Legislation and Strategy Update
Kim Guest: Senior Technical Manager - FirstTech
July 2014
firsttech@colonialfirststate.com.au
Disclaimer
This presentation is given by a representative of Colonial First State Investments Limited AFS Licence 232468, ABN 98 002 348 352 (Colonial
First State). Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of interests in
FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension and FirstChoice Employer
Super from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and interests in the Rollover & Superannuation Fund
and the Personal Pension Plan from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840 and interests in the Colonial
First State Pooled Superannuation Trust ABN 51 982 884 624.
The presenter does not receive specific payments or commissions for any advice given in this presentation. The presenter, other employees and
directors of Colonial First State receive salaries, bonuses and other benefits from it. Colonial First State receives fees for investments in its
products. For further detail please read our Financial Services Guide (FSG) available at colonialfirststate.com.au or by contacting our Investor
Service Centre on 13 13 36.
All products are issued by Colonial First State Investments Limited. Product Disclosure Statements (PDSs) describing the products are available
from Colonial First State. The relevant PDS should be considered before making a decision about any product. Stocks referred to in this
presentation are not a recommendation of any securities.
The information is taken from sources which are believed to be accurate but Colonial First State accepts no liability of any kind to any person
who relies on the information contained in the presentation.
This presentation is for adviser training purposes only and must not be made available to any client.
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© Colonial First State Investments Limited 2014.
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What we’ll cover …
• Deeming of account based pensions
• Insurance in super changes
• Budget repair levy
• Super contribution tips and traps
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Deeming of account based
pensions
Deeming of account based pensions & annuities
• Legislation to apply deeming to account based pensions and
equivalent annuities – Royal Assent 31 March 2014
• Grandfathering:
– Receiving income support payment immediately before 1 Jan 2015 and
received continuously
– Pension or allowance (not low income health care card)
– Account based pension immediately before 1 Jan 2015 and received
continuously
– Reversionary pensions grandfathered if:
– Original pension grandfathered
– Reversionary beneficiary receives income support payment continuously
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Overview of impact on clients
• More assessable income could result in lower Centrelink payment
• Impacts clients with other assessable income such as deemed
income, government pension etc
• Aged care clients
– Lower age pension, higher ongoing care fees
– Self funded retiree – higher assessable income as no
grandfathering
• Anyone who has an existing ABP but not on Centrelink may be
worse-off when they eventually claim a Centrelink payment
• Clients currently not income tested may become income tested on
1 Jan 2015
• Impacts pensioners with lower levels of assets because asset
tested clients are unaffected
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Single income and assets test – current deeming
Assets v income test
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
$0
$50,000
$100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000 $500,000
Assets test
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Income test
Who will be affected once ABPs are deemed
If a person only has financial assets…
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Family circumstances
Point at which maximum
pension start to reduce
under income test
Point at which assets test
takes over as
determining test
Single- homeowner
$139,429
$252,930
Single –non-homeowner
$139,429
$518,674
Couple combined –
homeowner
$245,086
$320,209
Couple combined – nonhomeowner
$245,086
$585,953
Based on rates and thresholds current as at 1 July 2014, deeming rate of 2% and 3.5%
Clients
whose total
assets are
above these
levels are
unaffected
Maximum annual pension reduction - new rules
Family circumstances
Deeming rate of 2%
and 3.5% (current)
Deeming rates of
3% and 4.5%
Deeming rates of
4% and 5.5%
Single- homeowner
$1,066
$2,049
$3,033
Single –non-homeowner
$3,559
$5,256
$6,952
$714
$2,109
$3,504
$3,208
$5,315
$7,423
Couple combined –
homeowner
Couple combined – nonhomeowner
Assumptions: Client is assumed to have 100% of their assessable assets in an account based pension with no allowance for
home contents and personal assets.
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Opportunities between now and 31 December 2014
• Consider claiming an “income support payment” if eligible
– Clients currently on the Pension Bonus Scheme should consider claiming
pension and utilising the Work Bonus instead
– Claiming Newstart Allowance where close to age pension age
– Converting super in accumulation phase to ABP where under pension age
• Where grandfathering can apply:
– Commute and recommence ABP to lock in higher deductible amount
– Consider reversionary ABPs to extend grandfathering
– Choose provider carefully – no switching post 1 Jan 2015
– Amalgamate multiple ABPs
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Commute and recommence ABP for a higher deductible amount
• Commute and recommence ABP to lock in higher deductible amount
– Life expectancy reduces as people age
– Balance of ABP may have also increased
Example: single pensioner with existing ABP commenced years ago
Original pension
Roll back & recommence
Commencement date
1 August 2006
1 August 2014
Purchase price
$400,000
$400,000
Life expectancy
16.21* (67 y.o. male)
11.31** (75 y.o. male)
Centrelink deductible amount
$24,676
$35,367
Minimum pension payment (6%)
Additional Pension payment
before any amount becomes
assessable
$24,000 p.a.
$676 p.a.
