Quite a few readers have sent emails asking for information about the new rules on’ insurance for self-managed superannuation funds.

Many wanted to know whether my book explains this law. Yes, it is in the third edition of The Self Managed Super Handbook – Superannuation Law for Self-Managed Superannuation Funds in plain English. But, just so we are all on the same page, I thought I would explain this new requirement to give everyone some peace of mind.

The new insurance requirement is not about taking out an insurance policy for your SMSF in case of loss, fraud or theft, nor is it about insurance for SMSF assets such as collectables and artwork purchased after July 1, 2011. The rule is about a trustee’s obligation to consider whether insurance for life, total and permanent disability, income protection trauma, should be taken out for the members of the fund. The trustee is required to weigh this up when formulating or regularly reviewing the investment strategy for the SMSF.

The rule came into force in July. It is outlined in Regulation 4.09 (2) of the Superannuation Industry (Supervision) Regulations 1994, and requires trustees of SMSFs to consider whether they need to hold insurance cover for their members as part of the SMSF’s investment strategy. However, there is no actual obligation to take out cover and it is not compulsory to have insurance. If your SMSF is selected for an audit by the Australian Taxation Office, you will need to provide evidence that the trustees of your SMSF considered whether their members require insurance. The way you may want to support this is by documenting your reasons and decisions either in your investment strategy or the trustees’ meeting minutes. This will provide evidence that the new requirement has been addressed. Of course, if your SMSF did take out insurance for its embers then evidence of the cover, as well as the documents supporting this decision, should be provided instead.

Please remember that the new law requires you to “consider” insurance for your members. It does not mean that your SMSF must take out any insurance. But it does mean that trustees must be able to show that it was considered. T he penalty for trustees who intentionally or recklessly do not comply with this new law and are guilty of an offence is a fine not exceeding $17,000 for individual trustees and $85,000 for a corporate trustee.

On the question of whether your SMSF should take out insurance cover for fund members, please seek advice. This is because the kinds of insurance policies that an SMSF can take out will change from July 1 next year. For example, SMSFs will no longer be able to take out new insurance policies that do not meet conditions of release in the superannuation law – such as “own occupation” disability insurance policies instead of “any occupation” .

Remember, the law requires that trustees consider whether insurance for SMSF members is required. You do not have to have it, but you must consider it and document your decision.

• Monica Rule worked for the Australian Taxation Office, the SMSF regulator, or 28 years. She is the author of The Self-Managed Super Handbook – Superannuation Law for Self-Managed Superannuation Funds in plain English.