On 17 November 2014, the Australian Taxation Office (ATO) confirmed their stance that superannuation funds are unable to use cross-insurance arrangements. These types of strategies may have been used when trustees of a Self Managed Super Fund (SMSF) purchased direct property.

How cross-insurance arrangements worked was one trustee of the super fund would take out life insurance on the other trustee’s life. The intention of using a cross-insurance arrangement was in the event of one members / trustee’s death the surviving member would receive the insurance payout rather than being paid to the deceased members account.

The ATO has now made it clear that any life insurance proceeds must be paid to the deceased members account. This requires the sum of money to be paid out as a lump sum or pension if the trust deed and legislation permits.

As a result this could cause problems for trustees who decide to purchase a property or borrow to purchase a property. If the deceased members benefit cannot be paid out as a pension due to possible liquidity or legislation reasons the surviving member may be forced to sell the property. This could potentially lead to the property being sold at an inconvenient time and potentially at a loss. Further, if the super fund owns the business real premise that the business operates from the ATO’s stance could even be more of an issue.

The ATO will continue to monitor trustees buying to borrow property in their super funds to ensure that spruikers don’t take advantage of trustees or that trustees don’t risk borrowing too much at a time of low interest rates and get in trouble in later years when interest rates rise.

Another issue the ATO is monitoring is banks taking personal guarantees from trustees when they borrow to invest. Borrowing inside super is meant to be done on a limited recourse basis. Super Funds are unable to give a guarantee over the lending outside the property that is being purchase. Therefore banks and other lenders have been taking personal guarantees to reduce the lenders risk and effectively negates the purpose of limited recourse lending.

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Thomas Jacks BCom (Acc), SMSF SpecialistTM, Adv. Dip F.S. (FP)
“I want to be able to assist clients with their investment and retirement planning by providing real strategy advice. It’s my aim to not only help my clients but to educate them by addressing the entire picture” Google Plus

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