1. Keeping insurance cover in inactive super accounts
From 1 July 2019, trustees of MySuper or choice funds are prohibited from providing insurance where a member’s account has been inactive for a continuous period of 16 months or more unless the member has made a valid written election to take out or maintain insurance.
For the purposes of this measure, a member’s account is inactive if the super fund has not received a contribution or rollover in respect of the member.
It is important to note that this measure applies to both default insurance and voluntary insurance cover, regardless of the quantum of a member’s super balance.
This measure also applies to existing insurance arrangements that are in place before 1 July 2019.
If the member’s super account has been inactive for 16 months or more prior to 1 July 2019, any insurance cover held within that inactive account will be cancelled on 1 July 2019, unless the member submits a valid written election to their fund to maintain their insurance cover.
If your client wishes to maintain insurance cover in an inactive super account, particularly clients who are unable to obtain similar cover elsewhere due to age or health reasons, they need to submit a valid election to their super fund before their insurance cover is cancelled.
2. Recent retirees may make extra super contributions using work test exemption
From 1 July 2019, recent retirees aged 65 to 74 with a TSB below $300,000 at the previous 30 June will be eligible to make voluntary super contributions for an extra financial year, where they have met the work test in the previous financial year. The work test exemption is a once in a lifetime exemption and can only be used in one financial year.
The work test exemption provides a number of important planning opportunities for clients with low super balances, such as:
• Small business owners aged between 65 and 74 under the current rules could miss out on contributing the proceeds from selling an active asset to super if they cannot receive the sale proceeds until the new financial year, where they may fail the work test. The work test exemption may allow these clients to contribute the sale proceeds to super under the CGT cap in addition to their NCC and CC caps.
• The work test exemption may allow an individual to make extra contributions when selling an investment property close to retirement.
• The work test exemption can provide one extra year for eligible clients to implement the withdrawal and re- contribution strategy for estate planning purposes.
• It may be tax effective for certain clients to defer selling a CGT asset with a large capital gain (such as an investment property) to a new financial year following the year in which they retire. Selling the CGT asset in the new financial year (where the individual no longer has employment income) could result in lower tax payable on the taxable capital gain and the work test exemption could still allow the sale proceeds to be contributed to super.
3. Changes to the social security assessment of Lifetime Income Streams
From 1 July 2019, the social security assessment of Lifetime Income Streams will change.
Under the new rules, Lifetime Income Streams purchased on or after 1 July 2019 that comply with the capital access schedule will be assessed as follows:
• Assets test – 60% of the purchase price assessed until age 84 (and minimum of five years). This will then change to 30% of the purchase price for the remainder of life.
• Income test – 60% of payments will be assessed.
The Lifetime Income Streams can be purchased with super or ordinary money.
Grandfathering applies to lifetime income streams purchased prior to this date.
As a result of these changes, some clients may be better off purchasing a lifetime income stream in the current financial year to take advantage of the grandfathered rules.
The following client situations should be considered:
• Income tested clients – purchasing a lifetime income stream pre 1 July 2019 generally results in lower assessable income than post 1 July 2019.
• Asset tested clients – while purchasing a lifetime income stream on or after 1 July 2019 generally provides an upfront benefit of a 40% discount under the assets test, after a certain number of years a pre-1 July 2019 lifetime income stream may provide a higher rate of age pension.
• Access to capital – some clients may have a strong preference for access to capital. If they purchase a lifetime income stream that allows them to commute amounts that exceed the capital access schedule, they may be better off purchasing the income stream before 1 July 2019.
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