Buy/sell insurance may breach sole purpose
ATO Interpretative Decision (ID) 2015/10
Purchasing insurance inside an SMSF to fund buy/sell arrangements may breach the sole purpose test. This has long been a contentious issue, with debate as to whether the sole purpose test is breached.
The ATO has now entered the debate with the view the sole purpose test is breached by these arrangements.
In the situation considered, the deceased member’s shareholding was transferred to his brother. His spouse received payment through insurance benefits held inside the SMSF. The premiums had been paid by the company through additional super contributions.
The ATO view is the sole purpose test was breached because the contributions to fund premiums were never intended to produce a retirement benefit. The decision to purchase the life insurance policy was influenced by other factors not related to providing retirement or death benefits due to:
- the calculation of the insured amount being based on the company value, not future needs of the spouse, and
- the true benefit is that a non-member obtains 100 per cent ownership in the relevant company.
The agreement was also seen as providing financial assistance to the member’s brother because the resources of the fund were used to allow the brother to obtain total ownership and control of the company.
The ATO ID does not address grandfathering any existing buy/sell agreements in superannuation. Clients who have already structured their buy-sell insurance in superannuation should review their insurance policies and may need to seek legal advice.
Deductions for future liability on death and disability
ATO ID 2015/17
Trustees of SMSFs have more clarity about claiming deductions for death and disability payments.
SMSF trustees are generally aware of the ability to claim deductions for insurance premiums. However, they often overlook the opportunity to claim a deduction for the future liability portion of any death or disability lump sum.
In the year a death or disability payment is made, SMSF trustees can elect not to claim the premiums as a tax deduction and instead claim a deduction based on the future liability (service) portion of the benefit.
In ID 2015/17, the ATO confirmed the choice to claim a future liability deduction can be made after the death of an insured member.
Dividend stripping arrangements
Taxpayer Alert 2015/1
The ATO has issued a warning against clients using SMSFs to get dividends out of private companies at lower tax rates.
The concerns relate to situations where clients with significant retained profits and accumulated franking credits within a private company sell or issue new shares to an SMSF and then pay out the franked dividends to the SMSF after satisfying the 45-day holding period rule. This allows the tax to be applied at the lower 15 per cent super tax rate rather than the original shareholder’s marginal tax rate.
SMSF trustees are warned they may face increased regulatory scrutiny if involved in arrangements that display some or all of the following characteristics:
• shares in a private company are transferred to the SMSF,
• the SMSF receives retained profits as fully or partially franked dividends, and
• the SMSF trustee treats the franked dividends and the attached franking credits as exempt income to receive a refund of the franking credits.
The warning also applies where the SMSF receives franked dividends indirectly through a unit trust.
A public ruling may be issued in due course.
Changes to preservation age
Clients who turn 55 after 30 June 2015 will need to wait at least another year before they reach preservation age and can start to access super benefits under the retirement condition of release or commence a transition-to-retirement account-based pension.
Up until 30 June 2015, clients have reached preservation age when they turned 55. However, this is now starting to increase up to the age of 60 and will affect anyone born on or after 1 July 1960. No-one will reach preservation age in the 2016 financial year.
Trustees of SMSFs should carefully check the preservation ages for all members to avoid illegal early access of super benefits.
