The recent significant changes to the SMSF investment strategy operating standard now requires Trustees of SMSFs to regularly review their investment strategy and in addition to consider whether the Super Fund should hold insurance cover for all its’ members.
This change was the result of the Super System Review (Cooper Review) which concluded that there was a material issue of underinsurance in the SMSF sector, especially where super fund members moved from funds which provided risk cover to SMSFs where generally there is little or no risk cover.
While Trustees can choose one of many ways to comply with, and show they have complied with the new required changes, it would be my suggestion to take the following 8 step planned process.
SMSF Trustees should commit to annually reviewing the SMSF’s investment strategy. Such an annual review could become part of the annual end-of-year compliance activities for the Super Fund. An agenda can be created to ensure that all operating standing requirements are discussed and decided upon to formally comply with industry requirements, and a review of the insurance cover for all members can and should be one of those agenda items.
It is important to determine the investment/financial structure of the fund, whether it is in growth phase or pension phase; review the size of members accounts and determine whether those accounts are likely to increase with influxes of contributions and investment earnings; and are they likely to decrease through benefit outflows due to the ages of the members.
It is important to investigate and determine if SMSF members have other insurance cover outside of the SMSF, including the types of cover and the amount of cover. Without this information, the Trustees cannot make informed decisions as to whether or not the members should have cover.
Upon reviewing the information on the members insurance cover externally or within another super fund, Trustees can now determine whether or not the members need cover inside the SMSF. It could well be determined that there is sufficient external cover, not to need insurance cover inside the SMSF. Or there could be other extenuating circumstances which, because of a particular members’ personal circumstances, could make the insurance cover unattainable or too expensive to be considered.
The type of insurance cover and amount of cover can vary from member to member. The members do not all have to have the same amount and type of insurance cover, if in fact they need insurance cover at all, as the cover should be specific to their needs and current situation.
Once the Trustee/s has made a decision, it should be formally recorded as a minute or resolution, accounting for each member and the reasons behind the decision made. Itemise each member, record what insurance cover was decided upon for each member and why. Reasons could include that member already has sufficient cover outside the fund, another member may not want to have insurance cover inside the fund, etc.
Where insurance cover is taken up for a member, altered or cancelled, the Trustee must now ensure that all the correct applications and documentation is undertaken to implement the decision made for each member.
It is highly recommended that Trustees keep all reports, correspondence and research and relevant to the decided outcomes for each member as well as applications, etc, to ensure that Trustees can account for their decisions and outcomes.
Trustees should be aware that the question of ‘adequate’ cover could expose them to some risks in relation to liability to third parties for decisions made in relation to insurance cover for members, and whether trustees are in a position to make informed decisions regarding the type and level of insurance cover for each member.
To reduce the risks of third party liabilities, the Trustees should consider requiring each member to formally confirm the Trustee’s decision and acknowledge their choice not to have insurance cover or to have it outside the fund.
Trustees should also consider engaging an insurance expert to assist with the decision making or at the very least to confirm that the insurance coverage decided upon is appropriate for each member.
If you have any questions or would like some help with your SMSF please don't hesitate to contact us.
Paul Baggetta, Founding Partner of Baggetta & Co, has been a Taxation Accountant for over 32 years, a qualified Financial Planner since 1999 and in 1983 qualified as a Real Estate Licensee and holder of a Triennial Certificate.
November 15, 2017
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The information provided on this website, including the material and contents provided in the website publications, are informative in nature only and you should not act specifically on the basis of this information alone. It should not be used as a substitute for legal, business, accounting, tax, financial planning or other professional advice. If expert assistance is required, professional advice should be obtained.
Paul Baggetta is the Founder & Principal of Baggetta & Co. Paul Baggetta has been a Taxation Accountant since 1981, a Financial Planner since 1998, and in 1993 qualified as a Real Estate Licensee, holding a Triennial Certificate (currently not trading) and operated his own Real Estate business for property investment clients for over 5 years as a second business.
Financial planning services are provided by Paul Baggetta as an Authorised Representative (No. 261469) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. Australian Financial Services License No. 223135.
Taxation & Accounting services are provided by Paul Baggetta as a Registered Tax Agent (No.61487008) and is a Member of SMSF Association, FIPA & NTAA.