TECE News - December

In a recent case on appeal in the Full Federal Court, ASIC won their case against financial services organisations providing personal advice to customers about consolidating superannuation accounts. The Full Court found the providers were in breach of their Australian financial services licenses, as they had licenses to provide general advice but not personal advice in marketing / telephone campaigns.

The Full Court also found that by providing personal advice to their customers, these organisations failed to comply with other financial services laws in the Corporations Act, including the ‘best interests duty’. 

The decision provides additional clarity and certainty concerning the difference between general and personal advice for consumers and financial services providers and is a timely reminder not to provide personal advice to customers in any context unless you are specifically licensed to do so.

In this case, the judgement stated, “the decision to consolidate superannuation funds into one chosen fund is not a decision suitable for marketing or general advice. It is a decision that requires attention to the personal circumstances of a customer and the features of the multiple funds held by the customer.”

In Australia, an individual or entity must be licensed by ASIC to provide financial product advice.

Financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:

1. is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or
2. could reasonably be regarded as being intended to have such an influence.

There are two types of financial product advice: personal advice and general advice.

Personal advice is financial product advice that is given or directed to a person (including by electronic means) in circumstances where:

1. the provider of the advice has considered one or more of the person’s objectives, financial situation and needs, or
2. a reasonable person might expect the provider to have considered one or more of those matters.

General advice is financial product advice that is not personal advice.

When providing financial product advice there are a number of obligations that must be met by the provider, including disclosure obligations – that is, providing certain details and information to the client about the relevant product/s and the license under which the person is operating, a duty to act in the best interest of the client, to provide advice that is appropriate, and many others. The obligations are more substantial when providing personal advice compared to general advice, which reflects the personalisation of the advice (or expected personalisation) and likelihood of reliance on that advice by the client.

There is no requirement to be licensed in order to provide factual information.

Factual information is objectively ascertainable information, the truth or accuracy of which cannot reasonably be questioned.

Financial product advice generally involves a qualitative judgement about, or an evaluation, assessment or comparison of some or all of the features of a financial product – including an insurance or superannuation product. If a communication is a recommendation or a statement of opinion that is intended to or can reasonably be regarded as being intended to influence a client in making a decision about a particular financial product or class of product (or an interest in either of these), it is financial product advice.

If an individual or entity is not licensed by ASIC to provide financial product advice, it is important they do not provide anything other than factual information to clients and instead refer them to obtain their own advice from a qualified provider such as a licensed financial adviser, tax accountant, lawyer or other professional. 

Did you know there is over $20.8 billion in lost and unclaimed superannuation across Australia as at 30 June 2019 (source: ATO data). This can easily happen where individuals change jobs or move home.

Last year, over 540,000 active, lost and unclaimed superannuation accounts worth more than $4.4 billion had been consolidated using ATO online via myGov.

Since the ‘Protecting your super’ (PYS) and ‘Protecting members’ interests first’ (PMIF) measures were legislated this year, more clients may be able to locate their lost superannuation without them needing to take action. This is because the legislation requires superannuation funds to report and pay inactive low balance accounts to the ATO, which includes accounts that have not received a contribution for 16 months and have a balance below $6,000. 

On receiving the transfer of these amounts from lost or inactive superannuation fund accounts the ATO will either:

• transfer the funds into the client’s active superannuation account, or
• transfer funds directly into the client’s bank account where the amount is less than $200, or
• provide the client with a direct payment if they are aged 65 or over.  

Clients who think they may have lost or unclaimed superannuation should check ATO online and ensure their details are kept up to date. 

Q: My client (age 50) is about to receive a TPD payment from their superannuation fund. I have heard about the possibility of having an increased tax-free component created for a TPD benefit that is paid from superannuation. How does this work and is the calculation of the tax-free component an automatic process for clients receiving a TPD payment? 

A: TPD insurance proceeds from superannuation will initially form part of the taxable component in the fund. However, an increased tax-free component (in addition to any existing tax-free component) can be created/calculated due to permanent incapacity if a person:

• takes a benefit as a lump sum, or
• rolls over to another superannuation fund

This additional tax-free component reduces the taxable component of the lump sum, however it is not automatically created/calculated when the insurer pays the insurance proceeds into the superannuation account. It can only be calculated by the fund if the payment (lump sum withdrawal or rollover) is classified as a ‘disability lump sum benefit’ by satisfying the criteria below:

• the benefit is paid because the member suffers from ill health (whether physical or mental), and
• two legally qualified medical practitioners have certified that, because of the ill health, it is unlikely that the person can ever be gainfully employed in a capacity because of education, experience or training.

As long as the above conditions are satisfied, the increase in the tax-free component can apply even if the member’s fund did not receive a TPD insurance payout.

The increase in the tax-free portion of the disability superannuation benefit is calculated as:

Amount of benefit x (days to retirement / service days + days to retirement)

Where:

• amount of benefit = superannuation balance, including insurance proceeds
• days to retirement = number of days from when the person stopped being capable of being gainfully employed to their last retirement day (usually age 65)
• service days = number of days from the start of the eligible service period in the fund to the date the disability superannuation lump sum benefit is paid to the member.

The creation of the tax-free component broadly reflects the period of time an individual would have expected to have been gainfully employed had they not suffered the disability.

Tips:

• the tax implications depend on a client’s eligible service date. Generally speaking, a later start date for the service period will provide a greater tax-free component of a disability superannuation benefit. This is because a later start date provides a larger proportion of service period, which leads to a greater tax-free uplift and less tax on the end payout.
• as an earlier start date for the service period will negatively impact the tax-free component of a disability superannuation benefit, clients may wish to avoid rolling over a superannuation interest with an earlier service period to a superannuation interest holding TPD cover as this may disadvantage the client if a TPD claim is paid from the fund prior to age 60.

The AIA TECE team has an insurance calculator that can calculate this tax-free uplift for TPD benefits, including any tax payable on life and TPD benefits. Refer to the "Super life and TPD insurance tax calculator” heading to download the calculator. 

Do you have a technical question about a financial advice strategy or need to find technical resource material? Don’t hesitate to email us at tece@aia.com

Kind regards,
The AIA Technical and Education Centre of Excellence (TECE) Team