low-tax contributions (essentially concessional contributions) are greater than $300,000. The taxable contributions will be the lesser of the low-tax contributions and the amount above the $300,000.

The ATO have announced that Division 293 tax notices of assessment will start issuing from early February 2014 to those affected

How Division 293 tax is calculated:

An individual is generally liable to pay Division 293 tax if the sum of their income and their low tax contributions is greater than $300,000.

Income used

To calculate an individual’s income for Division 293 Tax purposes, we look at the individual’s income tax return and use:

o taxable income (assessable income less deductions)

o total reportable fringe benefits amounts

o net financial investment loss

o net rental property loss

o amounts on which family trust distribution tax has been paid

o super lump sum taxed elements with a zero tax rate.

These elements are summed (except the super lump sum amount, which is subtracted) to give the income amount.

Low tax contributions

Low tax contributions are generally contributions made in a financial year to a complying super fund in respect of the member which are included in the assessable income of the superannuation fund. We look at an individual’s member contribution statement (MCS) and/or self-managed super fund (SMSF) annual return and use:

o employer contributed amounts

o other family and friend contributions

o assessable foreign fund amounts

o assessable amounts transferred from reserves

o notional employer contributions, known as defined benefit contributions, when the fund is a defined benefit fund.

Excess concessional contributions have essentially lost their concessional status as, for the 2012–13 financial year they are taxed an additional 31.5% on top of the 15% taxed in the fund. In later financial years excess concessional contributions will be taxed at the individual’s marginal tax rate.

Excess concessional contributions are subtracted out of the low tax contribution amount for Division 293 tax purposes.

Calculation

To calculate the Division 293 tax liability, we:

12. Add the income and low tax contributions.

13. Compare the amount from Step 1 to the $300,000 threshold to identify any excess above the threshold.

14. Compare the low-tax contribution amount and the amount from Step 2. Take the lesser of the two amounts, which then become the taxable contributions.

15. Apply a 15% tax rate to the taxable contributions.

Example

16. An individual has an income of $291,000 and low-tax contributions of $25,000. The sum of these two amounts is $316,000.

17. $316,000 minus the threshold of $300,000 is $16,000.
Low-tax contributions is $25,000 and the excess is $16,000.

18. The lesser amount is $16,000, therefore this individual has taxable contributions of $16,000.

19. $16,000 x 0.15.
The amount of Division 293 tax levied on this individual equals $2,400.