14 Feb Advice tips and traps
Personal deductible contribution deadline looming
The removal of the 10% ‘maximum earnings’ test as an employee means that 2017/18 is the first year that more clients than ever may be eligible to make personal deductible contributions.
Obviously, one of the first things that a client must do is make a personal contribution to superannuation. As 30 June 2018 is fast approaching and falls on a Saturday, extra care needs to be taken to ensure the contribution is made in this financial year.
It’s important to check with individual super funds to understand their cut-off dates for receiving contributions. As a general guide, a super contribution is made when it is received by the super fund (Taxation Ruling TR 2010/1, see table below).
For example, if a client is contributing electronically via BPAY, the funds are deemed to be received when the funds are credited to the super provider’s account, not the day the client makes the BPAY transaction.
For employers using a clearing house for employee super contributions, it’s important to understand how long the clearing house takes to transfer the contributions. This is because the contributions are not deemed to have been made until the super fund receives them. The timeframes may also be different depending on the clearing house used.
Care should also be taken to avoid breaching the concessional contribution cap due to the associated penalties. Particularly for arm’s length employees, understanding what contributions have already been made by their employer during the year as well as any further contributions made prior to the end of the financial year must be considered.
For a detailed explanation of what needs to be done to ensure clients are eligible to claim personal super contributions as a tax deduction, please read our technical article Steps to claiming a super deduction.
Tax Ruling TR 2010/1 provides a number of examples of when a contribution is deemed to have been made including:
|If the funds are transferred by||A contribution is made when|
|Cash payment (Australian or foreign)||The cash is received by the superannuation provider|
|An electronic transfer of funds||The funds are credited to the superannuation provider’s account|
|A money order or bank cheque||The money order or bank cheque is received by the superannuation provider, unless the order or cheque is dishonoured|
|A personal cheque (other than one that is post-dated) that is presented and honoured with cash or its electronic equivalent||The personal cheque is received by the superannuation provider, so long as the cheque is promptly presented and is honoured|
Funding options for additional insurance in super
Employed clients who have insurance in a non-retail super fund may want to take out additional insurance in super using one of three funding alternatives.
Need for additional insurance
When a client joins a non-retail super fund, such as an industry, public sector or corporate fund, they may automatically qualify for certain insurances where no health evidence or disclosures are required.
However, the fixed or formula based amount of cover provided by non-retail funds is rarely enough. For instance, Rice Warner has revealed the average amount of life cover required by a family in 2015 was around $680,000, while the typical default cover was approximately $200,000.
Three funding options
There are three funding options where additional cover is taken out in super, each with some distinct pros and cons. The key features for each option are summarised in the table at the end of this article.
1. Increase non-retail cover
One option is to increase the cover (or apply for new cover) in the existing non-retail fund. Where this is done, the premiums can be funded with existing contributions (SG for example) or from the super account balance. However:
- a full or limited underwriting assessment will generally be required
- non-retail policies often don’t provide many of the additional features available with retail offerings, such as a guarantee of upgrade, guarantee of renewability, buy back options, portability and superior TPD definitions, and
- there has been a dramatic increase in the insurance premiums charged by the non-retail sector, particularly TPD and income protection rates, where increases have often been over 100% in response to poor claims experience.
- Fund additional retail cover with an Enduring Rollover
A second method involves:
- taking out a stand-alone insurance policy in a retail super fund, and
- arranging for 85% of the premium amount to be transferred from the account balance of the non-retail fund once every 12 months.
This solution takes advantage of the portability rules that have been in place for some time. However, it has become more seamless and automatic due to developments in insurers’ product offerings and changes in the portability legislation. Also, improvements in electronic rollover technology mean that the statutory maximum period for processing a rollover has dropped from 90 days to 3 days.
The key requirements are that the existing fund retains at least $5,000 (otherwise it must be a full rollover) and the partial rollover occurs only once in every 12 months.
3. Fund additional retail cover with personal deductible contributions
A third method is to make personal contributions to a stand-alone insurance policy in a retail fund and claim the contributions as a tax deduction. Since 1 July 2017, personal deductible contributions can be made regardless of employment status.
The difference between this option and enduring rollovers is that:
- the premium amount must be contributed each year whereas an enduring rollover can be funded from the accumulation balance
- the contributions will count towards the caps
- generally 100% of the premium amount, rather than 85%, must be paid to the stand-alone retail fund, although provided both options are funded by concessional contributions, the net cost is the same
- the client must notify the trustee of the stand-alone fund of their intent to claim the amounts contributed as a tax deduction (by completing a valid ‘Notice of Intent’ and submitting it to the trustee in time and receiving acknowledgement), and
- the Service Date will be the date the client joins the stand-alone fund (ie a later date, than if the premiums are funded by an enduring rollover) which can lead to beneficial taxation of TPD benefits, but less favourable taxation of death benefits paid to non-dependants, when compared to premiums funded by enduring rollovers.
