Help your staff get the most from their super and insurance needs.
The 2017 superannuation changes provide new opportunities for employees to finance their insurance needs.
The new regime changes include the welcome abolition of the ‘10 per cent rule’. This rule prevented employees making additional deductible personal contributions into superannuation, even though the additional contributions did not breach the concessional (tax deductible) contributions caps.
Outline of new measures
From 1 July 2017, employees in receipt of employer provided superannuation may make additional deductible personal contributions into superannuation, provided that they do not exceed their concessional contribution caps. This means that any shortfall can be used to fund insurance arrangements in a tax-effective way.
For example, consider the situation where an employer makes a $15,000 contribution into a superannuation fund for an employee during the income-year ended 30 June 2018. This employee will now have the capacity to make an additional deductible personal contribution of $10,000 in 2018. If the premium on the requisite insurance for the employee is $5,000 per annum, the employee can make a deductible personal contribution of $5,000 to the superannuation fund, and have the superannuation fund pay the requisite premium.
How does this benefit the employee?
1. Substantial cost reduction
Funding insurance in superannuation in this way can substantially reduce the cost of insurance. Unfortunately, the cost of insurance outside superannuation is generally not deductible for tax purposes. If we structure an insurance arrangement in super funded by deductible personal contributions we achieve a substantially different cost outcome. For example, if we assume that the employee in our example earns $90,000 per annum, he will have a marginal tax rate of 39 per cent. In order to fund an annual insurance premium of $5,000, this employee must earn $8,197 before tax. Using the insurance in superannuation route, that employee can reduce the cost of insurance to $5,000 per annum! The cost reduction is based on marginal tax rates. The higher the marginal tax rate, the greater the reduction for the contributor.
2. No erosion of retirement savings
A major criticism is that insurance in superannuation erodes retirement savings. This is certainly true when we are using superannuation balances to make insurance premiums more affordable for clients. However, in this instance there is no erosion of retirement savings. The $15,000 employer contribution and the employee’s member balance are not eroded by this arrangement.
3. No Contributions Tax
Clients and advisers are often confused over the imposition of the 15% contributions tax in insurance in superannuation arrangements. The good news is that the above arrangement does not carry a 15% impost.
The personal contribution is included in the assessable income of the recipient superannuation fund, but there is an offsetting tax deduction within the superannuation fund for the premium paid. This means that the contributions tax cost is reduced to zero via this tax deduction. Our employee’s insurance arrangements do not therefore carry any costs in addition to the premium paid.
A word of warning: beware the notice formalities
Personal contributions into superannuation are presumed to be non-deductible (‘non-concessional’) contributions, unless the member issues the superannuation fund trustee with a notice of intention to claim a tax deduction. If a notice is not issued and the associated formalities are not completed within the prescribed time periods, no deduction may be claimed for the contribution in question. This means that clients need to observe these provisions meticulously and diligently to ensure that this valued tax deduction is not lost.
The way forward
The insurance in superannuation landscape will change dramatically with effect from 1 July 2017. Arrangements need to be reviewed carefully as part of the discharge of best interest duty to ensure that both opportunities and pitfalls are identified.
By David Glen, National Technical Manager