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Monday, 27 August 2012 16:32

Reversionary Beneficiary

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Allocated Pensions - Reversionary Pension could save Tax for surviving spouse

retirement-planning

Many people are under the impression that their will deals with all of their assets after death.  Not so generally with respect to people’s superannuation.

The payment of the balance of your superannuation fund, after your death, will generally be to a dependant beneficiary, such as your spouse or a dependant child.  However if no nomination has been made, the decision about where to pay benefits could rest with the trustee of the super fund.  It may be beneficial to pay your superannuation benefit as a pension rather than a lump sum.  To facilitate this your fund may allow you to nominate what is known as a “reversionary beneficiary”. The nomination of a reversionary beneficiary allows for the continuation of your pension upon your death, locking in some important potential benefits.

The rules of the fund (trust deed for Self Managed Super Funds must allow you to nominate a reversionary at the time you begin the original allocated pension, this is an important aspect for trustees of Self Managed Super Funds to check.

Some advantages of nominating a reversionary beneficiary.

Continuity of Tax Treatment - If the primary beneficiary was 60 or older at the time of death, then payments to the reversionary beneficiary will be tax exempt regardless of the age of the beneficiary. This is also the case if the reversionary beneficiary is also 60 or older but the member died before reaching 60.

John is 62 years old and has commenced an allocated pension with his wife Mary aged 57 as his reversionary beneficiary. If John dies Mary would continue to receive his pension payment of $30,000 per year tax free even though she is only 57 years old.

This benefit can be particularly important if Mary has another source of taxable income in her own right where she has already used up her tax free and low tax threshold.

Your benefit is paid according to your wishes. Where a valid reversionary nomination is made, the trustee of the superannuation fund is bound to continue paying the pension to your nominated reversionary upon your death. This takes away the risk that the superannuation fund trustee may pay part or all of your benefit to someone other than whom you desired.

This risk can arise when people have multiple spouses (although not at the same time) and children from different relationships.  Sometimes in these situations having assets bypass the estate can reduce the risk of an estate being contested resulting in hefty legal bills.

There can clearly be benefits in establishing a “Reversionary Beneficiary” for investors with allocated pensions, however these nominations can only be made at the time of establishment. For those with pre-existing allocated pensions, they could simply rollover their fund to a new fund provider and nominate a reversionary beneficiary at that time, but this needs to be considered against any adverse effects on Centrelink entitlements.

 

Friday, 20 July 2012 08:02

Government Ad on Tax Cuts - Deceptive Conduct

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This is the advertisement that is being prominently displayed around the country (at great expense to the taxpayer) relating to the tax cuts that become effective from 1st July 2012 to offset the impact of the carbon tax.

This ad should be accompanied by the sort of warning you would expect to find on your car side mirrors "Tax Cuts are smaller than they appear".

Our issue lies with the assertion in the ad that the tax free threshold is tripling to $18,200.  This leaves the reader with the feeling that they are about to receive a  very generous tax cut and fails to state that the current effective tax free threshold is currently $16,000 when the low income rebate is considered.

The Government goes to great lengths with retailers to ensure that prices must be expressed as a dollar figure per litre of drink, or per tissue etc.  Financial services providers must disclose in dollar terms as well, rather than using percentages as apparently studies suggest that more than half of Australians do not understand how to calculate them (note I did not use the term 50%).

Despite the Government insisting that business openly disclose facts in a manner that the average member of the public can understand, there appears to be a double standard when it comes to Government advertising.

The reality of the July 2012 tax cuts is that an average Australian taxpayer earning less than $80,000pa receives a tax cut of around $300 when all of the various changes to the tax free threshold, marginal rates and rebates are considered.  Refer our previous blog article on what the tax cuts mean for you at http://www.gemcapital.com.au/blog/carbon-tax-tax-changes-and-what-it-means-to-you-from-1st-july-2012

But then I don't suppose that a $300 tax cut sounds anywhere near as good as tripling the tax free threshold.

There shouldn't be a rule for us and a separate rule for the Government and the Unions when it comes to advertising

 

 

 

23 May 2012 – The private health insurance rebate is to be means tested from July 1, 2012 but a method of maintaining the full 30% rebate has emerged.

Some private health insurance companies are accepting pre-payment of premiums before June 30, 2012, which will allow health fund members to lock in the current rebate before the new income-tested scaled reductions to the rebate comes into effect.

The office of the Minister for Health, Tanya Plibersek, has confirmed that private health insurance premiums that are paid before June 30, 2012 will qualify the payer for the level of rebate under existing rules, but that payments made after July 1, 2012 will be
subject to the new health insurance rebate rules.

The legislation allows for health insurance providers to determine themselves if they will allow for pre-payment of premiums. Many health insurers have done just that, and allow for pre-payment of up to 12 months, some allowing 18 months and one company
even providing for up to 30 months' pre-payment.

The Private Health Insurance Ombudsman's office (PHIO) confirms that the relevant legislation (the Fairer Private Health Insurance Incentives Act 2012) is worded in such a way to allow for the date when actual payments are made for health cover premiums to
determine under which financial year eligibility for relevant government rebates or offsets is set.

