Latest Guide to Holding Insurance in an SMSF – Tax and other considerations

Latest Guide to Holding Insurance in an SMSF – Tax and other considerations

There are several benefits associated with acquiring insurance within an SMSF, such as life insurance and total and permanent disablement (TPD) insurance. For example, the benefits of acquiring insurance within an SMSF can include the following:

  • Cashflow benefits – holding insurance within an SMSF can provide a means of obtaining wealth when it is needed most (e.g. upon death, injury or illness) without creating a cash flow problem for people struggling during these hard economic times.
  • Deductibility of premiums – a complying superannuation fund can claim deductions for certain premiums that would not be deductible if they were personally incurred by a member.
  • Tax free insurance proceeds – generally, insurance proceeds received by an SMSF are tax  free (i.e. they are generally capital in nature and disregarded for CGT purposes
  • No upper limit on what can be paid out of fund (no RBLs) – there is broadly no longer a limit on concessionally taxed amounts that can be withdrawn from the super system by members who have satisfied a condition of release (e.g. where they have ‘retired’ or ‘reached at 65’) or by their ‘tax’ dependants (eg., spouses, financial dependants, etc)

TAX WARNING – New rules now require SMSFs to consider insurance

The Government has recently amended the SIS Regs ( introducing new Reg 4.09(e)) to require SMSF trustees to consider (from 7th August 2012) whether to hold a contract of insurance (e.g. life insurance) that provides cover for one or more of their members.

In particular, SMSF trustees will be required to consider whether to hold insurance for their members (having regard to a member’s personal circumstance) when they formulate, regularly review  and give effect to the fund’s investment strategy under SIS Reg 4.09
Different insurance policies that can be held by an SMSF Brisbane – an overview

Type of Insurance (1) Can an SMSF Hold this policy? Are proceeds assessable in SMSF? CGT exempt? ( 2) Deduction for premiums? Condition of release (COR)
Life Yes No Yes(S.118-300 ITAA 1997) Yes(S.295-465




ITAA 1997)

TPD Yes No Yes(S.118-37 ITAA 1997) Yes(but it depends on the policy) Permanent incapacity
TMC Yes No Yes(S118-37 ITAA 1997) Yes(s.295-465 ITAA 1997) TMC
Trauma Yes No Yes(S118-37) ITAA 1997) No No specific COR applies (bit it might constitute TPD, TMC, temporary incapacity, etc.)
Income Protection Yes No Yes(S.118 – 305




ITAA 1997)





ITAA 1997)

Temporary incapacity


  • In addition, SMSF trustee can take out general insurance for other risks (e.g. to insure against public liability and associated risks with owning real estate).
  • The CGT provision outlined above are in the process of being amended. In the 2011-2012 Budget, the government announced that it will make minor extensions to the CGT exemptions to ensure that insurance policies owned by superannuation funds that were treated as being CGT exempt under the current CGT provisions and ATO administrative practices continue to be CGT exempt.

2.1  Life Insurance – death cover

If the life insurance cover in respect of a member’s death provides cover for risk only, then the premium is fully deductible.

However, if there is an investment component included in the policy, only a partial deduction maybe available (e.g. in respect of a whole of life or endowment policy, an SMSF can only claim a deduction for 30% and 10% respectively, of the premium for such policies.

Government abolishes the trading stock exception for most SMSF assets

Subject to certain exceptions, S.295-85(2) of the ITAA 1997 ensures that gains and losses made on CGT assets held by complying funds are taxed in accordance with the CGT rules rather than the general income and deduction provisions (e.g. s.6-5 and S.8-1 of the ITAA 1997)

One of the key exceptions to this general rule applies to CGT assets held on as trading stock. Therefore, where the exception applies, a gain or loss made on trading stock is taxed to the fund on revenue account, under the ordinary rules that apply to taxpayers generally, rather than under the CGT rules.

During the recent economic downturn, the ATO identified that many funds, for the first time, sought to treat some of their shares as trading stock so that the exception in S.295-85(4) would apply to ensure that any losses related to those shares were immediately tax deductible against any non-CGT income of the fund (e.g. dividends, rent, etc). Many funds sought to apply this practice even though the CGT rules were used in prior years where a gain was made in order to benefit from the general CGT discount in Division 115 of the ITAA 1997.

TAX WARNING – Trading Stock exception abolished

As part of the May 2011 Federal Budget, the government announced its intention to abolish the trading stock exception to the general rule that CGT is the primary code for taxing certain assets held by complying funds, generally with effect from 10 May 2011. Assets held as trading stock before this date would continue to be treated as trading stock of a fund (and, therefore, taxed on revenue account rather than under the CGT rules)

Following the above the Government recently amended the tax legislation to effectively remove access to the trade stock exception in S.295-85(4) to the general rule that CGT is the primary taxing code, for certain assets (e.g. shares, units in a unit trust and land -refer below) acquired by complying super SMSF’s after 7.30pm on 10 May 2011.

This basically means that gains and losses on affected assets (refer below) acquired by complying SMSF’s after 10 May 2011 will only be dealt with under the CGT rules rather than on revenue account.

In effect, the recent amendments achieve the above result by modifying the definition of ‘trading stock’ contained in S70-10 of the ITAA 1997 to exclude the following assets owned by e complying superannuation fund:

  • A share (or a non-share equity interest) in a company or a share in a foreign hybrid company;
  • A unit in a unit trust
  • Land (including an interest in land); or
  • A right or option to acquire or dispose of the above assets.

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