Legislation and Strategy Update

Kim Guest: Senior Technical Manager - FirstTech

firsttech@colonialfirststate.com.au

July 2014

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Disclaimer

This presentation is given by a representative of Colonial First State Investments Limited AFS Licence 232468, ABN 98 002 348 352 (Colonial First State). Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension and FirstChoice Employer Super from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and interests in the Rollover & Superannuation Fund and the Personal Pension Plan from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840 and interests in the Colonial First State Pooled Superannuation Trust ABN 51 982 884 624.

The presenter does not receive specific payments or commissions for any advice given in this presentation. The presenter, other employees and directors of Colonial First State receive salaries, bonuses and other benefits from it. Colonial First State receives fees for investments in its products. For further detail please read our Financial Services Guide (FSG) available at colonialfirststate.com.au or by contacting our Investor Service Centre on 13 13 36.

All products are issued by Colonial First State Investments Limited. Product Disclosure Statements (PDSs) describing the products are available from Colonial First State. The relevant PDS should be considered before making a decision about any product. Stocks referred to in this presentation are not a recommendation of any securities.

The information is taken from sources which are believed to be accurate but Colonial First State accepts no liability of any kind to any person who relies on the information contained in the presentation.  

This presentation is for adviser training purposes only and must not be made available to any client.

This presentation cannot be used or copied in whole or part without our express written consent.

© Colonial First State Investments Limited 2014.

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What we’ll cover …

• Deeming of account based pensions

• Insurance in super changes

• Budget repair levy

• Super contribution tips and traps

Deeming of account based pensions

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Deeming of account based pensions & annuities

• Legislation to apply deeming to account based pensions and equivalent annuities – Royal Assent 31 March 2014

• Grandfathering:

– Receiving income support payment immediately before 1 Jan 2015 and received continuously

– Pension or allowance (not low income health care card)

– Account based pension immediately before 1 Jan 2015 and received continuously

– Reversionary pensions grandfathered if:

– Original pension grandfathered

– Reversionary beneficiary receives income support payment continuously

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Overview of impact on clients

• More assessable income could result in lower Centrelink payment• Impacts clients with other assessable income such as deemed

income, government pension etc• Aged care clients

– Lower age pension, higher ongoing care fees– Self funded retiree – higher assessable income as no

grandfathering

• Anyone who has an existing ABP but not on Centrelink may be worse-off when they eventually claim a Centrelink payment

• Clients currently not income tested may become income tested on 1 Jan 2015

• Impacts pensioners with lower levels of assets because asset tested clients are unaffected

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Single income and assets test – current deeming

$0 $40,000 $80,000 $120,000$160,000$200,000$240,000$280,000$320,000$360,000$400,000$440,000$480,000$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

Assets v income test

Assets test Income test

8 Based on rates and thresholds current as at 1 July 2014, deeming rate of 2% and 3.5%

Who will be affected once ABPs are deemed

If a person only has financial assets…

Family circumstances Point at which maximum pension start to reduce under income test

Point at which assets test takes over as determining test

Single- homeowner $139,429 $252,930

Single –non-homeowner $139,429 $518,674

Couple combined – homeowner

$245,086 $320,209

Couple combined – non-homeowner

$245,086 $585,953

Clients whose total assets are

above these levels are unaffected

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Maximum annual pension reduction - new rules

Family circumstances Deeming rate of 2% and 3.5% (current)

Deeming rates of 3% and 4.5%

Deeming rates of 4% and 5.5%

Single- homeowner $1,066 $2,049 $3,033

Single –non-homeowner $3,559 $5,256 $6,952

Couple combined – homeowner

$714 $2,109 $3,504

Couple combined – non-homeowner

$3,208 $5,315 $7,423

Assumptions: Client is assumed to have 100% of their assessable assets in an account based pension with no allowance for home contents and personal assets.

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Opportunities between now and 31 December 2014

• Consider claiming an “income support payment” if eligible

– Clients currently on the Pension Bonus Scheme should consider claiming pension and utilising the Work Bonus instead

– Claiming Newstart Allowance where close to age pension age

– Converting super in accumulation phase to ABP where under pension age

• Where grandfathering can apply:

– Commute and recommence ABP to lock in higher deductible amount

– Consider reversionary ABPs to extend grandfathering

– Choose provider carefully – no switching post 1 Jan 2015

– Amalgamate multiple ABPs

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Commute and recommence ABP for a higher deductible amount• Commute and recommence ABP to lock in higher deductible amount

– Life expectancy reduces as people age– Balance of ABP may have also increased

Example: single pensioner with existing ABP commenced years ago

Original pension Roll back & recommence

Commencement date 1 August 2006 1 August 2014

Purchase price $400,000 $400,000

Life expectancy 16.21* (67 y.o. male) 11.31** (75 y.o. male)

Centrelink deductible amount $24,676 $35,367

Minimum pension payment (6%) $24,000 p.a.

