Business owners have been urged to avoid purchasing buy/sell insurance policies through SMSFs, according to financial services provider Partners Superannuation Services.
In a statement from parent company Partners Wealth Group, SMSF consulting and auditing director Martin Murden warned business owners were increasingly acquiring these policies through their SMSFs to secure tax deductions but that the downsides outweigh the benefits.
Mr Murden said buy/sell insurance protected business owners in cases where one partner dies or becomes permanently disabled by funding a buy-out of the practice to the affected partner’s family.
However, he warned that buying such a policy through the partner’s SMSF may fail the ‘sole purpose test’.
“If, as part of the agreement between the business partners, there is a requirement for the insurance policy to be held by each partner's SMSF and that the proceeds arising from an insurance claim are to be used as payment for the deceased's interest in the business, the SMSF could be considered to have ‘failed’ the sole purpose test under SIS, leading to an increase in the fund's tax rate from 15 per cent to 49 per cent,” he said.
In the absence of such an agreement, he warned the beneficiary of the deceased partner may not be compelled to hand over their share of the business.
“If the fund has already paid the insurance proceeds to the deceased's spouse/partner as part of the death benefit, why would they transfer an interest in the business for what appears to be no payment?” he said.
In addition, purchasing insurance through an SMSF decreased the pool of available funds for investment and may lead to a hike in the tax payable on the fund.
Mr Murden encouraged advice practice partners to hold insurance cover personally and to have a buy/sell agreement in place outside of their SMSF.
“Seek advice from a specialist risk writer and have them work with a solicitor to ensure you are adequately insured and the buy/sell agreement meets your needs,” he said.
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