It goes without saying that assets held by a Self-Managed Superannuation Fund need to be correctly valued and insured, but too many Trustees are not aware that failing to have an insurance policy over an asset held by the SMSF could cost them dearly in the case of an insurance event.
SMSF assets, whether they be residential or commercial properties, vehicles, or collectible assets must be adequately insured before acquisition to avoid any surprises.
However, if the insurance policy is held in the Trustee’s name rather than ‘on behalf of’ the fund, in the event of a claim any subsequent payout made out to the Trustee will end up in their personal bank account.
Is that a problem? In short, yes, it can be.
While it may seem relatively logical and simple that the Trustee would merely transfer any payout amount received from their personal bank account to the SMSF’s bank account, there is a higher possibility that the contribution cap could be breached.
This will result in the fund paying extra tax.
It could also result in the Trustee unable to contribute the insurance proceeds into the Fund in case the members have maximised their transfer balance caps.
Current rules mean as a non-concessional contribution you can only deposit up to $110,000 per member for the year, or up to a maximum of $330,000 per member as a three year bring forward rule.
If your insurance payout is higher than this amount depending upon your claim and circumstances, and you are having to make a transfer to replace the destroyed or damaged asset, it could potentially result in a significant tax bill, all as a result of three missing words.
It’s a simple mistake to make, and it’s one that often occurs because Trustees don’t realise why it’s necessary for insurance policies to be held on behalf of the SMSF, and also because people believe they’re unlikely to ever need to call on their insurance.
However, we insure our assets because unforeseeable events unfortunately can, and do, happen every day.
Should you need to make a claim, it’s a fair assumption to make that you’ll be under a high level of stress at the time.
It’s therefore worth ensuring the insurance policy is held correctly with the super fund being the beneficial owner, to avoid placing yourself under any extra stress and finding yourself in an undesirable tax situation.