COUNTING THE COSTS OF LIFE INSURANCE

It probably comes as no surprise to anyone that there is a significant underinsurance gap between what we would need to maintain our standard of living should the unthinkable happen, and what we are actually covered for in the way of insurance. Australia is one of the most under-insured nations in the developed world, ranking 16th for life insurance coverage. [i]

There are lots of reasons people give for not buying life insurance, but top of the list is invariably cost. Sounds reasonable enough, especially when households are under pressure from increases in the cost of living. But dig a little deeper and it turns out the way we weigh up decisions when outcomes are uncertain is not always in our best interests.

According to something called Prospect Theory, people fear a certain loss more than they value a larger but uncertain gain.[ii] We tend to view money spent on insurance premiums as a loss, unlike money spent on a daily cup of coffee, a pair of shoes or a weekend away, which deliver immediate rewards.

There’s also a disconnect between what we say we value and what we spend our money on.

Thinking about the unthinkable

When asked, most people say the thing they value most is family. Yet when it comes to insurance many of us cover our car and our home but overlook our most important assets – our life, our ability to earn an income and the well-being of the people who depend on us.
Thinking about being diagnosed with a terminal disease, suffering a disabling accident or contemplating your own death or that of your partner can be very uncomfortable. Seeking cover for those possible eventualities is something that is very easy to put off or avoid altogether.

Although it is uncomfortable facing the thought of not being there for your family, the real value of life insurance is that it buys peace of mind that if we die or become seriously ill and are unable to work then the right amount of money will go to the right people when they need it most.

Types of life insurance

There are three main types of life insurance. Death cover provides a lump sum if you die or are diagnosed with a terminal illness; total and permanent disability (TPD) pays a lump sum if you are permanently disabled due to an accident or illness and unable to work; and Income Protection provides a monthly payment if you can’t work for a period of time due to illness or injury.

The amount of life insurance you need depends on your family circumstances, your income and lifestyle. While many working Australians have default cover in their super fund, that’s no cause for complacency. It’s often a basic level of cover which may need to be topped up either inside or outside super.

Take Chris, aged 30. He has a partner, two children and the median level of default life insurance cover in super for someone his age.  That is, $211,000 in death cover, $162,500 for TPD and $2,250 a month for income protection.[iv] According to a recent report by Rice Warner, the amount someone in Chris’s position needs is closer to $704,000 of death cover, $910,000 of TPD cover and $4,150 a month of income protection.[v]

Paying for a peace of mind

Paying life insurance premiums won’t provide the instant pleasure hit of an espresso, but most people would be surprised to know that the peace of mind that comes from protecting their family’s financial security costs less than their daily cup of coffee.

Rice Warner estimates the cost of death of and TPD cover for the average working Australian at less than 1 per cent of salary, and less than 0.5 per cent for white collar workers.[vi] Which begs the question, what cost do you put on the wellbeing of the people you love most?

If you would like us to help you work out the appropriate level of life insurance for your family, and the best way to achieve it, give us a call.


[i] Swiss Re Economic Research & Consulting , 2007
[ii] Prospect Theory, Wikipedia, https://en.wikipedia.org/wiki/Prospect_theory
[iv] Under-insuranced in Australia 2017, Rice Warner, p.20.
[v] Ibid, p.10.
[vi] How affordable is group insurance in superannuation, Rice Warner, December 2016,
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5 REASONS TO TAKE YOUR INSURANCE MORE SERIOUSLY

As we move through life, find a partner, raise a family, and maybe start a business, the importance of insurance in a long term plan increases. That’s because insurance is all about providing a financial safety net that helps you to take care of yourself and those you love when you need it most.

Here are 5 reasons why insurance matters.

  1. Protection for you and your family

Your family depend on your financial support to enjoy a decent standard of living, which is why insurance is especially important once you start a family. It means the people who matter most in your life may be protected from financial hardship if the unexpected happens.

  1. Reduce stress during difficult times

None of us know what lies around the corner. Unforeseen tragedies such as illness, injury or permanent disability, even death – can leave you and your family facing tremendous emotional stress, and even grief. With insurance in place, you or your family’s financial stress will be reduced, and you can focus on recovery and rebuilding your lives.

  1. To enjoy financial security

No matter what your financial position is today, an unexpected event can see it all unravel very quickly. Insurance offers a payout so that if there is an unforeseen event you and your family can hopefully continue to move forward.

  1. Peace of mind

No amount of money can replace your health and wellbeing – or the role you play in your family. But you can at least have peace of mind knowing that if anything happened to you, your family’s financial security is assisted by insurance.

