Expert SMSF insights
The importance of opting in to maintain insurance cover
By Nicolas Ali
The Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, passed both houses of parliament on 18 February 2019. This Bill makes amendments to the Superannuation Industry (Supervision) Act 1993, to prevent trustees of APRA-regulated superannuation funds from charging certain fees and costs exceeding three per cent of the balance of a MySuper or choice product annually where the balance of the account is below $6,000. The Bill also prevents trustees of APRA regulated funds from providing opt out insurance to members with inactive MySuper or choice accounts, unless a member has directed otherwise. Finally, the Bill enables the Commissioner to consolidate amounts that are classified as unclaimed money, inactive low-balance accounts or lost member accounts into an active superannuation account where the reunited balance would be greater than $6,000.
Following-on from the Bill becoming law, the ATO released publications early May 2019, which were designed to give the SMSF sector a heads-up that SMSFs might start receiving rollovers from other funds, as a result of member accounts being consolidated.
Many SMSF members consolidate their various superannuation accounts into their SMSF for a number of reasons; however, insurance is often maintained in an APRA-regulated fund, due to group premium rates being lower in such funds and also to avoid the burden of going through an underwriting process (many APRA-regulated funds have automatic acceptance up to certain levels of cover). Therefore, the fund member will often leave enough money in the APRA-regulated fund to cover the cost of insurance premiums for the period of time the member needs the personal risk cover. The amendments in the Bill, however, may mean members lose their insurance cover if the account does not receive employer contributions or rollovers for a period of time and therefore considered an inactive account.
Where an APRA-regulated trustee identifies a member with a superannuation account, which on 1 April 2019 had been inactive for at least 6 months, the trustee must have given the member a written notice before 1 May 2019 that stated:
- From 1 July 2019, the fund will not provide the member with insurance cover if the account remains inactive;
- Cover can be maintained if the member elects to do so; and
- Sets out the method for election.
Super providers, excluding SMSFs and small APRA funds, will be required to report and pay (i.e. rollover) inactive low-balance accounts to the ATO as a new category of unclaimed super money (USM) for the first time by 31 October 2019. The ATO says it will now be able to proactively consolidate eligible USM into eligible active super accounts, including SMSFs and small APRA funds, if an individual has not requested a direct payment of this money or for it to be rolled over to a fund of their choice.
While SMSFs will not be required to report and pay inactive low-balance accounts, they may receive a rollover of consolidated USM for members.
The ATO says it will start proactive consolidation from November 2019 and notify individuals when it has consolidated their USM into an active super account.
While these amendments do not directly apply to SMSFs, they may have an indirect impact on SMSF members who maintain a small balance in an APRA regulated fund to keep their insurance cover active. Under these amendments, if no contributions or rollovers are made to their APRA regulated fund for a continuous period of 13 months or more, their account will become inactive. Unless the member then provides a direction to the APRA regulated fund for their insurance cover to be maintained, their cover will lapse. Furthermore, if their balance in the APRA regulated fund falls below $6,000, their balance may then be transferred to the ATO and ultimately paid to their SMSF or any other active superannuation account the member may have at the time with a balance greater than $6,000.
Even though the legislation specifically prohibits a superannuation account, which provides insurance cover to the member, being transferred to the ATO, this protection is lost if the account is inactive and the insurance cover lapses. It is therefore crucial SMSF members consciously make the decision to elect to maintain the cover by notifying their APRA-regulated fund that holds the cover as soon as possible.
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