SMSFs: Note that trauma insurance is not allowed after July 1, 2014

From July 1, 2014, a self-managed superannuation fund (SMSF) can only provide an insured benefit for a member for an event that is consistent with one of the below conditions of release of a member’s superannuation benefits:

• death
• terminal medical condition
• permanent incapacity (causing the member to permanently cease working), or
• temporary incapacity (causing the member to temporarily cease working).

An event covered by a trauma insurance benefit is not consistent with any of the above conditions  of release. This means that from July 1, 2014, an SMSF that provides a trauma insurance benefit in relation to a member will generally be in breach of the new regulation.

The new regulation does not, however, apply to the continued provision of insurance benefits to SMSF members who joined a fund before July 1, 2014 and we recovered in respect of that insured benefit from July 1, 2014.

As a result, SMSFs are allowed to continue to provide trauma insurance benefits to members who joined a fund before July 1, 2014 and we recovered in respect of that insured benefit before that time, and such members can vary the level of that cover. For example, the cover for these fund members can be increased or decreased, and any associated insurance premiums adjusted after July 1, 2014.

An SMSF trustee that continues to provide a trauma insurance benefit to a fund member can purchase an insurance policy to support the provision of that benefit and can still satisfy the sole purpose test – provided 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, and
• the policy was not acquired to secure some other benefit for another person, such as a member or a member’s relative.

An SMSF may not, however, provide one of its members with a type of insurance cover they did not have prior to July 1, 2014 unless the insured event is consistent with one of the conditions of release that was specified earlier.