SMSF insurance policies – when the policy owner is incorrect

If you discover an SMSF has been paying insurance premiums for an insurance policy it doesn’t own, action will be needed to rectify the situation. But what exactly is required?

Now, if you need a refresher on why it is essential the trustee of an SMSF is the owner of a permitted insurance policy it holds on behalf of a member and is paying the insurance premiums for, we covered this in our blog here.

If the policy is not in the correct name, the starting point is to check whether the insurance policy was correctly issued when the cover was applied for. If the application for insurance cover was completed in the name of the fund trustee on behalf of the fund, but the policy documentation was issued in error, approach the adviser who arranged the policy and ask they arrange with the insurer for the policy documentation to be corrected.

Otherwise, if the policy is owned by someone other than the SMSF, the trustee should stop paying premiums on the policy. Furthermore, if the policy is owned by the member or a relative (such as their spouse), it’s not as simple as transferring the policy into the fund’s name - the fund is not permitted to acquire the policy from the member (as funds are generally prohibited from acquiring assets from related parties other than listed securities and business real property).

Instead, the member of the fund will need to reimburse the trustee for the insurance premiums the fund has incorrectly paid. It will be appropriate to reflect this requirement in the fund’s financial statements by taking up a debtor for the total premiums to be refunded and requesting the member repay the fund as soon as possible. Similarly, an amendment to the fund’s annual returns will be required as the fund is not permitted to claim a tax deduction for the premiums on a policy it does not own.

The auditor of the SMSF should raise the above issues with the trustees in a management letter and may require proof of the reimbursement of the premiums, such as a fund bank statement showing the deposit from the member. Qualification of the fund’s audit report may also be appropriate (subject to materiality) since financial assistance has been provided to a member and separation of the fund’s assets from that of the member has not been maintained. Similarly, an auditor contravention report may be necessary if the relevant reporting criteria have been met as sections concerning financial assistance and separation of fund assets are reportable sections.

If you aren’t sure if a fund is permitted to hold a particular type of insurance, or want to learn about the issues to consider when deciding if it is a good idea to hold insurance inside super, check out our Education Bite – Super & Insurance – Do they belong together? For more details about accessing Education Bites, click here.