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Trauma cover within SMSF requires caution

Trustees with trauma cover within their SMSF need to pay particular attention to the situation due to the approach regulators are able to take in reviewing these arrangements, according to a risk insurance expert.

Holding trauma insurance inside an SMSF is not allowed for new policies issued after 1 July 2014.

However, policies taken out before this date and held within an SMSF are allowed to continue due to a grandfathering provision contained in the legislation governing super introduced in 2007.

“If the policy was established inside the fund prior to 1 July 2014, it may stay there, but proceed with extreme caution,” BT Financial Group life insurance product development senior manager Jeffrey Scott said.

“Because both the ATO and APRA (Australian Prudential Regulation Authority) have stated, prima facie, having trauma insurance inside super does not breach the sole purpose test but if there is an unreasonable diversion of assets of the fund to pay for trauma premiums, it may make the fund non-complying.”

Scott highlighted the clarification needed here was to determine what was an unreasonable diversion of assets.

“We’ve gone both to the ATO and gone to APRA to ask the question ‘what is unreasonable?’” he said.

“The ATO came back and said whatever we deem it to be after we do the audit of your fund. That doesn’t provide you with much comfort.”

Due to this arbitrary power the regulator has to make an SMSF non-complying due to trauma cover inside the fund, Scott’s advice is for trustees to hold this type of insurance outside the super fund.

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