* 2000-02 Australian life tables; ** 2005-07 Australian life tables
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$11,367 p.a.
Reversionary or not?
Susan (65) and Walter (67) are full age pensioners
• Assets and income:
– Family home - $400,000
– Home contents - $20,000
– Cash at bank - $20,000
– Walter’s account based pension
– Current balance $250,000;
– Currently drawing down pension payment of $20,000 per annum
– Purchase price: $270,000
– Relevant number: 18.54 (Walter’s life expectancy at commencement)
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Case study
• If Walter nominates Susan as a reversionary beneficiary on his ABP by
re-commencing the pension before 1 January 2015
• Susan’s life expectancy of 21.62 will be used resulting in lower DA
and more assessable income.
Keep Susan as BDN
Susan as reversionary
Deductible amount
$14,563 pa
$11,563 pa
Assessable income from ABP
$5,437 pa
$8,437 pa
Total assessable income
$5,837 pa
$8,837 pa
Pension entitlement (combined)
$33,036pa
$32,310 pa
Note: Walter could reduce his annual pension drawdown and drawdown
irregular pension payment in late June to maximise their age pension
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Assumptions: pension and deeming rates current as at 1 July 2014
Case study
• If Walter dies 5 years later and his ABP will be paid to Susan.
• Assume ABP balance at the time is $170,000, and Susan will reduce
pension payments to $12,000 pa
• Home contents now $10,000, cash at bank $10,000
Keep Susan as BDN
Susan as reversionary
Assessable income (ABP rules)
Nil
$437 pa (DA is $11,563)
Deemed income
$5,580 pa
$350 pa
Total assessable income
$5,580 pa
$437pa
Pension entitlement (single)
$21,203 pa
$21,912 pa
Pension entitlement (single)
If deeming rates increase by
1.5%
$19,853 pa
$21,912 pa
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Assumptions: pension and deeming rates as at 1 July 2014
Considerations / strategies post 1 Jan 2015
• Where 2 ABPs are running and one is grandfathered, drawdown
strategy is important
• TTR refreshing
• Consider alternative income streams where a new income stream
required
• Need to check whether client’s ABP minimum is more than DA
– If so, need to compare current income test treatment v deemed amount
– May then be better to rollover and remove grandfathering
– Is ABP minimum ever more then DA?
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ABP from age 65
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
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100
$0
Age
16
Minimum payment
Male DA
Female DA
Commonwealth Seniors Health Card
• Deeming proposal
– Deeming of account based pensions will be added to ATI for CSHC
purposes from 1 January 2015
– Grandfathering: Holders of CSHC before 1/1/2015 who have an
account based pension before 1/1/2015 will not be deemed
– No mention of reversionary pensions being grandfathered
– Partners - If partner does not have a CSHC, account based pension
will be deemed
• Overseas travel – extend from six to 19 weeks temporary overseas
travel before card cancelled
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Commonwealth Seniors Health Card
Other proposed changes:
• Annual indexation of income thresholds to CPI from Sept 2014
• Seniors Supplement will cease from June 2014.
• Currently $876.20 p.a. (singles or couples separated due to illness)
or $660.40 (couples, each).
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Insurance in super
Insurance in super changes
• From 1 July super trustees are prohibited from providing an insured
benefit in relation to a member unless the insured event consistent
with condition of release for:
– death, permanent incapacity, temporary incapacity & terminal
medical condition
• Insured benefit in relation to a member means a right for the
member’s benefits to be increased on the realisation of a risk
• Trauma policies – out!
• Pre 1 July policies grandfathered
– where member was covered prior to 1 July 2014
– can vary level of cover
– lapsing
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Implications – life insurance including TMC
•
Death cover only – no change
•
Death policy that includes a terminal medical condition benefit, the
policy terms and conditions must align with the SIS definition
•
Two registered medical practitioners have certified, jointly or separately,
that the person is suffering from an injury or illness that is likely to result
in their death within 12 months from that date
•
At least one of the registered medical practitioners is a specialist practising
in an area related to the injury or illness suffered by the person
Benefit must be paid within 12 months of the date of the certificates.
