Ms Demanuele reminded SMSF practitioners that an SMSF will only be able to claim this deduction if the fund has paid an insurance premium in the year in which a death or disability benefit is paid, the fund had also been claiming tax deductions for the insurance premiums previously, and the member ceased work as a result of the disability or death.

“The future liability deduction may be available to funds when they pay a benefit to a member as a result of death, terminal illness, total and permanent disability or temporary disability,” she said.

“Once this election is made however, the fund cannot claim future tax deductions for the cost of insurance, so the SMSF trustees need to carefully consider which tax deduction may be more beneficial for their fund.”

Ms Demanuele used the example of David and Julia who are both aged 55 and have an SMSF. Each member is insured for $1.4 million of term life and TPD insurance cover. On 1 March 2018, David suddenly passed away. At the time of his death, he had been a member of the SMSF for 10 years, she explained.

“The SMSF received a death benefit insurance payout of $1.4 million which was added to his accumulation balance of $500,000. The SMSF paid the insurance premium of $2,000 on 1 February 2018,” she continued.

“After David’s death, Julia’s son Michael joined the fund and also became a trustee of the fund. As trustees, Julia and Michael seek tax advice and are informed that they could choose to claim the premium paid of $2,000 as a tax deduction or claim a future liability deduction instead for the 2017/18 financial year.”

If the SMSF claims a deduction for the premium paid, Ms Demanuele explained it will receive a tax deduction of $2,000.

“If instead Julia and Michael choose not to claim a deduction for insurance premiums paid by the fund in 2017/18, the fund can instead claim a tax deduction under provisions for the future liability to pay benefits,” she said.

The deduction, she explained, will be calculated as follows:

Benefit amount x Future Service Period/Total Service Period

= $1.9 million x 10 years/20 years

= $950,000

“By claiming the future liability tax deduction, an SMSF could be significantly better off,” she said.