Life insurance and buy-sell agreements

The Self-managed super fund: Life insurance - Buy-sell agreement - financial assistance - sole purpose (ATO ID 2015/10) interpretative decision clarifies our view of whether a SMSF contravenes super laws by purchasing a life insurance policy covering the life of a member, where the purchase is dependent on a buy-sell agreement.

The following case study is based on a similar agreement to the one described in ATO ID 2015/10.

Case study

John is a member of a SMSF. The only other member of the SMSF is his wife, Robin. John and his sister Kate own and run a separate company. John and Kate enter into a buy-sell agreement where the SMSF buys a life insurance policy covering John’s life with the insured amount based on an agreed market value of his interest in the company. The company makes contributions that are allocated to his member account. Under the terms of the buy-sell agreement, these amounts are used to pay the premiums on the policy.

If John dies, the terms of the insurance policy stipulate:

  • the proceeds are paid to the SMSF and added to his benefits
  • all of his benefits are paid to Robin
  • his shareholding in the company is transferred to Kate and Robin relinquishes all claims on his shareholding in the company.


The fund has been utilised by an external agreement which effectively relieves Kate from providing money to pay premiums on the policy and, in the event of John’s death, from having to fund the purchase of his share of the company.

Significantly, the policy would not be purchased at all if it cannot be purchased in accordance with the terms of the agreement.

By purchasing and holding a life insurance policy under this type of arrangement, the fund is not being maintained in accordance with the requirements of section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA) and would breach the sole purpose test.

The terms of the agreement also allow Kate to obtain total ownership and control of the company upon John’s death, without the need to pay any consideration either in the way of insurance premiums or as a direct sum to Robin for her expected inherited share of the company.

It is our view that because some of the benefits of the arrangement flow to Kate, financial assistance has been provided to a relative of a member of the SMSF and a contravention of section 65 of the SISA has occurred.

What you should do

If you have entered into an agreement of this type you should seek independent professional advice. All insurance held by an SMSF trustee should be consistent with the purposes of super, and therefore correspond with one of the requirements of the core or ancillary purposes set out in the sole purpose test in s62 of SISA.

Deciding if the trustee has complied with the sole purpose test requires an examination of all the facts and circumstances associated with the maintenance of the SMSF. Generally, the presence of a buy-sell agreement on its own will not result in a breach of the sole purpose test.

If you realise your SMSF has breached the sole purpose test, or provision of financial assistance or any other super laws, you should speak to your auditor. Some matters are most appropriately dealt with by auditors when doing their annual audit. If this is not the case, you should contact us to discuss your options.

    Last modified: 06 Apr 2016QC 46541