1. Insurance and Super, a need to know for client reviews
Introduction
Scott Hoger
Technical Account Manager
Affinia, July 2017

2. Why are we here?
There is a growing trend towards insurance in superannuation
Actuarial consulting firm Rice Warner estimates that 71 per cent of all death cover, 88 per cent of total and permanent disability cover and 59 per cent of income protection cover in Australia is provided through superannuation
A recent discussion paper from the Insurance in Superannuation Working Group, Account Balance Erosion Due to Insurance Premiums, found that: “Despite this coverage, insurance at an individual level may be insufficient to meet the needs of members or their beneficiaries.”
The regular has already stated that they intend to focus on insurance advice through superannuation

3. Super insurance strategies
(1 min)
DO: Go through Agenda at high level

4. Concessional contributions
From July , the concessional cap will reduce from $35,000/$30,000 to $25,000
The cap will be indexed in line with Average Weekly Ordinary Time Earnings (AWOTE) in $2,500 increments
The calculation of any excess concessional contributions above the cap will be treated in the same way as it is currently

5. What are the insurance implications?
Client’s using contributions to fund insurance premiums will have to balance their retirement savings objectives against the lower cap
Client’s and their advisers will need to understand what portion of the concessional cap has been taken up before considering an contribution funded insurance strategy
Making an excess concessional contribution may still be desirable when using the excess to fund an insurance premium

6. Excess concessional contributions
The excess concessional contribution tax is calculated using the client’s marginal tax rate less 15% (recognising the contributions tax already paid)
A client on the highest marginal tax rate therefore would have a 34% tax liability on the excess contribution (49% - 15% = 34%)
The tax can be paid by the super fund or the individual tax payer
Interest is charged at the commencement of the tax year at 9.75%
The Division 293 does not apply to amount in excess of the concessional cap
Exceeding the cap to fund an insurance premium may be desirable as the contributions tax is offset by the corresponding deduction the trustee claims for the insurance premiums

7. Excess concessional contributions example
Consider John, a medical administrator aged 50, who has a marginal tax rate (MTR) of 49%. He requires $1 million dollars of life cover, with a premium of $15,671. John is already making concessional contributions up the concessional cap
What is the after tax cost of:-
Insurance outside of superannuation
Insurance inside of superannuation if John makes a concessional contribution in excess of the cap?

8. Excess concessional contributions example
Non-super
Super
Amount to fund premium
$30,727
$15,671
Income Tax
$15,056 $0
Contributions Tax
$2,350
Insurance premium deduction
Excess contribution tax
$5,328
Income Tax on excess
$10,447
Interest on excess
$779
Total
$26,897
Difference
+$3,830

9. What are the insurance implications?
Exceeding the concessional cap may be beneficial for clients in certain circumstances
Care must be taken in presenting this strategy to clients as it will result in an excess tax determination being sent to client in the year after the tax return has been submitted
It would be prudent for clients to seek independent taxation advice on the appropriateness of this strategy balanced against any other tax strategies the client has in place
Any concessional contribution in excess of the concessional cap is counted towards the clients non-concessional cap
Client’s with balances in excess of $1.6 million dollars are unable to use this strategy

10. Division 293 – concessional contribution surcharge
The Division 293 threshold has reduced from $300,000 to $250,000 as at July
Division 293 income comprises of taxable income + reportable fringe benefits + concessional contributions
The surcharge is based on Div. 293 income (as per above calculation) or the client’s concessional contributions – which ever is the lesser
The additional surcharge is 15%
Division 293 only applies to an individuals concessional contributions

11. Deducting personal contributions
For the 2016/17 tax year, a client must earn less than 10% of their income from employment activities to claim a tax deduction for a personal contribution to superannuation
This rule is broadly known as the 10% rule, or the substantially self employed rule
Client’s that do not fit the criteria must use salary sacrifice arrangements to get the benefit of the deduction
From July , the 10% rule will be abolished, allowing employed individuals to claim a tax deduction for personal contributions up to their concessional cap of $25,000

12. What are the insurance implications?
The use of insurance only superannuation funds has been a popular strategy for self-employed clients as they have been able to claim a tax deduction for insurance premiums
From July 1, this strategy will be available to employees also, effectively allowing a tax deduction for authorised insurance benefits in superannuation
Client’s who have been funding their insurance premiums via their accumulated balance will be able offset this erosion by contributing an amount to superannuation equal their premium
Reviewing a clients cash flow position annually will allow advisers to determine whether the client is capable of taking advantage of this rule change

13. What are the insurance implications?
This one change may allow financial advisers to have more engagement with their accounting referrers who are not licensed to provide advice
As they will be discussing this amendment at tax time, advisers may be able to assist with the advice component of any contribution
mployees will now be able to make a concessional contribution below their concessional cap without the need to salary sacrifice
This allows advisers to proactively consider the clients cash flow and CGT position to determine whether a contribution would be beneficial
Clients who are funding insurance premiums via their accumulation balance will now be able to make a contribution to super below their $25,000 cap, equal to the premium to remove the issue of retirement erosion