The new means testing will mean that singles earning more than $130,000 and households on more than $260,000 will miss out entirely on the rebate from July 1, 2012. The reduction in rebate levels starts after individual incomes reach $84,000 and family
income passes $168,000 (see table below).

REBATE
Unchanged               Tier 1                          Tier 2                           Tier 3

Singles            <$84,000              $84,001-97,000            $97,001-130,000          >$130,001
Families          <$168,000            $168,001-194,000        $194,001-260,000         >$260,001

< Age 85            30%                       20%                              10%                              0%

< Age 65-69       35%                       25%                              15%                              0%

< Age 70+          40%                      30%                               20%                              0%

There are three ways to claim the rebate. Either by asking your fund to give you the rebate in the form of a reduced premium, through a Department of Human Services service centre as a cash payment or cheque (and there's another form for that), or claim it back through your annual income tax return

The carbon tax has now become law with effect from 1st July 2012.  Here we take a look at the changes to the personal tax system that will be made and how that will impact you.

Executive Summary

1. According to Government estimates, households will see cost increases of $9-90 per week which includes increasing electricity and gas charges.

2. There are two ways that households will receive compensation for the additional costs which include increases in pensions, allowances and family payments in addition to tax cuts.

Specifically these measures are:

- Pensioners and self funded retirees will get up to $338 extra per year if they are single and up to $510 per yer for couples combined.  There will be a cash payment made to these people automatically in May/June 2012 which represents a "bring forward" payment.

- Families receiving Family Tax Benefit Part A will get up to an extra $110 per child.

- Eligible Families will get up to extra $69 in Family Tax Benefit B.

- Allowance recipients (eg New Start Allowance) will get up to $218 extra per year for singles, $234 per year for single parents and $390 per year for couples combined.

- On top of this, taxpayers with annual income of under $80,000 will all get a tax cut, with most receving at least $300 per year.

Tax Rate Changes In Detail

The new tax thresholds from 1st July 2012 will be as follows:

Taxable income Tax on this income
0 - $18,200 Nil
$18,201 - $37,000 19c for each $1 over $18,200
$37,001 - $80,000 $3,572 plus 32.5c for each $1 over $37,000
$80,001 - $180,000 $17,547 plus 37c for each $1 over $80,000
$180,001 and over $54,547 plus 45c for each $1 over $180,000

 

The tax free threshold will rise from $6,000 to $18,200, and the maximum value of the Low-income tax offset (LITO) will be reduced from $1,500 to $445.  This means that the effective tax free threshold for ordinary Australians considering the LITO is now $20,542.

The first marginal tax rate will be increased from 15 per cent to 19 per cent, and will apply to that part of taxable income that exceeds $18,200 but does not exceed $37,000.

The second marginal tax rate will be increased from 30 per cent to 32.5 per cent, and will apply to that part of taxable income that exceeds $37,000 but does not exceed $80,000.

All of this results in tax cuts for working Australians earning up to $80,000 per year of around $300.

For retirees over the age of 65, who are entitled to the Seniors or Pensioner Tax Offset, the effective tax free threshold now rises to approx $32,200pa for singles and approx$29,000pa for each member of a couple living together ($58,000pa combined)

Food for thought:  Australia's initial carbon tax is set at $23 per tonne.  China is considering a carbon tax of $1-50 per tonne and according to a recent Financial Review article European businesses currently pay between $8-70 - $12-60 per tonne.

Note: Advice contained in this articler is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at March 2012.

 

 

 

 

 

 

 

Monday, 02 April 2012 11:37

Private Health Insurance Rebate Means Tested

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The legislation to apply an income test to the 30% private health insurance rebate has passed the House of Representatives and is expected to pass the Senate. The income test will start from July 1, 2012.

Obviously not everyone will be affected, but for those that are, they need to understand that their taxable income, any fringe benefits and superannuation come into the calculation of the income test. I will explain this below.

The legislation gives effect to 2009 Federal Budget announcements concerning the private health insurance rebate and consequential Medicare Levy Surcharge changes. The essence of the proposed changes is to effectively income test the 30% private health insurance rebate for individuals whose income for Medicare levy surcharge purposes is more than $83,000pa and for families where that income is more than $166,000pa.

To achieve the means testing, the legislation proposes to introduce three new "Private health incentive tiers" with effect from July 1, 2012. If the legislation is passed, then from that date, individuals and families may not be eligible for the full 30% rebate for their private health insurance premiums. In conjunction with this, also from July 1, 2012, the rate of Medicare levy surcharge for individuals and families without private patient hospital cover may increase depending on their level of income.

The effect of these new tiers would be that the rebate would begin to phase out for individuals who earn more than $83,000pa and for families where that income is more than $166,000pa. There would be no rebate where individual income is over $129,000pa and families over $258,000pa.

For single people aged 65 to 69 years, the rebate is 35% if they earn less than $83,000pa, and for those aged 70 and over earning that income, the rebate is 40%.

For families with more than one dependent child, the relevant threshold is increased by $1,500 for each child after the first.

