Centrelink changes and strategies Presented by Cathy Allen and Jarrod Owen 19 November 2015 Audit | Tax | Advisory | Financial Advice Cathy Allen Jarrod Owen Senior Advisor – Financial Advice Representative Financial Advisor Representative Tel Tel 03 5234 0200 catherine.allen@crowehorwath.com.au Audit | Tax | Advisory | Financial Advice 03 5234 0200 jarrod.owen@crowehorwath.com.au 2 Disclaimer All information, opinions, conclusions, forecasts or recommendations are current at the time of compilation but are subject to change without notice. Findex Advice Services Pty Ltd trading as Crowe Horwath Financial Advice assumes no obligation to update this content after it has been issued. Findex Advice Services Pty Ltd trading as Crowe Horwath Financial Advice has exercised reasonable care in preparing this content but accepts no liability, under any theory of liability, including but not limited to in tort, in contract, under statute or in equity, for any loss sustained by any person as a result of relying on any advice contained herein. Findex Advice Services Pty Ltd trading as Crowe Horwath Financial Advice recommends that you seek personal financial advice tailored to your needs before making any decisions in relation to financial products. Please read the relevant Product Disclosure Statement before acquiring any financial product. Past performance is not a reliable indicator of future performance. Findex Advice Services Pty Ltd trading as Crowe Horwath Financial Advice is the holder of Australian Financial Services Licence number 243253 ABN 88 090 684 521. Audit | Tax | Advisory | Financial Advice 3 Our service offering Audit Tax Advisory Financial Advice Audit and Assurance Specialist Tax Advice Accounting Corporate Governance Business Structuring Business Advisory Estate and Succession Planning Internal Audit and Risk Consulting GST, State and Indirect Taxation Corporate Finance Financial Advisory and Wealth Management Forensic Accounting Lending and Finance Business Recovery Performance Consulting Risk and General Insurance Mergers and Acquisitions Superannuation and SMSF International Tax and Expats Research & Development Customs and Excise The relationship you can count on Audit | Tax | Advisory | Financial Advice 4 Centrelink proposed changes have you confused? Let’s try to clarify some of the changes. Audit | Tax | Advisory | Financial Advice 5 Learning outcomes How the Age Pension age is increasing Understand the proposed changes to deeming rates Understand the proposed changes to the assets test limits How the new limits may affect your Age Pension in future Strategies to assist in Age Pension maximisation Find out why it is important to consider estate planning in conjunction with your retirement planning Audit | Tax | Advisory | Financial Advice 6 Seniors Health Care Card The Commonwealth Seniors Health Card provides discounts on Pharmaceutical Benefits Scheme (PBS) prescription medicines. You may also get a discount or concession on: Bulk billed doctor appointments, at the discretion of the doctor Cheaper out of hospital medical expenses through the Medicare Safety Net Concessional rail travel on Great Southern Rail services, such as The Indian Pacific, The Ghan, and The Overland Also, Household, transport, education, and recreation concessions that are offered by state or territory and local governments and private businesses Audit | Tax | Advisory | Financial Advice 7 Seniors Health Care Card The Commonwealth Seniors Health Card is subject to an income test that includes: Adjusted taxable income, which is indexed on 20 September each year, and a deemed amount from account based income streams There is no assets test You should have an annual income of less than: $52,273 for singles $83,636 for couples combined Audit | Tax | Advisory | Financial Advice 8 Seniors Health Care Card The current account balance of an account based income stream is subject to deeming where it is: Purchased or changed on or after 1 January 2015. Owned by someone granted Commonwealth Seniors Health Card on or after 1 January 2015 . Owned by a card holder’s partner who is aged 60 or more. Portability for the Commonwealth Seniors Health Card Has been increased from 6 to 19 weeks from 1 January 2015. This means that holders of the card can travel overseas for up to 19 weeks before having their card cancelled. Audit | Tax | Advisory | Financial Advice 9 Current Pension qualifying age Date of Birth Male qualifying age Female qualifying age 1 July 1947 - 31 Dec 1948 65 64.5 1 Jan 1949 – 30 June 1952 65 65 1 July 1952 – 31 Dec 1953 65.5 65.5 1 Jan 1954 – 30 June 1955 66 66 1 July 1955 – 31 Dec 1956 66.5 66.5 67 67 1 Jan 1957 and Later Audit | Tax | Advisory | Financial Advice 10 At what age are you eligible for the Age Pension 2014 Federal Budget Proposal Date of Birth Male & Female qualifying age Commencing from 1 July 1958 - 31 Dec 1959 67.5 1 July 2025 1 Jan 1960 – 30 June 1961 68 1 July 2027 1 July 1961 – 31 Dec 1962 68.5 1 July 2029 1 Jan 1963 – 30 June 1964 69 1 July 2031 1 July 1964 – 31 Dec 1965 69.5 1 July 2033 70 1 July 2035 1 Jan 1966 and Later Audit | Tax | Advisory | Financial Advice 11 What is deeming? Deeming is the process whereby Centrelink assess a