14. mployees will now be able to make a concessional contribution below their concessional cap without the need to salary sacrifice
This allows advisers to proactively consider the clients cash flow and CGT position to determine whether a contribution would be beneficial
Clients who are funding insurance premiums via their accumulation balance will now be able to make a contribution to super below their $25,000 cap, equal to the premium to remove the issue of retirement erosion

15. Unused concessional cap carry forward
This measure will allow clients to carry forward their unused concessional contributions (under the concessional cap) for up to five previous years
The members total superannuation balance must be less than $500,000 in the year the client intends to ‘catch up’ their contributions
This catch up measure begins July , meaning that clients will not have an unused concessional amount until the 2018/19 financial year

16. Unused concessional cap carry forward
2018/19
19/20
20/21
21/22
22/23
23/24
Concessional contributions
$10,000
$100,000
Unused cap
$15,000 $0
Cumulative available unused cap
$30,000
$45,000
$60,000
$75,000

17. What are the insurance implications?
Clients who are self-employed or have irregular income patterns will be able to ‘catch up’ their unused portion of the cap
Client’s must have a balance of less than $500,000 to utilise this ‘catch up’ provision
Client’s who are funding their insurance premiums through superannuation will be able to use this provision to offset multiple years of superannuation erosion – a very handy SoA solution for mitigating erosion over the medium to long term
This provision can be used to offset large capital gains – this includes non working spouses who may have a large gain on the sale of an investment property

18. Non-concessional contributions
From July , the non-concessional cap will reduce from $180,000 to $100,000
The bring forward amount will be amended to $300,000
A new requirement will be that the individuals total superannuation balance must be less the general transfer balance cap (currently $1.6 million) to be eligible to make a non-concessional contribution
There are transitional arrangements for client’s who have the bring forward provisions

19. Transfer balance cap
With effect from July , the maximum amount that can be in tax exempt pension phase is $1.6 million dollars per member
Amounts in excess of this amount must remain in accumulation phase or removed from the superannuation system
Existing pensions balances in excess of $1.6 million dollars prior to July 1, must transfer the excess to accumulation phase or remove from the superannuation system
Transitional relief: Opportunity to step up the cost base of existing assets supporting pension balances to market value at transfer date

20. Transfer balance cap
The cap will be indexed to changes in CPI in $100,000 increments
A child may be subject to a transfer balance cap when in receipt of a death benefit pension
Investment gains (or losses) and pension payments to not impact the transfer balance cap
Commutations from pension phase reduce the $1.6 million dollar cap
Lump sum or income stream amounts paid from accumulation balances retain their tax free status in the hands of those aged over 60

21. Transfer balance cap poll question
The cap will be indexed to changes in CPI in $100,000 increments
A child may be subject to a transfer balance c
ap when in receipt of a death benefit pension
Investment gains (or losses) and pension payments to not impact the transfer balance cap
Commutations from pension phase reduce the $1.6 million dollar cap
Lump sum or income stream amounts paid from accumulation balances retain their tax free status in the hands of those aged over 60

22. What are the insurance implications?
Having an insurance policy in excess of the cap does not breach the cap
The cap only applies to balances that are in pension phase
The transfer balance cap will impact the way the client intends to distribute the proceeds of their accumulated balance plus insurance to beneficiaries
Benefits paid in lump sum form to beneficiaries will not impact the deceased, nor the beneficiaries cap
Benefits paid in pension form however, will impact the beneficiaries – though the impact is different for tax dependants (e.g. spouse) and children

23. What are the insurance implications?
The value of the asset supporting the death benefit pension to tax dependants such as a spouse, will have that value assessed against their transfer balance cap
If the pension recipient does not have a transfer balance account, then the value will be assessed against the general transfer balance cap (currently $1.6 million)
That value will effectively start a transfer balance cap for the beneficiary as the asset is in pension phase
The beneficiary does not get to use their transfer balance cap and the deceased transfer balance cap – each individual is subject to $1.6 million

25. Other bits and pieces
Anti-detriment benefits will be abolished from July
The work test will continue to apply for those aged between 65 – 75 with the requirement to have 40 hours employment of a 30 day period
The transfer balance cap also applies to TPD pensions
From July 1, superannuation trustees will be able to rollover a death benefit to another complying superannuation for the purposes of paying a death benefit pension

26. Any questions?

27. Thank you
The information contained in this presentation is general information only and is not intended to be legal, taxation or financial advice.
TAL Australia, it subsidiaries and its representatives have not taken into consideration any individual’s personal circumstances, financial needs or objectives.
If any person is intending to act on the information contained in this presentation, consideration should be given to the appropriateness of this general information in the light of that person’s own objectives, financial situation or needs before acting on the information. Persons acting on any matter covered in this presentation should seek independent professional advice on the application of that matter to their individual circumstances.
In relation to any financial product referred to in this presentation, a copy of the Product Disclosure Statement should be obtained and read prior to making any decision regarding the acquisition that financial product.