Hi Clare

Yes insurance held by a SMSF should be in its name.

The ATO has a good summary of the insurance rules re a SMSF on their website that covers critical (trauma) illness insurance.

The rules re trauma insurance changed 1 July 2014 so if the policy was in place pre then it may be able to continue.

The change was due to the SIS regulation 4.07D from 1 July 2014 is:

"Operating standard--permitted types of insurance

(1) This regulation is made for subsection 31(1) of the Act.

(2) A trustee of a regulated superannuation fund must not provide an insured benefit in relation to a member of the fund unless the insured event is consistent with a condition of release specified in item 102, 102A, 103 or 109 of Schedule 1.

(3) However, subregulation (2) does not apply to:

(a) the continued provision of benefits to members who joined a fund before 1 July 2014; or

(b) the provision of benefits under an approval granted before 1 July 2014 under subparagraph 62(1)(b)(v) of the Act.

(4) If a trustee is unable to amend the governing rules of a fund, to make the governing rules comply with subregulation (2):

(a) the rules that do not comply with subregulation (2) are taken to have been omitted from the governing rules; and

(b) the rules omitted under paragraph (a) are taken to have been replaced by rules that allow the provision of benefits that are permitted under subregulation (2).

(5) This regulation does not apply until 1 July 2014."

The ATO also states:

"Insurance for members

When preparing your investment strategy you're required to consider whether to hold insurance cover for each member of your SMSF.

Your SMSF can generally provide insurance for a member for an event that is consistent with one of these conditions of release of the member's super:

• death

• terminal medical condition

• permanent incapacity (causing the member to permanently cease working)

• temporary incapacity (causing the member to temporarily cease working).

Trauma insurance

Trauma insurance typically pays a lump sum if the insured person is diagnosed with a critical illness or injury as specified in the policy, such as cancer, stroke, coronary bypass or heart attack. The lump sum is paid regardless of whether the insured person ceases work or becomes permanently disabled. This is not consistent with one of the conditions of release of the member's super, so SMSFs generally cannot provide trauma insurance for their members.

However, SMSFs can continue to provide trauma insurance benefits to a member if it is a continuation of insurance benefits for that member that existed before 1 July 2014. In this situation the member can vary the level of the cover, and any associated premiums, after 1 July 2014.

To meet the sole purpose test, the following conditions must be met:

• any benefits payable under the policy must be paid to a trustee of the SMSF

• those benefits will become part of the assets of the SMSF at least until such time as the relevant member satisfies a condition of release

• the policy was not acquired to secure some other benefit for another person, such as a member or member's relative."

Thanks

SMSF AAA

I had this situation where the member took out a trauma policy held in his own name with premium came out of the Super Fund. The annual premium was only for $1500 and being the first year of contravention. My then auditor lodged an ACR for this $1500. I disagreed with that firstly, it was the first year and only breach with no prior year "trustee behaviour" issue, secondly, it did not reach the 5% and/or $30K reportable threshold.

Am I correct in taking this view?

Hi Stephen

Yes I agree with your view re the trustee behaviour test & the 5% & $30,000 test.

ACR reporting criteria is at:

www.ato.gov.au

Instructions to complete the Auditor actuary contravention report and addendum for 2019–20, 2020–21 and 2021–22 financial years due to the impacts of COVID-19.

Also need to consider if it was a new Fund and "if the SMSF is less than 15 months old and there are contraventions, you need to identify if any single contravention has exceeded $2,000." The amount of the contravention is less than $2,000.

Perhaps the previous auditor used their "professional judgement" to lodge the ACR given if there was a payment of insurance proceeds the amount would likely be in excess of the 5% & $30,000.

Thanks

SMSF AAA