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  • TECE News - June

    19 June 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.

    TECE News

    Latest news and developments

    End of financial year (EOFY) checklist

    With the end of the 2019/20 financial year fast approaching, many people may be wondering how much they can contribute to their superannuation to reduce tax and/or increase their superannuation savings.

    The information below is an EOFY checklist that provides a summary of the key superannuation and insurance year-end planning actions that advisers should consider for clients in 2019/20. 

    Superannuation measures
    Measures Clients impacted Key actions
    Track the concessional contributions (CC) cap
    • Clients with salary sacrifice arrangements in place
    • Clients that make personal deductible contributions
    • Refer to the “Concessional contribution checklist” to track the CC cap for clients
    • Review insurance owned in super to confirm whether it is still appropriate given the CC cap
    • Consider alternative investment structures and strategies for CCs that exceed the cap
    • Adjust salary sacrifice arrangements and personal deductible contribution levels from 1 July 2020
    Salary sacrifice vs personal deductible contributions  All clients that are eligible to make a personal contribution 
    • Consider whether employee clients should salary sacrifice or make personal deductible contributions
    • Review whether clients should make any personal deductible contributions towards the end of the financial year to use up their remaining CC cap
    • Check the maximum deduction that a client should claim to avoid exceeding the CC cap
    Personal deductible contribution check list

    All clients that are eligible to make a personal contribution

     

    • Ensure client meets ALL of the basic conditions for deductibility:
      • Client is aged 18 to <75
      • Client makes a personal contribution to a complying super fund
      • Client submits a valid ‘notice of intent’ (NOI) to claim a deduction for the personal contribution to the super fund trustee
      • NOI must be given before the earlier of:
        • The day the client lodges their tax return for the year in which the contributions were made, and
        • The EOFY after the year in which the contributions were made
      • The trustee acknowledges the NOI form
      • A deduction claimed for a personal contribution cannot create a tax loss
    • Ensure NOI form is submitted and acknowledged by trustee prior to client:
      • Rolling over to another fund (e.g. where client is funding a super life/TPD policy by paying for insurance premiums via a rollover from another super fund)
      • Withdrawing funds
      • Commencing an income stream
      • Splitting contributions with their spouse
      • Completing their tax return
    • Ensure deduction amount will not take client over the CC cap for the year
    Catch-up concessional contributions 

    Clients with a total super balance (TSB) of less than $500,000 as at 30 June 2019 who have not maximised their CC cap in 2018/19

     

    • Check remaining CC cap amount for 2018/19
    • Review whether client should:
      • Make unused CCs in 2019/20, or
      • Carry unused CCs forward for a future financial year if client plans on selling an asset in the future and is likely to incur a capital gain (this will allow the client to use a larger CC cap to manage their CGT liability)
    Div 293 tax threshold for very high income earners ($250,000+) Clients with total income for surcharge purposes plus CCs (“low tax contributions”) that exceed $250,000
    • Review salary sacrifice and personal deductible contribution strategies to avoid clients paying extra tax of 15% on the lesser of:
      • The excess over $250,000, or
      • The CCs (except excess contributions)
    Non-concessional contributions (NCC) cap of $100,000 or $300,000 under the bring-forward rules Clients with available after-tax funds wanting to make NCCs 
    • Refer to the “Non-concessional contributions – decision tree” to track NCC cap for clients
    • Ensure clients reduce NCCs to $300,000 or $100,000 if over age 65
    • Ensure clients do not make any further NCCs once their TSB equals or exceeds $1.6m as at 30 June in the previous financial year (i.e. 30/6/19)
    Restricted bring-forward rules where TSB exceeds $1.4m Clients with TSB at 30/6/19:
    • Less than $1.4m = $300,000 bring-forward cap
    • $1.4m < $1.5m = $200,000 bring-forward cap
    • $1.5m < $1.6m = $100,000 bring-forward cap
    • $1.6m+ = nil NCC cap
    • Ensure clients with a TSB of $1.4m or more at 30/6/19 stay within their reduced NCC bring-forward caps
    • Ensure clients do not make any further NCCs once their TSB equals or exceeds $1.6m as at 30/6/19
    • Consider making NCCs to the client’s spouse’s super fund to equalise super balances (if lower)
    Insurance measures
    Measures Clients impacted Key actions
    Review insurance needs
    • Clients who experience the following life changes:
      • Changes to family situation (marriage, relationship breakdown, loss of a loved one, the birth or adoption of a child, or adult children becoming financially independent, leaving the family nest, etc)
      • Borrowing funds or reduction in debt levels
      • Changes to income (earning more or reduction of income)
      • Health and lifestyle has improved since time of application (i.e. quit smoking, no longer work in a high risk occupation or participate in high risk activities)
    • Clients who have a self-managed super fund (SMSF) as it is mandatory for SMSF trustees to consider insurance when formulating or reviewing the fund’s investment strategy
    • Ensure client’s type of insurance and the amount insured for remains appropriate to meet their needs
    • Refer to ASIC’s life insurance advice checklist as it provides a list of issues to consider when giving life insurance advice

     

    Estate planning measures
    Measures Clients impacted Key actions
    Review super death benefit nomination forms 

    Clients who have experienced the following life events: births, deaths, marriages, separation, divorce, inheritance or receipt of large sums of cash, child turns 18, insolvency or bankruptcy, enter or cease dependency or interdependency, etc

    • Ensure client’s review their death benefit nominations when their circumstances change to ensure nominated beneficiary is consistent with client’s estate planning objectives
    • Explain how directing super death benefits to the estate (by nominating the legal personal representative as beneficiary) can have advantages for clients intending to use testamentary trusts 

