Newsletter No. 9, September 2013

Insurance for SMSF members needs to be considered

Thank you all for your best wishes for my new business as an SMSF expert since leaving the Australian Taxation Office (ATO) in August this year.  I was very touched by the personal messages of encouragement. They have certainly added to my motivation to continue my journey.

This month’s newsletter is about the requirement for SMSF trustees to consider insurance for their members.  Recently I have received a lot of emails from my readers who were worried that they may not have been aware of this new law.

A lot of the trustees wanted information on the new legislative requirements for SMSFs to have insurance.   Many wanted to know whether my book explains this law.  Yes, the third edition of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English” does cover this new requirement (refer to pages 56 and 58) as well as others that were announced in May this year.  But so as not to cause my readers sleepless nights I thought I would explain this new requirement to give everyone some peace of mind.

Before I go any further, I must stress that the new insurance requirement is not about taking out an insurance policy for your SMSF in case of loss, fraud or theft, nor is it about insurance for SMSFs assets such as collectables and artwork purchased after 1 July 2011. It is about considering whether insurance (e.g. life, total and permanent disability, income protection, trauma) should be taken out for the members of your SMSF when formulating, regularly reviewing and giving effect to the SMSF’s investment strategy.  From 1 July 2012 the law, which is outlined in Regulation 4.09(2) of the Superannuation Industry (Supervision) Regulations 1994, requires trustees of SMSFs to consider whether they need to hold insurance cover for their members as part of their SMSF’s investment strategy.  However, there is no actual obligation to take out cover and it is not compulsory to have insurance.

If your SMSF is selected for an audit by the ATO, you will need to provide evidence that the trustees of your SMSF have considered whether their members require insurance.  The way you may want to support this is by documenting your reasons and decisions either in your investment strategy or the trustees’ meeting minutes.  This will provide evidence that the requirement has been addressed.  Of course if your SMSF did take out insurance for its members, then evidence of coverage as well as the documentation of this decision should be provided instead.

Please remember that the law requires you to “consider” insurance for your members.  It does not mean that your SMSF must have insurance, but that trustees must be able to show that it was considered.  The penalty for trustees who intentionally or recklessly do not comply with this new law and are guilty of an offence is a fine not exceeding $17,000 for individual trustees and $85,000 for a corporate trustee.

As to whether your SMSF should take out insurance cover for their members, please seek advice from an insurance provider as the types of insurance policies that can be taken out by SMSF will change from 1 July 2014.  For example, SMSFs will no longer be able to take out new insurance policies that don’t meet conditions of release in the superannuation law – such as “own occupation” disability insurance policies instead of “any occupation”.

Remember, the law requires that due consideration is given to whether insurance for SMSF members is required. You don’t have to have it, but you must consider it and document your decision.

Upcoming Webinar

I will be conducting my first webinar on behalf of, online legal document provider, Law Central on “Investment Restrictions under the Superannuation Law” in October.  Although the webinar will be aimed at professionals, I believe a lay person will be able to understand it.  If you are a trustee and have already read my book, you will definitely be able to understand topics explained in the webinar.  If you want to be notified of my upcoming webinars on SMSFs, it is best you subscribe to the Law Central website. This way, you will be immediately notified. The subscription to Law Central is free but there is a fee for the webinar. If you would like to subscribe to Law Central, click here. I am also writing in-house newsletters for Law Central.  To read my last Law Central SMSF Bulletin click here.

Monica Rule worked for the ATO, the Regulator of SMSFs, for 28 years is the author of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English” and is a columnist with The West Australian and The Australian newspapers. www.monicarule.com.au

Disclaimer

Monica Rule is the author of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English”.  Her advice is general in nature and readers should seek their own professional advice before making any financial decisions.