The Australian Taxation Office (ATO) on the 17th November 2014 confirmed that new regulations which came into effect on 1 July 2014 do not permit new insurance products acquired on or after 1 July 2014 to be used as part of a cross-insurance arrangement. This was a common strategy used to protect SMSFs engaging in Limited Recourse Borrowing Arrangements from being forced to sell a property if a member of the fund died or became disabled.
Insurance strategy rejected
The ATO confirmed that these types of arrangements are not permitted under the new rules as “the insured benefit will not be consistent with a condition of release in respect of the member receiving the benefit”.
Impact on SMSFs with existing cross-insurance arrangements
Where a trustee acquired insurance products prior to 1 July 2014 to implement a cross-insurance strategy, the ATO’s announcement seems to imply that those arrangements will continue to be permitted as those policies would be grandfathered and therefore exempt from the new regulations.
According to Colonial First State’s FirstTech team, where a trustee acquired a new policy to implement a cross-insurance strategy on or after 1 July 2014, the new rules will apply and the trustee will need to restructure their fund’s insurance arrangements in consequence of the ATO’s announcement. In this case, trustees may wish to contact the fund’s auditor or seek legal advice to confirm their options.
SMSF Trustees may wish to seek SMSF specific advice from the ATO before proceeding with any other debt reduction and liquidity strategies
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Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557
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