certain level of investment income from a persons financial assets Financial assets are: Cash Shares Superannuation (over Age Pension age) Account based pensions commenced after 1 January 2015 Audit | Tax | Advisory | Financial Advice 12 Current deeming rates Deeming rate Single Pensioner Pensioner couple 1.75% First $48,600 First $80,600 3.25% $48,600+ $80,600+ Source: Department of Human Services, rates effective 20 September 2015 Example: Couple with $150,000 of financial assets First $80,600 assessed at 1.75% Remaining $69,400 assessed at 3.25% TOTAL Audit | Tax | Advisory | Financial Advice = $1,411 = $2,256 = $3,667 13 Proposed changes to the asset test at 1 January 2017 Minimum limits Current 20 Sept 2015 Proposed 1 Jan 2017 Single $205,500 $250,000 Couple $291,500 $375,000 Maximum limits Current 20 Sept 2015 Proposed 1 Jan 2017 Single $783,500 $547,000 Couple $1,163,000 $823,000 Audit | Tax | Advisory | Financial Advice 14 How will this affect you? If your assets are less than the lower limit (which will be higher), you will get an increased level of Age Pension If your income is between the upper and lower limits, the amount which you will receive will reduce faster Previously the “taper” rate reduced the pension by $1.50 for each $1,000 over the lower limit The proposed changes will reduce the pension by $3.00 for each $1,000 over the lower limit If your assets are above the proposed new upper limits, no pension will be payable, when previously you may have qualified for some Age Pension Audit | Tax | Advisory | Financial Advice 15 How will this affect you? Centrelink calculator SINGLE ASSETS Full Pension $ 891.00 HOME OWNER $ 547,000.00 Yes ANNUAL COUPLE ASSETS Full Pension $ 1,343.20 HOME OWNER $ 900,000.00 Yes ANNUAL Current Test 1 July 2015 Proposed 1 Jan 2017 $ 378.75 $ - $ 9,847.50 $ - Current Test 1 July 2015 Proposed 1 Jan 2017 $ 430.45 $ - $ 11,191.70 $ - Centrelink calculator link Audit | Tax | Advisory | Financial Advice 16 Strategies to consider prior to retirement Gifting Centrelink allows you to “give away” $10,000 per annum in a financial year and up to $30,000 over a 5 year period. If you gift more than this level of assets – you are deemed to still have these assets and deemed to still earn income on them for 5 years. After 5 years, the assets are no longer deemed and will no longer count under the income or the assets test. Audit | Tax | Advisory | Financial Advice 17 Strategies to consider prior to retirement Spending your own funds Currently, your own home is generally not counted as an asset. If you spend money on your own home (i.e. renovating) this will reduce your assessed assets. If you spend money on upgrading your own home, this also will reduce your assets. Spending money on holidays, weekends away etc. reduces your assets. Audit | Tax | Advisory | Financial Advice 18 Risks of these strategies Gifting You are actually giving up control of these funds If you transfer property, you may incur stamp duty for doing so Transferring some assets can result in Capital Gains Tax – taxation needs to be taken into account If you reduce your own funds by spending – you will have less funds from your own assets to fund your retirement Audit | Tax | Advisory | Financial Advice 19 Questions? Audit | Tax | Advisory | Financial Advice Other strategies to maximise the Age Pension Audit | Tax | Advisory | Financial Advice Re-contribution strategy – to maximise Centrelink Re-contribution strategy is where an amount is taken from a super account and then contributed back into a super account in a younger spouse’s name The benefit drawn is generally as a lump sum One of the purposes of this is to remove this amount as an assessable asset for Centrelink means testing You need to have met a condition of release Age 65 is a condition of release Audit | Tax | Advisory | Financial Advice 22 Case study – Re-contribution strategy Jim has recently reached age 65, is married to Joan who is age 60. They have two adult children Jim has $600,000 in super, all taxable Other non-financial assets are $25,000 Financial assets are $50,000 Jim would like to apply for the Age Pension and maximise his entitlements Audit | Tax | Advisory | Financial Advice 23 Case study – Re-contribution strategy Jim has met a condition of release and can draw up to 100% of his super fund balance as a tax-free lump sum being aged over 60. Prior to applying for the Age Pension, Jim could withdraw $540,000 Joan could then contribute the $540,000 to a superannuation account in her name as a tax-free contribution As Joan is under Age Pension age, her superannuation balance is not assessed by Centrelink The contribution to Joan also increases the tax-free nature of her superannuation balance and will assist from a tax perspective if this is received by her adult children in the future Audit | Tax | Advisory | Financial Advice 24 Case study – Results: Age Pension Prior to the re-contribution, $675,000 in assets would have been assessed by Centrelink Jim would be eligible under current rules for $9,513 in Age Pension Under future proposed rules he would be eligible for $5,291 in Age Pension By cashing out and recontributing $540,000 of his super balance to Joan’s name, assessable