Trustees of self-managed super funds (SMSF) were previously allowed to purchase trauma insurance policies for fund members and still satisfy the sole purpose test of the Superannuation Industry (Supervision) Act 1993 (SISA). The sole purpose requirement stipulates that the sole purpose of a superannuation fund is to provide retirement benefits for each fund member when they reach retirement age, as specified in regulations (or in the event of their death, to provide those retirement benefits to their dependents).
However, from 1 July 2014 onwards, an SMSF can generally only provide an insured benefit for a member for events that are consistent with one of the following conditions of release of superannuation benefits:
- Temporary incapacity resulting in the member temporarily ceasing work
- Permanent incapacity resulting in the member permanently ceasing work
- Terminal medical condition
As trauma insurance typically pays lump sum benefits if the insured person is diagnosed with a critical illness or injury defined in the policy regardless of whether they cease work or become permanently disabled, it is not consistent with these conditions of release. Therefore, an SMSF that provides trauma insurance benefits will generally breach the new regulation. However, this new regulation does not apply to continued provision of insured benefits to members who joined a fund before 1 July 2014 and were covered before this date.
SMSFs are governed by strict rules and managing your own super is a considerable responsibility. For further assistance or advice, please consult a specialist from our SMSF team at (08) 9367 7023.