  1. A legacy to leave behind 

A lump sum death benefit can secure the financial future for your children and protect their standard of living.

To ensure you’ve got the right cover for you and your family, please contact us today.

 

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.

SUPERANNUATION – Concessional Contribution Changes Now Law

Background

The 2016/17 Federal Budget proposed several amendments to superannuation, both in the accumulation and pension phase. A number of these measures that will change the concessional contributions (CC) that can be made, was passed through Parliament on 23 November 2016.

The changes to CCs include:

  • a reduction in the annual CC cap regardless of age to $25,000;
  • a lowering the income threshold above which the additional 15% tax is payable on CCs to $250,000;
  • introduction of the ‘catch-up contributions’ regime for certain individuals; and
  • removal of the “10% test” for personal deductible contributions.

Reduction in CC cap

From 1 July 2017, the annual CC cap will reduce to $25,000 for all individuals, regardless of age. Indexation of the CC cap to changes in Average Weekly Ordinary Time Earnings (AWOTE) will continue on an annual basis, but, in increments of $2,500. This is likely to result in more frequent increases to the cap. The table below shows the aged based CC caps that will still apply for the remainder of 2016/17.

CC caps for 2016/17

Where possible, a client can take advantage of the higher CC limits for this financial year. For an employee, this would require entering into a salary sacrifice arrangement, as only future earnings can be sacrificed to superannuation. A self-employed client has greater flexibility and can make a CC closer to the end of the financial year.

There are no changes to the assessment of excess CCs. Excess CCs are included in an individual’s assessable income and taxed at their marginal tax rate. The excess CC charge will also be payable. Where a person has made an excess CC and an election is made not to withdraw the excess from the fund, then this amount is treated as a non-concessional contribution
(NCC).

Interaction with SG

Ordinarily, an employer is required to pay the superannuation guarantee (SG) at 9.5% up to the maximum contribution base (MCB) of $51,620 per quarter. This regulation limits the mandated SG contribution for the 2016/17 financial year to $19,616 for an individual employee but does not prohibit an employer from making employer contributions above this level (e.g. salary sacrifice or employer voluntary contributions).

Impact of lower cap

The reduction in the annual CC cap clearly limits the contributions that a person can make to super. When the reduction in the annual non-concessional contribution (NCC) cap to $100,000 from 1 July 2017 is also taken into account, the overall capacity to make ongoing contributions to super is significantly reduced. The consequence is that alternative investment options outside the super environment may need to be considered.

Division 293 tax

From 1 July 2017, the income threshold above which an additional 15% tax is payable on CCs (within the annual limit) will be reduced from $300,000 to $250,000. This is known as ‘Division 293 tax’. There is no change to the definition of ‘income’ for the purpose of determining liability for the additional tax or the way in which the liability is calculated.

The ATO issues a separate notice to any person who is liable to pay Division 293 tax.

Personal deductible contributions

From 1 July 2017, all individuals under the age of 65 (and those aged 65 to 74 who meet the work test), will be able to claim a tax deduction for personal super contributions. Currently, only people who derive less than 10% of total income from employment sources are eligible to claim a tax deduction. This change will enable a range of clients, who were previously not able to make a concessional contribution, to now do so.

Key examples of people previously excluded from making CCs are those:

  • employed and receive SG contributions that are within the CC cap but whose employer does not offer salary sacrifice arrangements;
  • who switch from being a self-employed contractor to an employee during the course of a year and fail the 10% test due to employment income; and
  • residents who, for tax purposes, are working overseas for a foreign employer and their employer can’t or won’t contribute to an Australian super fund.

Care should be taken regarding the amount claimed as a tax deduction. CCs are taxed at 15% in the superannuation fund and, therefore, income should not be reduced below a level that a client will personally pay less tax compared to the superannuation fund.

Catch up CCs

From 1 July 2018, certain individuals will be able to accrue unused CCs and carry these amounts forward. This change will enable a CC in excess of the annual cap to be made in subsequent years. Amounts will be carried forward on a five year rolling basis. As the new regime will only apply to unused amounts accrued from 1 July 2018, the first year a person will be eligible to utilise a carried forward amount will be the 2019/20 financial year.

$500,000 maximum account balance

To make use of a carried forward CC, an individual’s total superannuation balance cannot exceed $500,000 on the 30 June of the previous financial year.

Accumulating unused cap amounts

Contributions made in excess of the annual CC cap, where a person has unused cap amounts from one of the five prior financial years, will be deducted from unused amounts from the earliest to the latest financial year. Unused amounts which have not been utilised within five years will not be available to carry forward.

