Priority Protection
Priority Protection provides a selection of cover options to cater for a broad range of insurance needs.
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{{label}}21 January 2020
Welcome to this month’s technical roundup from the TECE team. This update helps keep you up to date with the latest industry news and technical developments in financial advice relating to insurance, superannuation, tax and estate planning.
Foreign residents will no longer have access to the CGT main residence exemption where the individual is a foreign resident at the time of the CGT event.
The changes apply from 7.30pm on 9 May 2017, or from 1 July 2020 if the foreign resident held the property on 9 May 2017.
Background
The main residence exemption is a generous concession as it allows individuals to a full CGT exemption where they live in the property as their main residence, provided it has not been used to produce assessable income (ie. rental income).
A partial CGT exemption is also available if the property was the individual’s main residence for only a part of their ownership period or if it was also used to produce assessable income during their ownership period.
Furthermore, under the ‘six year absence rule’, an individual can move out of their home and continue to treat it as CGT exempt for up to six years even while renting it out, as long as they don’t own another property on which they wish to claim a CGT exemption.
Exemptions from the CGT changes
The legislation provides exemptions that may allow a foreign resident to retain access to the CGT main residence exemption where one of the below applies:
1) The individual has been a foreign resident for a continuous period of six years or less and a specified ‘life event’ occurs during that period.
A life event includes the following situations:
2) The disposal qualifies under the ‘transitional period’, that is, the main residence was acquired by the individual before 9 May 2017 and is sold on or before 30 June 2020.
A foreign resident is generally someone who is not a tax resident of Australia and includes Australian citizens and permanent residents who are foreign residents. Thus, Australians who go overseas but have the intention of returning back home may become foreign residents for tax purposes. This means they may be caught out by the changes if they do not satisfy the above exemptions and decide to sell their main residence at the time they are a foreign resident.
Warning – if an individual is a foreign resident at the time they sell their residence and the exemptions do not apply, they will be subject to CGT on the full amount of any capital gain. This means the main residence exemption will still be denied for foreign residents even if:
Death and the CGT changes
If the deceased was a tax resident of Australia (or was a foreign resident for six years or less) at the time of death, the main residence exemption accrued by the deceased for the property continues to be available to the trustee or beneficiary or beneficiaries of the deceased estate that are bequeathed the property.
This means the exemption will be available for:
However, the CGT main residence exemption will not apply if:
What actions are needed?
Advisers with expatriate clients should consider whether their clients will be negatively impacted by the changes, particularly if the client becomes a foreign resident and decides to sell their home whilst on assignment.
For example, a foreign resident client that held their main residence as at 9 May 2017 may wish to consider selling their main residence before 30 June 2020 to obtain the main residence CGT exemption under the transitional rules if the CGT liability will be substantial.
Alternatively, individuals who resume their Australian tax residency would not be adversely affected by the changes provided the contract for sale is entered into after they have resumed Australian tax residency (unless the Commissioner is satisfied that the sole purpose of the arrangement is tax avoidance).
Impacted clients should seek their own tax advice to determine the impact of the changes on their personal tax situation.
An additional CGT discount of up to 10% is now available for resident individuals who invest in affordable housing from 1 January 2018.
Individuals are generally entitled to a 50% discount on capital gains for assets held for at least 12 months. The additional 10% discount will increase the CGT discount up to a maximum of 60%.
To qualify for the additional 10% discount:
CHPs will determine the tenant eligibility criteria, including the rent charged, consistent with state and territory affordable housing policies.
The changes aim to address housing affordability for members of the community earning low to moderate incomes by providing tax incentives for investors to increase the supply of affordable housing that is available.
This is general information only and impacted clients should see their own advice from a tax professional to determine the impact of the changes on their personal situation.
Agreed value income protection (IP) policies may soon become a thing of the past according to APRA’s proposed changes to IP insurance.
The proposals come as APRA revealed life insurance companies have collectively lost around $3.4 billion over the past five years through the sale of IP policies to individuals. Most of the losses came from the individual disability income insurance (DII) channel (ie. IP held outside superannuation) rather than the group channel.
