Whenever I make a speech to retirees, I talk about the death tax of 15% (or 17% when it includes the Medicare levy), which can apply to superannuation death benefits. Most people have never heard of it, and believe that Australia doesn’t have death duties.
Well, I guess it is not, strictly speaking, a ‘death duty’, but the effect is the same. So take the time to get your head around it, as it’s an easy tax to minimise with a bit of planning.
The first thing to understand is that it applies only to the taxable portion of your superannuation fund that is given to a non-dependant. A spouse is always a dependant whether they have a separate income or not.
It does not apply to the tax-free portion of your super, so those over 60 and still eligible to contribute to super could take advice about adopting a withdrawal and re-contribution strategy. This involves taking out a chunk of your super tax-free, and then contributing it back as a non-concessional contribution.
There is no cost involved, as there is no entry tax on these contributions, and it effectively converts the amount re-contributed into a tax-free component. But watch the contribution limits as there are big penalties for exceeding the caps.
The next thing to understand is that you cannot elect to withdraw just from the taxable component. If your balance is partly taxable and partly non-taxable, the components of the withdrawal will be in the same ratio as your existing balance.
Many retirees are in pension phase, which means the earnings on their fund are tax-free, as are the withdrawals if they are aged 60 or over and eligible to withdraw. However, the tax-free status of the fund does not mean that all the components become tax-free as well. There will almost certainly still be taxable and non-taxable portions of the components, with the death tax applying to the taxable component when paid to a non-dependant.
One reader asked if the death tax could be avoided by leaving the money to a charity. There is no joy here, as a charity is treated in the same way as a non-dependent. A much better option for anybody who wants to leave money to charity would be to withdraw it from superannuation before they die, make an immediate donation and claim a tax deduction.
However, if you are receiving Centrelink benefits, take advice before doing this, because the gift could be regarded as a deprived asset if it is over $10,000.
So, if the tax does apply, how is it calculated? It is a maximum of 17%, not a flat 17%, and is deducted by your superannuation fund before paying your beneficiary the death benefit. The tax paid is recorded on a PAYG payment summary (similar to wages). When your beneficiary lodges their personal tax return, the assessable amount received and PAYG withheld must be reported. If they have a high income, or if the sum is large, the tax is rebated so that no more than 17% is payable. If they have a low income, they may receive a refund of the tax paid by your super fund.
If you are considering a binding nomination, make sure you clearly understand the implications before setting it up. Once a valid binding nomination is in place, the trustee may lose the discretion to distribute the proceeds of the deceased’s superannuation fund in the most tax-effective manner.
The simplest way to avoid the death tax is to make sure you have given a trusted person an enduring power of attorney, with instructions to withdraw your superannuation in full if it appears that death is imminent. There would be no tax on the withdrawal, and the money could then be distributed in accordance with the terms of your will after your death..
For privacy reasons I will name her Sandra. Sandra said that, following the advice of her “trusted” accountant, she will allow this policy to lapse as her circumstances have now changed
What were her new circumstances? Very sadly, her husband had been diagnosed with a terminal brain illness. What was the accountant’s advice? To allow her Income Protection policy to lapse and redirect the “saved premiums” to mortgage repayments.
On several levels, the accountant has not acted in the best interests of his own client, Sandra.
The above scenario happens all too often. Consequently, the following points need to be kept in mind before acting on any such advice:
So, in summary, when you share your financial circumstances seeking advice, you need to speak to an expert in that area, ensure the expert knows the full details of your circumstances, and that any advice is in your best interests.
For an appointment with a qualified Wealth Adviser, contact us at email@example.com or phone at 1300 761 669 for financial consultation.
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
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.
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.
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.
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.
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.
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.
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.
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:
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.
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
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).
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.
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.
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:
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.
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.
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.
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 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.
For further information, please contact Campbell Flower or John Todd at Odyssey Financial Management on 1300 761 669.
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.
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.
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.
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.
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.
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:
– 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).
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.
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:
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:
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.
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.
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.
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.
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.]]>