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Forward Thinking Magazine : August 2011
32 LENDER $500K death benefit $500K death benefit $500K loan repayment $500K debt Charge Beneficial Interest $500K life insurance cover on Frank's life Holding Trust MARY FRANK LRBA asset $1m SMSF Figure 2: Example 1. Mary and Frank's SMSF has entered into an LRBA over the business real property from which the family business is run. Mary and Frank have agreed that they would like to retain the property in the fund if Frank were to die, as their children work in the business also. The property is valued at $1 million and there is $500,000 of LRBA debt. Figure 2 shows the fund's flow (bold black arrows) if life cover of $500,000 is established in the SMSF and is attributable to Frank's accumulation account. Upon Frank's death a superannuation death benefit becomes payable. The SIS compulsory cashing rule requires that a death benefit is paid as soon as practicable. Mary receives the policy proceeds of $500,000 (ignoring other accumulated benefits in the fund). If those funds are then used by Mary to directly pay down the outstanding LRBA debt, the amount would be treated as a non-concessional contribution, with excess contributions tax applying. Alternatively, (see figure 3) Frank and Mary might establish the cover and not attribute it to any specific account within the SMSF, assuming the fund deed allows it. Payment of the policy proceeds is made to the SMSF, which then directly repays the debt to the lender. This approach avoids the repayment of debt being treated as a contribution. Note: The premiums paid by the fund in the Figure 3 scenario are not deductible to the SMSF, but the premiums paid in the Figure 2 scenario will generally be deductible. However, the convenience of direct reduction of the debt, lack of excess contributions issues and maintenance of the full non-concessional contribution cap for Mary in the Figure 3 scenario may mean that Frank and Mary prefer that option. Of course, the effectiveness of this scenario depends upon the SMSF trust deed containing the appropriate enabling provisions.