Succession Planning

SMSF succession planning role questionable

A recent ATO interpretative decision (ID) has placed doubt over the validity of any business succession plans involving life insurance cover held within an SMSF.

ATO ID 2015/10 addressed a situation where a business owner effectively used the proceeds from a life insurance policy of an SMSF member as consideration for purchasing the deceased individual’s share in that business.

The strategy involved two brothers who were business partners, one who had an SMSF that included his spouse as the other member, and was implemented whereby the SMSF took out life cover for one brother financed by contributions from the business to the fund for that specific purpose.

Upon the death of the brother in the SMSF, the proceeds of the insurance cover were paid to his spouse, resulting in 100 per cent ownership of the business passing to the other brother.

The ATO ruled the arrangement represented a breach of the Superannuation Industry (Supervision) (SIS) Act as it failed to comply with the sole purpose test and the sections prohibiting the provision of financial benefits to a member or relative.

In regard to the sole purpose test, the ATO stated in the decision “the SMSF has been utilised by an external agreement to which the SMSF is not a party in an arrangement which effectively relieves the member’s brother from having to provide money to pay the premiums on the policy and, in the event of the member’s death, from having to fund the purchase of the member’s share of the company. It is clear the SMSF acts as a conduit under the agreement.”

In reference to providing financial assistance to a member, the commissioner ruled a breach of the SIS Act had occurred because “the terms of the agreement allow the member’s brother to obtain total ownership and control of the company upon the member’s death without the need to pay any consideration either in the way of insurance premiums or as a direct sum to the member’s widow for her expected inherited share of the company”.

Commenting on the decision, Townsends Business and Corporate Lawyers special counsel Michael Hallinan questioned the involvement of the SMSF from the start.

“While it is always easier to be intelligent in hindsight, involving the SMSF trustee as a party to the succession agreement was probably not a good move,” Hallinan said.

“The terms of the SMSF could have been amended to confer on the member the ability to direct the trustee to provide risk cover of a certain level.

“If so, the involvement of the SMSF trustee would have been reduced to simply providing a death benefit of an amount specified by the member which was financed by contributions made by or in respect of the member.”


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