Small business CGT contributions impact on CCs

Small business owners selling their business or business assets may be eligible to use the proceeds to contribute to
superannuation free of capital gains tax (CGT) subject to certain limits and eligibility criteria. The small business CGT cap allows for the capital gain realised on the sale of any active small business asset up to $500,000 per eligible taxpayer to be contributed to superannuation. If the asset has been held for more than 15 years, that threshold rises to $1.415 million for the 2016/17 financial year.

Once small business CGT concessions are contributed into super, these amounts will count as part of a member’s total superannuation balance. For CC catch-up contribution purposes a member’s total superannuation balance as at the previous 30 June must be below $500,000.

Contact details

For further information, please contact Campbell Flower or John Todd at Odyssey Financial Management on 1300 761 669.

 

This email message is intended only for the addressees and contains information that may be confidential. If you are not the intended recipient please do not read, save, forward, disclose or copy the contents of this email. If this email has been sent to you in error, please delete this email and any copies or links to this email completely and immediately from your system. Any advice and information in this email is of a general nature only and has been prepared without taking account of individual objectives, financial situations or needs and, because of that, you should consider the appropriateness of the advice before acting. The email does not constitute formal advice, guidance or commitment by the sender or Odyssey Financial Management.

THE FEDERAL BUDGET 9 MAY, 2017

The Federal Treasurer, the Hon. Scott Morrison MP, delivered his second Federal Budget on 9 May 2017.

With the main focus on affordable housing, there are minor impacts on personal income taxation, superannuation and social security entitlements.

This summary provides coverage of the key issues.

Highlights

Personal income tax

  • temporary Budget Repair Levy will definitely cease on 30 June 2017
  • Medicare levy to increase to 2.5 per cent from 1 July 2019
  • removal of certain residential rental property deductions
  • increase in CGT discount to 60 per cent for qualifying affordable housing.

Foreign residents

  • lower threshold for withholding tax for residential property disposals

Business owners

  • limiting access to small business capital gains tax concessions

Superannuation

  • first home super saver scheme to commence 1 July 2017
  • home downsizing superannuation contributions where over age 65.

Social Security

  • energy assistance payment

Personal income tax

Increase in the Medicare levy

The Medicare levy will increase by half a percentage point to 2.5 per cent of taxable income from 1 July 2019. Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also be increased.

Low-income earners will continue to receive relief from the Medicare levy through the low-income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place.

Temporary Budget Repair Levy expiry

The Temporary Budget Repair Levy (TBRL) will definitely cease on 30 June 2017. This means that the top marginal tax rate (where taxable income exceeds $180,000), including the Medicare levy, will reduce from 49.0 percent to 47.0 per cent from 1 July 2017, and increase to 47.5 per cent from 1 July 2019.

Disallow certain deductions for residential rental property

From 1 July 2017, deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rent property will be disallowed.

Investors will not be prevented from engaging third parties such as real estate agents for property management services. These expenses will remain deductible.

Also from 1 July 2017, plant and equipment depreciation deductions will be limited to outlays actually incurred by investors in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers and ceiling fans.

Expanding tax incentives for investments in affordable housing

From 1 January 2018, the CGT discount will increase from 50 per cent to 60 per cent for resident individuals who elect to invest in qualifying affordable housing.

To qualify for the higher discount, housing must be provided to low to moderate income tenants, with rent charged at a discount below the private rental market rate. The affordable housing must be managed through a registered community housing provider and the investment held for a minimum period of three years.

Foreign residents

Lower threshold for withholding tax for residential property disposals

From 1 July 2016, foreign investors were subject to a withholding tax where they sold a residential property for $2 million or more. The obligation to withhold falls on the purchaser of the property.

From 1 July 2017, this threshold will reduce to $750,000. As median house prices in both Sydney and Melbourne exceeded $750,000 in the December 2016 quarter 1, a far greater number of purchasers will need to be conscious of these rules to avoid any penalties for failure to withhold.

This obligation to withhold applies where:

  • the purchaser knows or has reasonable grounds to believe the vendor is a foreign resident
  • the purchaser doesn’t reasonably believe the vendor is an Australian resident and

– has a record about the purchase indicating that the vendor has an address outside Australia, or
– is authorised to provide a financial benefit (eg make a payment) to a place outside Australia (whether to the vendor or to anybody else).

