TECE News - November 2019

An employee’s salary sacrifice contributions will no longer be able to be used to reduce an employer’s minimum SG contributions. The changes apply from 1 January 2020.

Employees who currently salary sacrifice to superannuation risk receiving reduced SG contributions as:

• SG is based on an employee’s ordinary times earnings (OTE) and salary sacrifice contributions can reduce an employee’s OTE, thereby reducing the employer’s SG liability, and
• Salary sacrifice contributions count as employer contributions, which means employers can use these amounts towards their minimum 9.5% SG obligation.

These changes will allow employees to receive SG contributions based on their pre-salary sacrificed salary.

Key considerations:

• Employees and employers should clearly state and agree on all the terms of any salary sacrifice arrangement to avoid any doubt.
• Employees wishing to check their conditions should review their employment contract or the award or agreement they are working under. Alternatively, employees can contact the Fair Work Commission for further information. 

Current tax law allows taxpayers who hold vacant land to claim a tax deduction for the costs of holding land if it is held for income-producing purposes, or if they are carrying on a business to produce income.

However, from 1 July 2019, tax deductions for costs relating to vacant land will be limited to land that is available for rent or utilised in carrying on a business.

The changes will affect individuals, trusts (which are not widely held) and self-managed super funds (SMSFs).

Exemptions apply to ensure the changes will not apply to:

• Land that is used or held available for use by a business by the taxpayer or certain parties that have a relationship or connection with the taxpayer
• Corporate tax entities (i.e. Companies), superannuation funds (other than SMSFs), managed investment trusts or public unit trusts, or
• Unit trusts or partnerships of which all the members are entities of the above types.

Key considerations:

• Individuals and trusts that are not in the business of property development are most likely to be affected by the changes. Costs will generally only be deductible when the property is complete and being advertised for rent (ie. When there is a substantial and permanent structure on the land).
• The inability to claim upfront deductions will have cashflow and financing impacts on affected taxpayers. The financial impacts should be carefully considered before such arrangements are entered into.
• Individuals who wish to acquire land in a company structure in order to be exempt from the changes should remember that the 50% CGT discount is not available to companies. This trade-off between claiming a tax deduction for holding costs versus claiming the 50% CGT upon sale should be considered. 

Concessional tax treatment for genuine redundancy and early retirement scheme payments will be extended to individuals who are 65 years or older, provided they are dismissed or retire before they reach age pension age.

The extension of the age limit will now be aligned with age pension age which is currently age 66 and rising to 67 by 1 July 2023.

Concessional tax for genuine redundancy and early retirement scheme payments is currently restricted to employees who are dismissed before they turn 65.

The changes will see older Australians paying less tax upon receipt of these payments.

The amendments apply to payments received by employees who are dismissed or retire on or after 1 July 2019.

Did you know that Australia’s pension system is ranked third in the world, according to a global study conducted by Mercer (the Melbourne Mercer Global Pensions Index 2019).

The Netherlands took the top spot with most workers benefiting from defined benefit plans based on lifetime average earnings. Denmark came in at second place.

The report provides insights on how nations are preparing ageing populations for retirement.

In particular, the study measured 37 retirement systems (representing more than 63% of the world’s population) against more than 40 indicators to assess whether a system:

• Leads to improved financial outcomes for retirees
• Is sustainable, and
• Has the trust and confidence of the community.

The study comes as many countries and their pension systems are under pressure to deal with more people entering retirement, people living longer and needing a steady flow of income on which to survive.

Q: My client is looking to take out buy/sell insurance to protect themselves in the event of their death, disability or illness. How should the buy/sell policy be structured and what are the tax implications?

A: There are many different policy ownership structures that are available when funding a business succession plan with insurance. As a general rule, buy/sell cover is typically owned outside of the trading entity. Thus self-ownership is a preferred ownership structure as it is a tax effective and efficient way of ensuring the proceeds end up in the right hands.

Under the self-ownership option, each business owner owns an insurance policy on their own life. If a business owner exits the business due to death, TPD or crisis recovery (trauma), the following will generally occur:

• The insurance proceeds are paid to the departing owner or their estate
• The recipient (i.e. the departing owner or their estate/beneficiaries) accepts the insurance proceeds as consideration/payment for the departing owner’s interest in the business, and
• The departing owner’s business interest is transferred to the remaining business owners.

Note that success depends on an effective buy/sell agreement. If there is no buy/sell agreement then the departing owner/beneficiary will retain both the insurance proceeds and business ownership interest.

From a tax perspective, self-ownership is tax effective as no CGT is payable on life insurance proceeds if the recipient is the original owner of the policy (or they acquired the policy for no consideration). Further, CGT is not payable on TPD or crisis policies as the life insured is the owner of the policy.

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