Most of us pay our Insurance premiums by the month as it helps with cash flow, and why should a Self Managed Super Fund (SMSF) be any different?
We recently had one of our clients hand in their 2016 work, and upon compiling their SMSF Tax Return, we noticed there was a Premium Funding application to pay their Insurance Premium. Premium funding pays the Insurance premium upfront and then you can pay it off over equal monthly instalments.
Seems pretty innocent and normal however Premium funding is technically classified as a borrowing in an SMSF. Under Section 67A of the SIS Act 1993, it states:
A trustee of a regulated superannuation fund must not:
- Borrow money; or
- Maintain an existing borrowing of money.
Note 1: Section 67A contains an exception for certain limited recourse borrowing arrangements (LRBA)
Note 2: Section 166 imposes an administrative penalty for a contravention of subsection (1) in relation to a self
Now before you panic and frantically start looking through your Insurance premiums, it is ok to pay by the month as long as you aren’t charged Interest for the privilege of paying your Insurance by the month. If your Insurance Policy just charges you an application fee or fee for the purpose of paying monthly that is okay, it is when they use the wording interest or interest charges that it becomes a borrowing and in turn a breach of the SIS act.
The below example is what a Premium funding policy will look like:
|Monthly instalment amount||$1,185.51||Total premium||$12,970.61|
|Plus Deposit||$0.00||Less Deposit||$0.00|
|Plus Stamp Duty||$0.00||Plus Interest Charges||$1,255.56|
|Plus Application Fee||$77.00||Total amount to be repaid||$14,226.17|
|Plus Additional monthly instalment(s) due||$0.00||Number of instalments||12|
|Initial instalment payment||$1,262.56||Flat rate||9.68%|
You can see where it is circled Plus interest charges the client has paid $1,255.56 in interest charges, this makes this a borrowing and therefore a breach of Section 67A of the SIS act.
Fortunately we were able to avoid administrative penalties for our client but it did highlight how easy it is to be in breach in such an innocent way. It is also worthy to note that not all Trustees will be eligible to avoid an Administrative penalty.
If you think you may have breached the SIS act by way of using Premium funding to pay for an Insurance policy or are looking at paying your Insurance by the month, contact us today as we may be able to help avoid an Administrative penalty.