The Australian Taxation Office has issued an Interpretative Decision (ATO ID 2015/10, the ID) regarding life insurance held within a self managed super fund (SMSF) as part of a buy-sell agreement.
The ID relates to whether an SMSF contravenes section 62 and paragraph 65(1)(b) of the Superannuation Industry (Supervision) Act 1993 (SISA) by purchasing a life insurance policy over the life of a member of the SMSF, where the purchase is a condition and consequence of a buy-sell agreement members have entered into as co-owners of a business.
A buy-sell agreement is commonly used to deal with the preservation and succession of businesses in circumstances such as death, disability, dispute and departure. It has been a practice when implementing buy-sell agreements for SMSFs to take out buy/sell life insurance, to provide a surviving spouse with an equivalent business value through the insurance proceeds in exchange for the shares in the business.
The specific scenario considered in the ID involved a member of an SMSF and his brother who both own shares in a business. A buy-sell agreement was entered into, where the business is to pay additional contributions to the SMSF, and those contributions are used to pay for a member’s life insurance policy (to the value of that member’s share of the business). If that member dies, the insurance benefit would go to the SMSF, which would distribute a death benefit to the member’s spouse. When this occurs, the buy/sell agreement requires the member’s spouse to then arrange for transfer of the remainder of the business to the living brother, and to relinquish all rights over the business.
It is the ATO’s view in the ID that this arrangement will breach section 62 of SISA (the Sole Purpose Test) and section 65(1)(b) (prohibition on providing financial assistance to fund members or ...