I was recently asked if a SMSF whose only assets are an insurance policy and cash topped up by contributions used to meet premiums on the policy would comply with the sole purpose requirement in the Superannuation Industry (Supervision) Act 1993.

It depends. It will depend on the terms of the life policy and significantly on the age of the member:

The sole purpose test in sub-section 62(1) is structured as follows:

(1) Each trustee of a regulated superannuation fund must ensure that the fund is maintained solely:

(a) for one or more of the following purposes (the core purposes ):

… or

(b) for one or more of the core purposes and for one or more of the following purposes (the ancillary purposes ):

….

In other words a fund maintained for any of the listed core purposes complies with the sole purpose test. A fund maintained for an ancillary purpose or purposes also complies with the sole purpose test so long as it is also maintained for a core purpose or purposes.

The life insurance policy in question would need to be considered. Will the policy pay out insurance proceeds to the trustee of the fund on the death of the member to be used by the trustee to pay death benefits?

Pursuing a core purpose

If the policy would indemnify the trustee on the death of the member before the member:

• ceases gainful employment; or
• reaches age 65;

the trustee of the fund would appear to pursue core purposes either in sub-paragraph 62(1)(iv) or (iv) which are:

(iv)  the provision of benefits in respect of each member of the fund on or after the member’s death, if:

(A)  the death occurred before the member’s retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged; and

(B)  the benefits are provided to the member’s legal personal representative, to any or all of the member’s dependants, or to both;

(v)  the provision of benefits in respect of each member of the fund on or after the member’s death, if:

(A)  the death occurred before the member attained the age (65) prescribed for the purposes of subparagraph (ii); and

(B)  the benefits are provided to the member’s legal personal representative, to any or all of the member’s dependants, or to both;

by taking out life cover to fund these death benefits.

Pursuing an ancillary purpose

If the life cover in the policy:

• is in respect of the life of a member who is over age 65 and who has ceased gainful employment; or
• only extends cover following both of those events;

then the fund is only maintained for ancillary purposes in sub-paragraph 62(2)(iii) and (iv) which are:

(iii) the provision of benefits in respect of each member of the fund on or after the member’s death, if:

(A) the death occurred after the member’s retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged (whether the member’s retirement occurred before, or occurred after, the member joined the fund); and 

(B) the benefits are provided to the member’s legal personal representative, to any or all of the member’s dependants, or to both;

(iv) the provision of benefits in respect of each member of the fund on or after the member’s death, if: 

(A) the death occurred after the member attained the age prescribed for the purposes of subparagraph (a)(ii); and 

(B) the benefits are provided to the member’s legal personal representative, to any or all of the member’s dependants, or to both;

and the fund is not maintained for core purposes and so the fund does not comply with the sole purpose requirement in sub-section 62(1).

Summary

To reiterate: where the member has both:

• reached the age of 65; and
• ceased gainful employment;

or the policy doesn’t fund death benefits before either case then core purposes in sub-paragraph 62(1)(iv) and (iv) don’t apply to life cover taken out by the fund and the sole purpose test in section 62 could be breached for failure to pursue a core purpose in addition to an ancillary purpose or purposes.