•
•
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Watch out for cover where policy would pay under only 1 medical
certificate required or the expected life expectancy diagnosed can be
greater than 12 months
Implications – total and permanently disability (TPD)
•
Prohibited from providing “own occupation” policies
•
“Any occupation” policies that provides ancillary lump sum benefits
problematic:
22
•
Loss of limbs
•
Loss of sight benefits
Implications – income protection
•
•
Under temporary incapacity condition of release:
•
Benefits can only be paid in the form of a non-commutable income stream
for the purpose of continuing (in whole or part) the gain or reward which
the member was receiving immediately before the temporary incapacity,
and
•
Member must have ceased to be gainfully employed
Ancillary lump sum benefits prohibited
•
•
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Redundancy, crisis, rehabilitation, specific injury or home care benefits
Policies that pay a partial benefit when a member only reduced their
hours of work due to incapacity rather than ceasing employment prohibited
Implications for SMSFs
•
Trustees must be aware of the new requirements
•
Watch out for policies that are not specifically designed to be held
within super
•
Advisers must have an extremely good understanding of the terms
and conditions of any policy they recommend to SMSFs
•
Note it may still be possible to acquire policies that are not aligned
with the 4 conditions of release if the policy is not acquired in respect
of a member e.g. debt reduction or liquidity purposes where
proceeds would be allocated to a reserved rather than the member’s
account
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Budget Repair Levy
Budget repair levy
• Temporary levy of 2% pa of taxable income above $180,000
– 2014/15, 2015/16, 2016/17
• Essentially increases the top MTR to 49% during these years
– Other rates based on top MTR will also increase for the same period
– FBT rate increases to 49% between 1 April 2015 and 31 March
2017
• Income definition means some effective strategies
– Salary sacrifice, personal concessional contributions, negative
gearing
• Take care with capital gains
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Budget repair levy impact
Taxable income
Levy per financial year
$200,000
$400
$225,000
$900
$250,000
$1,400
$275,000
$1,900
$300,000
$2,400
$325,000
$2,900
$350,000
$3,400
$375,000
$3,900
$400,000
$4,400
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Budget repair levy
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Item
2013-14
2014-15, 2015-16,
2016-17
Non complying super fund
45%
47%
Super non arms length income
45%
47%
No TFN super conts
47%
49%
DASP (taxable)
35%
38%
DASP (untaxed)
45%
47%
Excess non concessional
47%
49%
Rollover of taxable component
(untaxed element) above
untaxed plan cap
45%
47%
Budget repair levy
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Item
2013-14
2014-15, 2015-16,
2016-17
FBT rate
47%
49%
Unearned income minors ($417
to $1,307)
66%
68%
Unearned income minors (over
$1,307)
45%
47%
FHSA misuse tax
45%
47%
Super contribution tips and
traps
Frank’s after tax contribution dilemma
• Frank:
– Turned 61 on 1 October 2013. Has retired from the workforce.
– Has $2 million in cash outside super from a few property sales
– Wants to maximise his after tax contributions to super
What are 3 things Frank should consider doing?
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Financial
year
Age (at
start)
General NCC
1
60
$150,000
2
61
$180,000
3
62
$180,000
4
63
$180,000
5
64
$180,000
6
65
$180,000
7
66
$210,000
Frank’s
strategy
?
Frank’s
strategy
$150,000
$540,000
$540,000
Watch out for fund capped limits
•
•
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Super funds are limited by ‘fund capped limits’ as to the
amount they can accept as a non-concessional contribution in a
single contribution
•
$540,000 for a person who was under age 65 at any time
during the financial year
•
$180,000 for a person age 65 or over for the whole
financial year
Forward planning required to make sure contributions are not
refunded
Tips for Concessional Contributions
•
Adjust contributions up to the new caps
•
•
Save on Medicare – increasing to 2% in 2014/15
•
•
$30,000 general cap, $35,000 age 50 or over
Tax saving of 6% for clients on 19% MTR
(21% - 15%)
High income earners earning over 300K will pay 30% contributions tax
•
Still worth it but not as good
* Assumes not eligible for other tax offsets like SAPTO or pension tax offset
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Low income super contribution
• Effective refund of contributions tax on SG if earning $37,000
– 15% of concessional contributions, capped at $500
– If earning less than $37,000, also refunds contributions tax on voluntary CC
• Introduced by Labor as part of MRRT package from 1 July 2012
• Proposed to be abolished by the Coalition for contributions made from
1 July 2013
– Minerals Resource Rent Tax Repeal and Other Measures Bill 2013 (No.2)
reintroduced
• Ideal contribution mix for some clients will change
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Ideal contribution mix, new rules of thumb
1. Make after tax contribution to get co-contribution
2. Then make concessional contributions (subject
to cap)
3. Then make after tax contributions (subject to cap)
Income
= Nil
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Income at which
point income tax
ceases
Income =
$49,487
Optimising after tax contributions to get co-contribution
Y = Income - $34,488
Contribute
Contribution =
$1,000 to get
Y x 0.03333 x 2
No
$500 co-
contribution
Example
Y = $40,000 - $34,488
Contribution =
Income =
$34,488
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$5,512 x .03333 x 2
= $367
Income =
$49,488
Finding where income tax ceases
• Generally effective to make concessional contributions to take taxable
income to:
– $20,542 (if eligible for LITO only)
– $32,279 for singles or $28,974* members of couple (if eligible for SAPTO)
• Marginal benefit making concessional contributions below $37,000
– 19% MTR v 15% super tax rate
– Additional 0.5% of Medicare levy saved from 1 July 2014
• Other considerations
– Concessional cap
– Other tax offsets (eg, pension tax offset if aged 55 to 59) increases the
point where income tax ceases
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* May be higher depending on partner’s income / use of their SAPTO
Questions
38
Thank You