Additional Pension payment before any amount becomes assessable

$676 p.a. $11,367 p.a.

* 2000-02 Australian life tables; ** 2005-07 Australian life tables

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Reversionary or not?

Susan (65) and Walter (67) are full age pensioners

• Assets and income:– Family home - $400,000

– Home contents - $20,000

– Cash at bank - $20,000

– Walter’s account based pension

– Current balance $250,000;

– Currently drawing down pension payment of $20,000 per annum

– Purchase price: $270,000

– Relevant number: 18.54 (Walter’s life expectancy at commencement)

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Case study

• If Walter nominates Susan as a reversionary beneficiary on his ABP by re-commencing the pension before 1 January 2015

• Susan’s life expectancy of 21.62 will be used resulting in lower DA and more assessable income.

Note: Walter could reduce his annual pension drawdown and drawdown irregular pension payment in late June to maximise their age pension

Keep Susan as BDN Susan as reversionary

Deductible amount $14,563 pa $11,563 pa

Assessable income from ABP $5,437 pa $8,437 pa

Total assessable income $5,837 pa $8,837 pa

Pension entitlement (combined) $33,036pa $32,310 pa

Assumptions: pension and deeming rates current as at 1 July 2014

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Case study

• If Walter dies 5 years later and his ABP will be paid to Susan.

• Assume ABP balance at the time is $170,000, and Susan will reduce pension payments to $12,000 pa

• Home contents now $10,000, cash at bank $10,000

Assumptions: pension and deeming rates as at 1 July 2014

Keep Susan as BDN Susan as reversionary

Assessable income (ABP rules) Nil $437 pa (DA is $11,563)

Deemed income $5,580 pa $350 pa

Total assessable income $5,580 pa $437pa

Pension entitlement (single) $21,203 pa $21,912 pa

Pension entitlement (single)If deeming rates increase by 1.5%

$19,853 pa $21,912 pa

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Considerations / strategies post 1 Jan 2015

• Where 2 ABPs are running and one is grandfathered, drawdown strategy is important

• TTR refreshing

• Consider alternative income streams where a new income stream required

• Need to check whether client’s ABP minimum is more than DA– If so, need to compare current income test treatment v deemed amount– May then be better to rollover and remove grandfathering– Is ABP minimum ever more then DA?

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ABP from age 65

65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

Minimum payment Male DA Female DA

Age

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Commonwealth Seniors Health Card

• Deeming proposal

– Deeming of account based pensions will be added to ATI for CSHC purposes from 1 January 2015

– Grandfathering: Holders of CSHC before 1/1/2015 who have an account based pension before 1/1/2015 will not be deemed

– No mention of reversionary pensions being grandfathered

– Partners - If partner does not have a CSHC, account based pension will be deemed

• Overseas travel – extend from six to 19 weeks temporary overseas travel before card cancelled

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Commonwealth Seniors Health Card

Other proposed changes:

• Annual indexation of income thresholds to CPI from Sept 2014

• Seniors Supplement will cease from June 2014.

• Currently $876.20 p.a. (singles or couples separated due to illness) or $660.40 (couples, each).

Insurance in super

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Insurance in super changes

• From 1 July super trustees are prohibited from providing an insured benefit in relation to a member unless the insured event consistent with condition of release for:– death, permanent incapacity, temporary incapacity & terminal

medical condition

• Insured benefit in relation to a member means a right for the member’s benefits to be increased on the realisation of a risk

• Trauma policies – out!

• Pre 1 July policies grandfathered– where member was covered prior to 1 July 2014– can vary level of cover– lapsing

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Implications – life insurance including TMC

• Death cover only – no change

• Death policy that includes a terminal medical condition benefit, the policy terms and conditions must align with the SIS definition

• Two registered medical practitioners have certified, jointly or separately, that the person is suffering from an injury or illness that is likely to result in their death within 12 months from that date

• At least one of the registered medical practitioners is a specialist practising in an area related to the injury or illness suffered by the person

• Benefit must be paid within 12 months of the date of the certificates.

• Watch out for cover where policy would pay under only 1 medical certificate required or the expected life expectancy diagnosed can be greater than 12 months

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Implications – total and permanently disability (TPD)

• Prohibited from providing “own occupation” policies

• “Any occupation” policies that provides ancillary lump sum benefits problematic:

• Loss of limbs

• Loss of sight benefits

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Implications – income protection

• Under temporary incapacity condition of release: • Benefits can only be paid in the form of a non-commutable income stream

for the purpose of continuing (in whole or part) the gain or reward which the member was receiving immediately before the temporary incapacity, and

• Member must have ceased to be gainfully employed

• Ancillary lump sum benefits prohibited• Redundancy, crisis, rehabilitation, specific injury or home care benefits