    Type of death benefit nomination form:

    Binding vs non-binding vs non-lapsing nominations

    All clients with super funds

    • Check the client’s nomination form (i.e. is it binding, non-binding or non-lapsing) and determine whether it suits the client’s circumstances when it comes to flexibility vs control:
      • Flexibility (non-binding) – provides guidance to the trustee and deals with family circumstances, tax and law at the time of death
      • Control (binding) – this binds the trustee to follow the nomination and may also be non-lapsing (unless revoked or amended)
    Review binding death benefit nomination (BDBN) conditions

    Clients with a BDBN  

    • Ensure the client’s BDBN form meets ALL of the following conditions in order for it to be valid:
      • Person(s) mentioned are super dependants of member
      • Proportion of benefit paid is readily ascertainable (i.e. Total adds to 100%)
      • BDBN is in writing in the approved form
      • Signed and dated by the member in the presence of 2 witnesses who are not beneficiaries in the notice, and
      • Updated every 3 years (unless non-lapsing nomination)
    Insurance-only super funds

    Clients who hold cover through an insurance-only super fund and have another super fund with their accumulated super benefits 

    Clients need to establish and maintain two beneficiary nomination forms as each fund has their own set of rules when paying death benefits 

    Did you know?

    Did you know that if an individual becomes bankrupt, certain life insurance policies (both inside and outside of superannuation) may be protected against bankruptcy?

    Section 116(1) of the Bankruptcy Act 1966 (the Act) provides a broad description of ‘property’ that is divisible amongst creditors. This includes all property that:

    • belonged to, or was vested in, the client at the commencement of the bankruptcy, or
    • is acquired by the client, or devolves on them, after the commencement of the bankruptcy and before the client’s discharge.


    The definition of ‘property’ would normally include life insurance policies and their proceeds, however, section 116(2) of the Act specifically excludes certain assets such as from being divisible among creditors, such as:

    • policies of ‘life assurance’ or endowment assurance in respect of the life of the bankrupt or the spouse or de facto partner of the bankrupt
    • the proceeds of such policies received on or after the date of bankruptcy
    • an interest in a regulated superannuation fund, approved deposit fund or exempt public sector superannuation scheme.


    However, there is a discrepancy between the Bankruptcy Act 1966 and the Life Insurance Act 1995 as to what constitutes a policy of ‘life insurance’ as opposed to policy of ‘life assurance’.

    The Bankruptcy Act does not include reference to the term ‘life insurance’. Instead, it refers to 'life assurance’, which is undefined. At common law (as expressed by the High Court in National Mutual Life Association of Australasia Ltd v Federal Commissioner of Taxation (1959)), the definition of life assurance refers to policies on the life of an insured person (ie. a pure life insurance policy) as opposed to policies covering total and permanent disability (TPD), trauma, and income protection.

    Whereas the Life Insurance Act defines a policy of ‘life insurance’ to also include any TPD, trauma and income protection.

    This means the exemption under the Bankruptcy Act will only protect a bankrupt person's life insurance policy (and generally any TPD or trauma policies that are riders to that life policy) from being divisible amongst the creditors of the bankrupt. Thus, in the event of bankruptcy, the policy proceeds would go to the bankrupt policy owner, a surviving joint owner or a nominated beneficiary, or to the bankrupt policy owner’s estate.

    As stand-alone TPD, trauma, and income protection policies are not considered ‘life insurance’ policies at common law, these policies will not be excluded from being property divisible amongst creditors of a bankrupt. 

    This month's FAQ

    Q: My client has been divorced for over 10 years. His ex-wife owns a life insurance policy with AIA over his life and she continues to pay the premiums on the life insured (my client).

    My client does not want the policy unless it is specifically for the benefit of his daughter, however there is no beneficiary listed on the policy. My client’s ex-wife refuses to nominate the daughter and does not want to transfer the life insurance policy to my client (as the life insured).

    Does my client have any ability to remove himself as the life insured?

    A: AIA’s strict legal obligation is to the policy owner first, not the insured.

    As we (AIA) don’t know what all the circumstances might be between the ex-spouses, we cannot amend, change or vary the policy without the policy owner’s agreement.

    Thus, the ex-wife as the policy owner does not have to cancel the policy or alter the beneficiary to the daughter as is being requested in this case.

    Want technical advice support?

    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.

    Contact AIA

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    PO Box 6111
    Melbourne VIC 3004

    enquiries@aia.com.au

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    Contact AIA

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    PO Box 6111
    Melbourne VIC 3004

    enquiries@aia.com.au

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    Copyright © 2021. AIA Group Limited and its subsidiaries or affiliates. All rights reserved. Priority Protection and Priority Protection for Platform Investors products are issued by AIA Australia Limited (ABN 79 004 837 861, AFSL 230043). AIA Vitality, a personalised, science-backed program that supports members every day to make healthier choices, is available with eligible products issued by AIA Australia. AIA Health with AIA Vitality is issued by AIA Health Insurance Pty Ltd ABN 32 611 323 034, a registered private health insurer governed by the Private Health Insurance Act 2207, Private Health Insurance Rules 2007 and the AIA Health Insurance Pty Ltd Fund Rules. The information on this website is current as at 14 January 2021 and may be subject to change. It is general information only and is not intended in any way to be financial, legal, tax, health, medical, nutritional or other advice. You should consider your own personal circumstances and needs and view the relevant product documents, fact sheets, fund rules and terms and conditions before making a decision to acquire such products. If necessary you should obtain professional advice from a financial, tax, medical or health professional. Unless expressly stated, any views or expressions of opinion (including any video content) do not represent the opinion of AIA.
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