Can trauma insurance be held in a self managed superannuation fund?

The Tax Office has recently released a draft Self Managed Superannuation Fund Determination (SMSFD 2009/D1) outlining the Commissioner’s view that the acquisition of a trauma insurance policy by the trustee of a self managed superannuation fund (SMSF) does not necessarily result in a contravention of the sole purpose test.

The sole purpose test prohibits the trustee from maintaining a SMSF for purposes other than providing retirement or death benefits for members (or their dependants).

The trustee can still satisfy the sole purpose trust, provided that any benefits payable under the trauma policy:

• are required to be paid to the trustee of the SMSF;
• will become part of the assets of the SMSF until the member satisfies a condition of release; and
• the policy was not acquired to secure some other benefit for a member or a member’s relative.

The trustee may breach the sole purpose test if the purchase of a trauma insurance policy provides a current day benefit to the member or the member’s relative – such as alleviation of financial stress or a discounted premium on another policy.

The trustee must also consider its obligations to the members including whether the premiums are taken out of all member balances or only from the accumulation account of the member who is insured and whether a high proportion of contributions will be used to purchase the cover.

Although this ruling clarifies the Commissioner’s view regarding the sole purpose test, a SMSF may not be the best place to hold a trauma policy, because the member cannot access the proceeds under the policy until they have satisfied a condition of release.