assets will now be $135,000 (below lower limit of $291,500) Jim would now be eligible for full Age Pension totalling $16,991 both under current rules and the proposed rules Audit | Tax | Advisory | Financial Advice 25 Case study – Results: Age Pension Why do we like this? Jim has reduced his assessable assets for Centrelink by $540,000 He has also reduced the deemed level of financial assets by $540,000 Jim has made the $540,000 withdrawn more tax effective by contributing funds to Joan’s name It can mitigate against potential tax changes that may be applied to superannuation in the future (unknown risk) Helps Jim to maximise his Age Pension entitlements prior to Joan reaching Age Pension age Audit | Tax | Advisory | Financial Advice 26 Income stream strategy requires regular review It is critical that members review their pension strategy and documentation regularly to ensure that the structure they have in place remains appropriate. The most common things that should be reviewed on a regular basis are: Does the income stream strategy remain relevant to current circumstances? Have new legislative changes impacted on existing pension strategies Tax benefits versus Centrelink benefits Audit | Tax | Advisory | Financial Advice 27 Income stream strategy requires regular review Crowe Horwath has designed a Pension Health Check, please contact your Advisor to review your existing income streams. Audit | Tax | Advisory | Financial Advice 28 Estate planning issues Audit | Tax | Advisory | Financial Advice Superannuation Beneficiary Options Reversionary beneficiary Binding death benefit nomination (valid for 3 years) Non-lapsing binding death benefit nomination No beneficiary nominated, super balance will be treated as an estate asset Audit | Tax | Advisory | Financial Advice 30 Superannuation Industry Supervision (SIS) vs tax dependants Death benefits are references in two different Acts – Income Tax Assessment Act (ITAA) and Superannuation Industry Supervision Act (SISA) SISA determines which dependants can receive a superannuation death benefit The ITAA defines which dependants are considered “tax dependants” in regards to how a death benefit will be taxed in their hands Audit | Tax | Advisory | Financial Advice 31 SIS vs tax dependants Who is a SIS dependant? (i.e. who can a member nominate for their superannuation death benefits to be paid to on their death) A spouse (does not have to be a legally married to the person, as long as they live with the person on a genuine domestic basis in a relationship as a couple) A child (includes an adopted child, a stepchild or an ex-nuptial child) An interdependent relationship (This is recognising financial and domestic support. It also enables couples who are separated due to illness or disability to be recognised as dependant) Audit | Tax | Advisory | Financial Advice 32 SIS vs tax dependants Tax dependants can receive superannuation benefits much more tax effectively than non-tax dependants. They include: Spouse A child less than 18 years old Any person who had an interdependency relationship with the deceased before death Any person who was a dependant of the deceased before death Audit | Tax | Advisory | Financial Advice 33 Concept of “Death Taxes” Benefits paid to non-tax dependants are taxed at 15% plus Medicare levy on the taxable portion of the lump sum Insurance proceeds could represent both taxed and untaxed elements and subject to 30% plus Medicare levy Benefits paid to the estate are not charged Medicare levy For tax purposes it could be better to direct the death benefits to the estate and have the estate subject to any taxes The tax-free component of a superannuation interest is paid out tax-free where no tax is payable by any dependant Audit | Tax | Advisory | Financial Advice 34 What you have learnt How the Age Pension age is increasing Understand the proposed changes to deeming rates Understand the proposed changes to the assets test limits How the new limits may affect your Age Pension in future Strategies to assist in Age Pension maximisation Understand the importance of constantly reviewing your retirement position, even after you have retired Find out why it is important to consider estate planning in conjunction with your retirement planning Audit | Tax | Advisory | Financial Advice 35 Questions? Audit | Tax | Advisory | Financial Advice Follow up We offer a complimentary consultation to new (non Financial Advisory) clients to review your personal financial circumstances Seminar survey– Please complete print out today or complete online version which will be emailed through to you, we would greatly appreciate if you would provide us with some feedback Completing feedback also gives you the option to subscribe to our free eNewsletter, which provides details on upcoming events and other useful financial updates Audit | Tax | Advisory | Financial Advice 37 Tel 03 5234 0200 www.crowehorwath.com.au The relationship you can count on Disclaimer Crowe Horwath (Aust) Pty Ltd is a member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath is a separate and independent legal entity. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania. ABN 84 006 466 351 Audit | Tax | Advisory | Financial Advice 38