• Policies that pay a partial benefit when a member only reduced their hours of work due to incapacity rather than ceasing employment - prohibited

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Implications for SMSFs

• Trustees must be aware of the new requirements

• Watch out for policies that are not specifically designed to be held within super

• Advisers must have an extremely good understanding of the terms and conditions of any policy they recommend to SMSFs

• Note it may still be possible to acquire policies that are not aligned with the 4 conditions of release if the policy is not acquired in respect of a member e.g. debt reduction or liquidity purposes where proceeds would be allocated to a reserved rather than the member’s account

Budget Repair Levy

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Budget repair levy

• Temporary levy of 2% pa of taxable income above $180,000 – 2014/15, 2015/16, 2016/17

• Essentially increases the top MTR to 49% during these years– Other rates based on top MTR will also increase for the same period– FBT rate increases to 49% between 1 April 2015 and 31 March 2017

• Income definition means some effective strategies– Salary sacrifice, personal concessional contributions, negative

gearing

• Take care with capital gains

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Budget repair levy impact

Taxable income Levy per financial year

$200,000 $400

$225,000 $900

$250,000 $1,400

$275,000 $1,900

$300,000 $2,400

$325,000 $2,900

$350,000 $3,400

$375,000 $3,900

$400,000 $4,400

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Budget repair levyItem 2013-14 2014-15, 2015-16,

2016-17

Non complying super fund 45% 47%

Super non arms length income 45% 47%

No TFN super conts 47% 49%

DASP (taxable) 35% 38%

DASP (untaxed) 45% 47%

Excess non concessional 47% 49%

Rollover of taxable component (untaxed element) above untaxed plan cap

45% 47%

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Budget repair levyItem 2013-14 2014-15, 2015-16,

2016-17

FBT rate 47% 49%

Unearned income minors ($417 to $1,307)

66% 68%

Unearned income minors (over $1,307)

45% 47%

FHSA misuse tax 45% 47%

Super contribution tips and traps

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Frank’s after tax contribution dilemma

• Frank:– Turned 61 on 1 October 2013. Has retired from the workforce.– Has $2 million in cash outside super from a few property sales– Wants to maximise his after tax contributions to super

What are 3 things Frank should consider doing?

Financial year

Age (at start) General NCC Frank’s

strategy

1 60 $150,000

?2 61 $180,000

3 62 $180,000

4 63 $180,000

5 64 $180,000

6 65 $180,000

7 66 $210,000

Frank’s strategy

$150,000

$540,000

$540,000

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Watch out for fund capped limits

• Super funds are limited by ‘fund capped limits’ as to the amount they can accept as a non-concessional contribution in a single contribution

• $540,000 for a person who was under age 65 at any time during the financial year

• $180,000 for a person age 65 or over for the whole financial year

• Forward planning required to make sure contributions are not refunded

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Tips for Concessional Contributions

• Adjust contributions up to the new caps

• $30,000 general cap, $35,000 age 50 or over

• Save on Medicare – increasing to 2% in 2014/15

• Tax saving of 6% for clients on 19% MTR (21% - 15%)

• High income earners earning over 300K will pay 30% contributions tax

• Still worth it but not as good

* Assumes not eligible for other tax offsets like SAPTO or pension tax offset

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Low income super contribution

• Effective refund of contributions tax on SG if earning $37,000– 15% of concessional contributions, capped at $500– If earning less than $37,000, also refunds contributions tax on voluntary CC

• Introduced by Labor as part of MRRT package from 1 July 2012

• Proposed to be abolished by the Coalition for contributions made from 1 July 2013– Minerals Resource Rent Tax Repeal and Other Measures Bill 2013 (No.2)

reintroduced

• Ideal contribution mix for some clients will change

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Ideal contribution mix, new rules of thumb

Income = $49,487

Income at which point income tax ceases

Income = Nil

1. Make after tax contribution to get co-contribution

2. Then make concessional contributions (subject to cap)

3. Then make after tax contributions (subject to cap)

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Optimising after tax contributions to get co-contribution

Income = $49,488

Income = $34,488

Contribute

$1,000 to get

$500 co-

contribution

No

Y = Income - $34,488

Contribution =

Y x 0.03333 x 2

Example

Y = $40,000 - $34,488

Contribution =

$5,512 x .03333 x 2

= $367

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Finding where income tax ceases

• Generally effective to make concessional contributions to take taxable income to:– $20,542 (if eligible for LITO only)– $32,279 for singles or $28,974* members of couple (if eligible for SAPTO)

• Marginal benefit making concessional contributions below $37,000– 19% MTR v 15% super tax rate– Additional 0.5% of Medicare levy saved from 1 July 2014

• Other considerations– Concessional cap– Other tax offsets (eg, pension tax offset if aged 55 to 59) increases the point

where income tax ceases

* May be higher depending on partner’s income / use of their SAPTO

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Questions

Thank YouThank You