Features at a glance
|Summary of funding options|
|Issue||Topping up cover in existing non-retail fund||Enduring rollover||Personal deductible contribution|
|Underwriting||Yes, full or limited||Yes||Yes|
|Superior policy features||Generally no||Yes||Yes|
|Impact on cashflow||No||No||Yes|
|Impact on CC cap||No||No||Yes|
|Notice of intent required||No||No||Yes|
|Service date impacted||No||No||Yes, with TPD taxed less and death benefits to non-dependent taxed more|
 Australia’s Underinsurance Gap Explained (RiskInfo June 26, 2015)
 The 15% tax deduction the fund receives for the insurance premium is passed back to the client as a premium reduction.
 Some funds may allow a lower remaining balance and/or more frequent rollovers.
TRAP: Untaxed element in death benefit rollovers
Since 1 July 2017 the definition of rollover was extended to include death benefit superannuation lump sums. This was introduced to allow the death benefit to be rolled over to another provider for immediate payment.
This was a positive change as some superannuation funds don’t have the ability to pay a death benefit pension and allows greater choice for an individual to select a pension provider.
The rollover of a death benefit superannuation lump sum can result in an untaxed element being calculated where:
- insurance proceeds form part of the benefit
- a tax deduction was claimed for the insurance premiums, and
- the deceased was under age 65.
The untaxed element forms part of the income of the receiving superannuation fund and therefore will attract 15% earnings tax.
Whilst the industry believes this is an unintended consequence of the super reforms and is lobbying the Government, at this time the legislation needs to be applied according to its actual operation. This means rollover benefit statements will include an untaxed element, where applicable, and the receiving super fund trustee will deduct tax. However, it is recommended that you speak with individual providers to understand how they are applying the legislation.
News and updates
Superannuation Guarantee amnesty
A 12 month Superannuation Guarantee (SG) amnesty was introduced as part of the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018.
This measure, which has not been legislated at the date of publishing, provides an opportunity for employers to self-correct past SG non-compliance without penalty.
The ATO explains that employers, who voluntarily disclose previously undeclared SG shortfalls during the amnesty, will not be liable for late payment penalties and will be able to claim a deduction for catch-up payments during the 12-month amnesty period.
To be eligible for the amnesty, employers must disclose their SG shortfall amount including nominal interest within the 12 month amnesty period available from 24 May 2018 to 23 May 2019.
The ATO has released the SG amnesty fund payment form for employers to pay the amount owing in full to an employee’s super fund.
The ATO has also released the SG amnesty ATO payment form for employers that wish to pay the SG amnesty but cannot pay the amount owing in full.
Super Guarantee exemption
On 9 May 2018, the ATO released their interpretation of the 2018 Federal Budget measure, ‘Preventing inadvertent concessional cap breaches by certain employees’.
The ATO has confirmed individuals with more than one employer who earn more than $263,157 pa will be able to apply for an exemption certificate to release some of their employers from paying Superannuation Guarantee (SG) contributions on their behalf. Individuals will still need to receive SG payments from at least one employer.
Applications will need to be submitted 60 days before the start of the quarter the exemption will apply to. Individuals will be able to:
- download the application form from ato.gov.au from 1 July 2018, and
- complete and return the form to the ATO.
The ATO will then, if the application is approved, send an irrevocable exemption certificate to the individual and the employer. Exemption certificates may be issued for multiple quarters within a financial year and will not extend beyond the financial year in which they are issued.
Employers can choose to not comply with the exemption certificate. The take-up of this arrangement and any changes to remuneration would need to be negotiated between an employee and their employer.
At the time of publishing, no legislation has been introduced to Parliament for this proposal.
LRBAs and total superannuation balance
Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 contains a number of measures including details of when a limited resource borrowing arrangement (LRBA) will be included as part of a member’s total superannuation balance (TSB).
Under the measure, the outstanding balance of an LRBA will be included in an individual’s TSB, if the LRBA is entered into on or after 1 July 2018 where a member has either:
- satisfied a condition of release with a nil cashing restriction, or
- a related party LRBA.
This will be tested not only at the time the loan is entered into, but on an ongoing basis. This means that if a member has a related party LRBA or will soon meet a full condition of release, and wishes to make NCCs in the future, they may need to take steps to unwind the LRBA.
Conditions of release with a nil cashing restriction for this purpose are retirement, terminal illness, permanent incapacity and reaching age 65.
An exemption exists for pre-1 July 2018 LRBA arrangements that are refinanced after that date.
This measure is designed to stop individuals from artificially reducing their TSB using an LRBA.
Medicare levy low income thresholds
The Government has introduced the Treasury Laws Amendment (Medicare Levy and Medicare Levy Surcharge) Bill 2018.
The Bill includes the 2017/18 income tax thresholds where no Medicare Levy is payable. The thresholds, if legislated, will be:
|Family situation||Not eligible for SAPTO||Eligible for SAPTO|
|Couples and families*||$37,089||$48,585|
* Thresholds for couples and families increase by $3,406 for each dependent child.