SMSF – Insurance for members and Restrictions on investments

When preparing your investment strategy you’re required to consider whether to hold insurance cover for each member of your SMSF.

Your SMSF can generally provide insurance for a member for an event that is consistent with one of these conditions of release of the member’s superannuation benefits:
• death
• terminal medical condition
• permanent incapacity (causing the member to permanently cease working)
• temporary incapacity (causing the member to temporarily cease working).

Your SMSF can’t provide trauma insurance for a member unless it is a continuation of insurance cover that existed before 1 July 2014.

Trauma insurance
Trauma insurance typically pays a lump sum if the insured person is diagnosed with a critical illness or injury, such as cancer, stroke, coronary bypass or heart attack. The lump sum is paid regardless of whether the insured person ceases work or becomes permanently disabled.

From 1 July 2014 an SMSF can generally only provide insurance for members to cover death, terminal medical condition, and permanent or temporary incapacity. Trauma insurance is not permitted because the events covered by trauma insurance are not consistent with these events. However, SMSFs can continue to provide trauma insurance benefits to a member if it is a continuation of insurance benefits for that member that existed before 1 July 2014. Such members can vary the level of the cover. For example, their cover could be increased or decreased, and any associated premiums adjusted, after 1 July 2014.

An SMSF trustee that continues to provide a trauma insurance benefit to such a member will still satisfy the sole purpose test, provided all the following conditions are met:
• any benefits payable under the policy are required to be paid to a trustee of the SMSF
• those benefits will become part of the assets of the SMSF at least until such time as the relevant member satisfies a condition of release
• the policy was not acquired to secure some other benefit for another person, such as a member or member’s relative.

SMSF – Restrictions on investments

All investments must be made on a commercial ‘arm’s length’ basis. You can’t buy assets from, or lend money to, fund members (or other related parties) unless an exception exists. Generally, your fund can’t borrow money.

Related parties and relatives
A number of investment restrictions apply to ‘related parties’ of your fund and ‘relatives of members’. This is because no-one associated with your fund should get a present-day benefit from its investments.

Loans or financial assistance
You can’t lend money or provide direct or indirect financial assistance from your fund to a member, or a member’s relative. For example, you can’t use fund assets to guarantee a personal loan of a member.

Acquiring assets from related parties
You can’t acquire assets for your fund from a related party unless the asset is a listed security or business real property acquired at market value, or an in-house asset (there are limits on in-house assets).

In-house assets
An in-house asset is a loan to or investment in a related party, an investment in a related trust, or an asset of your fund that is leased to a related party. In-house assets can’t be more than 5% of your fund’s total assets unless an exception applies.

Business real property
Land and buildings used wholly and exclusively in a business may be excepted from the restrictions that apply to in-house assets and related party acquisition of assets .

Collectables and personal-use assets
If your fund invests in collectables or personal-use assets – such as artworks, jewellery, vehicles or boats – related parties aren’t allowed to use these assets or store them in their home.

Your fund can only borrow money in very limited circumstances, such as short-term loans to make benefit payments, or limited recourse borrowing arrangements in which the assets of the fund are protected.


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