Business owners

Integrity measures limiting access to small business capital gains tax concessions

Measures will be introduced to ensure that taxpayers do not arrange their affairs in a way that means ownership interests in larger businesses do not count towards the small business CGT tests.

This will ensure that the small business concessions are available to the appropriate group of taxpayers.

Superannuation

First home super saver scheme

From 1 July 2017 individuals will be able to make voluntary contributions to superannuation of up to $15,000 per year and $30,000 in total, to be withdrawn for the purpose of purchasing a first home. Both voluntary concessional and non-concessional contributions will qualify.

These contributions (less tax on concessional contributions) along with deemed earnings can be withdrawn for a deposit from 1 July 2018. When withdrawn, the taxable portion will be included in assessable income and will receive a 30 per cent offset.

Features associated with this measure include:

  • contributions will count towards existing concessional and non-concessional contribution caps
  • earnings will be calculated based on the 90 day Bank Bill rate plus three percentage points.
  • the ATO will administer this scheme, calculate the amount that can be released and provide release instructions to superannuation funds.
  • the amount withdrawn (including the taxable component) will not flow through to income tests used for tax and social security purposes, such as for the calculation of HECS/HELP repayments, family tax benefit or child care benefit.

Contributing the proceeds of home downsizing to superannuation

It is proposed that from 1 July 2018, people aged 65 and over will be able to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home. These contributions will be in addition to the existing contribution caps.

Features associated with this measure include:

  • the property must have been the principal place of residence for a minimum of 10 years
  • both members of a couple will be able to take advantage of this measure for the same home, meaning $600,000 per couple can be contributed to superannuation through the downsizing cap
  • amounts will count towards the transfer balance cap when used to commence an income stream
  • contributions will be subject to social security means testing when added to a superannuation account.

Contribution eligibility requirements, such as the work test and restrictions on contributions from age 75 will not apply to these contributions. The requirement to have a total superannuation balance of less than $1.6 million to be eligible to contribute will also not apply.

Example from Budget Fact Sheet 1.5

George and Jane, both retired and aged 76 and 69, sell their home to move into more appropriate accommodation. The sale proceeds are $1.2 million. They can both make a non-concessional contribution into superannuation of $300,000 ($600,000 in total), even though Jane no longer satisfies the standard contribution work test and George is over 75. They can make these special contributions regardless of how much they already have in their accounts.

Social security

Energy Assistance Payment

A one-off Energy Assistance Payment will be made in 2016-17 of $75 for single recipients and $125 per couple for those eligible for qualifying payments on 20 June 2017 and who are a resident in Australia.

Qualifying payments include the Age Pension, Disability Support Pension, Parenting Payment Single, the Veterans’ Service Pension and the Veterans’ Income Support Supplement, Veterans’ disability payments, War Widow(er)s Pension, and permanent impairment payments under the Military Rehabilitation and Compensation Act 2004 (including dependent partners) and the Safety, Rehabilitation and Compensation Act 1988.

Additional Tax on Big Banks

The new Budget includes a 0.06 per cent levy on bank liabilities (a deposit a bank is obliged to pay interest on) for the ANZ, Commonwealth, NAB, Westpac, and Macquarie banks. Smaller banks will not be affected.

This levy will take effect from 1 July 2017 and won’t apply to customer deposits of less than $250,000.

There is a risk, however, the cost of the levy may be passed on to customers.

Some experts estimate that the five largest banks would need to raise home loan standard variable rates by 0.2 per cent to offset the earnings impact of the levy.

The Government also announced the creation of a new external dispute resolution body, the Australian Financial Complaints Authority (ACFA), designed to replace the existing Financial Ombudsman Service, the Credit and Investment Ombudsman and the Superannuation Complaints Tribunal.

“In response to the [Professor Ian] Ramsay review, we are establishing a simpler, more accessible and more affordable one-stop shop for Australians to resolve their disputes and obtain binding outcomes from the banks and other financial institutions,” Treasurer Scott Morrison said.

Contact us for further details

Should you require further information on any of the issues raised in the latest Budget, or wish to discuss how any of the proposed changes may impact on your personal circumstances, then please call or email either John Todd or Campbell Flower, Wealth Advisers and Directors of the Company.

We look forward to being of assistance to you.

KNOW WHAT YOU’RE LEAVING BEHIND – 3 THINGS TO CONSIDER ABOUT YOUR WILL

We all like to think we’ll leave a lasting legacy – but good planning is key. If you’re not sure what would happen to your assets if you passed away, it might be time to formalise your estate plan.

Your personal assets (‘estate’) will one day be divided among the people you love and the causes you believe in. But do you know exactly how that division is going to happen? Or whether you could be distributing your assets more tax-effectively?

