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Life insurance and buy-sell agreements

16 October 2015

The ATO has recently released ATO ID 2015/10 that clarifies the ATO’s view as to whether a SMSF contravenes super legislation by purchasing a life insurance policy that covers the life of a member where the purchase is dependent on a buy-sell agreement.

In the case study John and his wife Robin are members of their SMSF. John worked in business with his sister, Kate and both were the directors and shareholders of their trading Company.

buy-sell agreement between them agreed that the Company would make contributions to the SMSF (to John’s member account) to enable it to pay the premiums for life insurance policy on John’s life.

Upon the death of John, the proceeds of the policy were paid by the insurance company to his SMSF member account, and then paid to his wife, Robin.

As stipulated in the buy-sel agreement, it followed that John’s shares in the Company were transferred to Kate, and Robin surrendered any claim she may have on her husband’s interest in the company.

The ATO’s views on this are twofold;

1. Breach of the sole purpose test (s.62 SIS Act), as the SMSF is being used by an external agreement and relieves Kate from having to purchase John’s shares in the Company;

2. By giving financial assistance to a relative of a member that is, Kate, is a contravention of s.65 SIS Act.

If the Company pays the life insurance premiums for John and Kate on policies owned in their own names this would be avoided.

For more information about buy-sell agreements please contact Linda Alexander.

This article is general information only and should not be relied on without obtaining further specific information.

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