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

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

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

Concessional contributions From July 1 2017, 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

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

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

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?

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

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

Division 293 – concessional contribution surcharge The Division 293 threshold has reduced from $300,000 to $250,000 as at July 1 2017 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

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 1 2017, 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

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

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

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

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 1 2018, meaning that clients will not have an unused concessional amount until the 2018/19 financial year

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

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

Non-concessional contributions From July 1 2017, 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

Transfer balance cap With effect from July 1 2017, 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

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

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

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

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

Other bits and pieces Anti-detriment benefits will be abolished from July 1 2017 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

Any questions?

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.