Superannuation Trustees Must Consider All Insurance Needs Of Members

Superannuation complexity increases. So will SMSF's costs.

A new Superannuation Industry (Supervision) Amendment Regulation 2012 has been legislated.  I will quote from the Explanatory Memorandum (EM) then add my comments.

"Paragraph 4.09(2)(e) is intended to ensure that trustees of SMSFs consider whether they should hold a contract of insurance that provides insurance cover for one or more members of the fund."   What is not clear is what insurance cover is to be considered. Given the wide range of policies available this may necessitate a specialist review of the Members insurance needs apart from an Investment Review. Also, is it supposed to duplicate or augment any insurance the Member holds? But note, it says "consider" so you do not have to take out insurance. However I would suspect no-one has enough insurance.

"Trustees of SMSFs are expected to be self-reliant in determining the type and level of insurance cover members might require whether within or outside their SMSFs."   Again, this means that eventually the ATO (Australian Taxation Office) will issue a Ruling when 'self reliance' is considered not enough. This will probably happen 3 years from now and be backdated to the start of this requirement as 'self evident'.

"The Super System Review panel noted that less than 13 per cent of SMSFs have insurance and that SMSF members were more likely to hold appropriate levels of insurance, or be able to hold insurance outside their superannuation, than members of other superannuation funds. In making its recommendation, the panel wanted to ensure that trustees appropriately consider the holding of insurance for SMSF members."  Two comments here. First: What are 'other superannuation funds' and why is the comment "dropped in" to the statement? So if a Member of a SMSF can hold more insurance than "other funds", then the implication is "let's make them hold more!"  Secondly: So, if a Member is well covered outside the Fund does this become another cost to bear by the Fund to either document the insurance a Member already has and the Fund has to keep a list of external insurances up to date as well as insurances it takes out for a Member, along with an Asset Register? The list will also be diverse and complex if each Member's requirement is different to another Member's and a Register of what the Member's ENTIRE insurance holdings are kept.

"SMSF trustees will be required to consider whether to hold insurance, for their members, such as life insurance when they formulate, regularly review and give effect to the fund’s investment strategy. Trustees may evidence this requirement by documenting decisions in the fund’s investment strategy or minutes of trustee meetings that are held during the income year."  To date no guidance has been proposed or mentioned by the ATO. It seems the SMSF sector will have to work this out at additional cost of seeking out their professional adviser for an opinion on the interpretation of the meaning of this explanation. A lot of duplicated work.

It appears that SMSFs will gradually be regulated to a point that starting a SMSF will involve so much paperwork and ongoing updates to the paperwork that time to deal with the primary purpose - providing for a person's retirement, may become a secondary activity. The comment is an example of Reductio ad absurdum, but the point is - when is enough regulation, enough?

Paragraph 4.09(2)(e) came into effect 1 July 2012, so will be part of any audit of a SMSF for the 2013 year.

Brett Lamond
[20120918]
Source: Quotes are from
http://strongersuper.treasury.gov.au/content/exposure_drafts/smsf_insurance/downloads/Explanatory_Material.rtf
Last Edit: 20 September 2012