As IP insurance plays an important role in providing replacement income to policyholders when they are unable to work due to illness or injury, APRA has proposed a range of sustainability measures that they expect insurers to adhere to otherwise insurers may face additional financial penalties.
Some of the proposals include:
1) Ceasing the sale of ‘agreed value’ policies from 31 March 2020.
APRA’s view is that the insured should not receive more income than what they were receiving pre-disablement. As an agreed value claim payment is based on the individual's income at time of application and will be guaranteed to be paid at claim, this could mean the insured receives more at claim time if their income has since reduced. Thus, going forward, all new IP policies will need to be offered as indemnity policy contracts whereby the product would replace a proportion of earnings at the time of a disability claim. Any existing agreed value IP policies are expected to be grandfathered under the proposed changes.
2) Ensuring IP benefits do not exceed the policyholder’s income at the time of claim. From 1 July 2021, new IP policies:
3) Avoid offering IP policies with fixed terms and conditions of more than five years from 1 July 2021.
4) Ensuring effective controls are in place to manage the risks associated with longer benefit periods from 1 July 2021. For example, IP policies with a long benefit period (ie. Say to retirement age) may need to have a stricter disability definition.
By introducing this package of measures, APRA is forcing the industry to better manage the risks associated with IP insurance and to address unsustainable product design features to ensure IP products continue to be offered in the future. We will keep you informed as these proposals progress into the New Year.
For further information, refer to:
Did you know that life insurance claims acceptance rates have risen to historical levels with falling claims time frames, particularly in group insurance in superannuation (source: APRA Life Insurance Claims and Disputes Statistics, November 2019).
Some of APRA’s key statistics show:
Despite APRA’s other media releases around the proposed changes to IP and their review into TPD insurance claims (ASIC Report 633), these recent statistics show that life insurance products are still providing substantial benefits to consumers at a time in need.
Q: My client is terminally ill and satisfies the 'terminal medical condition' condition of release. Is my client restricted to withdrawing his superannuation benefits as a lump sum?
A: No. The 'terminal medical condition' condition of release is a full condition of release that converts all of a member's benefits to unrestricted non-preserved benefits (ie. Fully accessible).
Remember, a member will be taken to be assessed as suffering from a terminal medical condition if two medical practitioners (at least one of these is a specialist) certify that the member is suffering from an illness or has incurred an injury that is likely to result in the death of the person within a period of 24 months. A superannuation condition of release also applies to terminal medical illness.
The client can therefore choose to take a lump sum, income stream or a combination of both. However, it is important to check with the trustee of the client's superannuation fund as they may impose additional restrictions.
Another important consideration is tax as there is a difference in the tax concessions available depending on whether the client takes a lump sum or an income stream.
A terminal illness lump sum benefit is paid tax-free, regardless of the recipient’s age and the underlying tax components.
Conversely, concessional tax treatment does not apply to a terminal illness income stream as they are subject to normal superannuation income stream taxation. That is, any taxable component is taxed at marginal tax rates, however, the 15% pension tax offset will only apply between preservation age and age 60 (or if the disability superannuation benefit definition has been met).
Tip – once a member has advised their superannuation fund of their terminal medical condition they cannot roll over their superannuation benefits to another fund. Terminal medical condition benefits may only be cashed out as either a lump sum or a pension. Where such a benefit is transferred between complying superannuation funds, the transfer will be treated as having been cashed out as a lump sum and re-contributed for tax and contributions cap purposes and excess contributions tax could apply.
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
Copyright © 2020 AIA Australia Limited (ABN 79 004 837 861 AFSL 230043). All rights reserved. This information is intended for financial advisers only and is not for wider distribution. This information is current at the date of distribution and is subject to change. This is general information in summary only, without taking into account the objectives, financial situation, needs or personal circumstances of any individual, and may not be exhaustive. It is not intended as financial, legal, medical, tax or other advice.