While your family may have a good understanding of your intentions, the only way to avoid uncertainty and make the most of your legacy is to put together a formal estate plan.

Why do you need a valid Will?

A valid Will specifies how you would like your estate distributed following your death. Combined with the rest of your estate plan, it can be used to make provisions for children and grandchildren – as well as yourself while you are alive – through various powers of attorney and guardianship.

If you pass away without a professionally-drafted, up-to-date Will, it opens the door to the confusing and often expensive world of intestacy. This could see some of your estate eroded by legal fees at the expense of your beneficiaries.

Despite the importance of a Will, it’s estimated that around 45 per cent of Australians don’t have one . Among those that do, many could find their Will doesn’t meet strict legal requirements – effectively leaving loved ones no better placed than if there was no Will at all.

Are you passing on your assets tax-effectively?

Another important part of estate planning is ensuring the effective distribution of your assets to the intended beneficiaries. Tax is a key consideration here – particularly around benefits paid out of superannuation.

If you leave your superannuation death benefit – including the proceeds of any life insurance held in super – as a lump sum to a spouse or someone who is financially dependent on you (such as a child or grandchild who lives with you), there will be no tax payable by the beneficiary.

However, if you leave that death benefit to someone who is not financially dependent (such as an adult child or grandchild) they may have to pay tax of up to 31.5%. Not only is this an unfavourable result from a tax perspective, it could mean your estate is distributed unevenly as a result.

Greater certainty for your estate

Working with your solicitor and financial adviser, you can put together a Will and estate plan to help ensure your wishes are carried out in the way you intended, and in the most tax-effective way possible.

Ongoing reviews of your estate plan every year or two help to ensure it keeps up with any changes in your personal circumstances, or changes in the rules and regulations.

To know what you’re leaving behind, and to find out more about getting your estate plan in order, talk to your financial adviser today.

 

 

 

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.

SHAKING THE FOUNDATIONS

High prices. Fast bidding auctions. A mass of new constructions. The housing market has risen fast in the past few years but is it becoming too risky? Tim Rocks, Head of Market Research & Strategy, believes there is little to fear from housing at the moment but investors might find more attractive opportunities in shares.

Burning down the house

The view of rapid increases in house prices since 2011 has lead to fears around:

  1. a housing bubble
  2. the potential of a crash and mortgage stress
  3. timing for a potential crash

But are high house prices really a sign of bad things to come?

The truth is, the increases have been concentrated in areas with rising employment, incomes and population flows like Sydney and Melbourne, while others have just risen with inflation – or even fallen like Adelaide and Perth (Source: Corelogic). Falling interest rates have offset increasing house prices so households are actually spending roughly the same percentage of their income on mortgage repayments as they did before the rapid rise in prices. Mortgage defaults are also lower than historic averages (Source: Reserve Bank of Australia (RBA)). This might change if interest rates or unemployment suddenly rise, but at this stage, interest rates are more likely to stay the same or even decrease.

Nothing lasts forever

The sharp increase in housing prices, even in areas like Sydney and Melbourne, is unlikely to last forever but doesn’t necessarily mean a crash. While prices have increased, construction of new apartments has also been rapid. For example, developers added 30% to city apartment supplies in Melbourne, 36% in Brisbane and 18% in Sydney by the end of 2015 (source: RBA). This additional supply has seen rent increases slow down and vacancies rise, which should gradually translate to a slowdown in prices and construction.

So from an investment perspective, housing is likely to be less attractive over time because a greater supply not only means less opportunity to command high rent, but also less certainty of a constant rental income. But for owner-occupiers, this change may translate to some stabilisation in house prices – and greater opportunities if interest rates stay low.

A share in time

Investors specifically targeting returns may need to extend their search beyond bricks and mortar. Currently, shares and listed REITs (listed property trusts) offer higher yields compared to the rental income and deposits from residential property (Source: Datastream). This is likely to continue over the next couple of years, particularly as supply in residential property increases, but also as the need for office space, warehouses and shopping centres continue to make listed REITs necessary.

An investment property may still be an important part of a portfolio, but it depends on what your goals and needs are, along with your expectations for returns. Shares and listed REITs can be a riskier type of investment, but do offer the potential both for higher gains – or bigger losses – depending on a range of factors.

 

 

 

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances

Discover how the inner circle can help you. Contact us today for a financial consultation.

This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs.
Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.
Odyssey Financial Management is an authorised representative of Total Financial Solutions Australia Limited.