In future years, the singles thresholds will be indexed to average weekly ordinary time earnings and increased in $1,000 increments (rounding down). The couples/family thresholds will be double the relevant singles thresholds.

For those who think they may be affected by the changes, the income test includes the sum of a person's:

  • taxable income (including the net amount on which family trust distribution tax has been paid, lump sums in arrears payments that form part of taxable income, and payments for unused annual and long service leave); plus
  • reportable fringe benefits (as reported on the person's payment summary); plus
  • total net investment losses (includes both net financial investment losses (eg. shares) and net rental property losses); plus
  • reportable super contributions (includes reportable employer super contributions (eg. under salary sacrifice arrangements) and deductible personal super contributions),

Less:

  • where the person is aged 55-59 years old, any taxed element of a lump sum superannuation benefit, other than a death benefit, which they received that does not exceed their low rate cap.

The rebate can currently be claimed in one of three ways:

  • The health fund can provide the rebate as a premium reduction.
  • Where the full, upfront cost of the private health cover premiums has been paid, people can receive a cash payment from the Government through their local Medicare office or by lodging the claim form by post.
  • The rebate can be claimed on annual income tax returns if the full, upfront cost has been paid.

The changes are significant in a "hip pocket" sense and because of the way in which the income test is calculated, people may need to consult their adviser to see how they may be impacted.

Note: Advice contained in this articler is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at March 2012.

 

 

Sunday, 05 June 2011 11:07

Personal Deductible Super Contributions

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For people who are self employed or persons with substantial taxable income personal deductible contributions are a way of tax deductible contributions to superannuation reducing your taxable income leaving more after tax money for investment.

What is the strategy?

Making personal deductible contributions reduces a person’s taxable income because the contribution is claimed as a tax deduction.

The contribution is taxed at just 15% which may be less than the tax paid if taken as taxable income. This means more after-tax money is available for investment, which increases a person’s overall retirement benefits.

Who is suited to this strategy and why?

This strategy is suitable for individuals who are:

  • primarily self-employed as a sole trader
  • under age 65 and who have not been employed in the income year the contribution is made, or
  • employed, but the income earned from employment is less than 10% of their total income.

The benefits of making personal deductible contributions are:

  • personal income tax is reduced
  • retirement savings are increased, and
  • small business owners can diversify their wealth outside of their business.

 

How the strategy works?

Individuals who are eligible to make personal deductible contributions into superannuation can claim a tax deduction equal to the amount of contribution.

The tax deduction reduces the person’s taxable income thereby reducing income tax.

Personal deductible contributions are taxed at 15% upon entry into super. This means the individual making the contribution will ultimately pay tax at 15% on the contributed amount instead of at their marginal rate.

Notice of Deductibility

To be eligible to claim a deduction for contributions to super, an individual must lodge a Notice of Deductibility form with their superannuation fund by the earlier of:

  • the date the individual lodges their tax return for that financial year, or
  • the end of the following financial year.

The form must be lodged prior to commencing a pension, rolling the contribution over to another fund or withdrawing the contribution.

Example

Kate is age 40. She runs her own mining engineering consultancy business as a sole trader, earning $185,000 per annum.

Kate’s financial adviser has recommended she contribute $20,000 into her superannuation fund as a personal deductible contribution.

Kate is aware that she won’t be able to access the contribution until she meets a condition of release, but she is interested in building up her retirement savings in a tax-effective manner.

 

The following table shows that Kate has created a tax saving of $5,100 as a result of implementing the strategy. Her cash flow has reduced by $11,900 but she has saved $17,000 for retirement.

 

Cash Flow BeforeStrategy AfterStrategy
Gross salary $185,000 $185,000
Less personal deductible contributions $0 $20,000
Taxable income $185,000 $165,000
Tax on taxable income* $59,575 $51,475
After-tax income $125,425 $113,525
Superannuation
Personal deductible contributions $0 $20,000
Less contributions tax $0 $3,000
Increase to super $0 $17,000
Net Package $125,425 $130,525

* 2010/11 financial year. Includes relevant tax offsets and the 1.5% Medicare levy.

Risks and implications

  • Making personal deductible contributions to superannuation reduces a person’s cash flow.
  • Contributions to superannuation are preserved until a ‘condition of release’ is met.
  • Personal deductible contributions count towards a person’s concessional contribution cap, as do SG contributions and salary sacrificed contributions. Contributions in excess of the concessional contribution cap are taxed at 46.5% and count towards the non-concessional contribution cap.
  • Reducing taxable income too low can result in more tax being paid as the 15% contributions tax paid on deductible contributions may be higher than the individual’s marginal tax rate.
  • Individuals who have worked through the year must be certain that they satisfy the 10% rule prior to making the deductible contribution.
  • Changes in legislation may reduce the flexibility or benefits that superannuation currently enjoys.

Note: Advice contained in this flyer is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at May 2011.

Further information on Deductible Super Contributions can be found on our YouTube site which can be accessed via the website below:

Website:  www.gemcapital.com.au

 

or to arrange a no-cost, no-obligation first consultation, please contact the office on 08 8273 3222.

 

Blog Website:  www.investmentadviceadelaide.com

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