The new financial year always brings change, and 2019/20 is one of the more dynamic in recent times. An array of rates and thresholds have moved, but the first week of this July brings more than just incremental changes. A number of rules affecting the clients of financial planners are markedly different in the new financial year. July’s Industry Insights focuses on a dozen of these changes that planners need to know.
Means-testing concessions for lifetime income streams go live
Lifetime income streams purchased on or after July 1, 2019 are subject to different social security rules than those purchased prior to that date. Asset test concessions of 40 per cent up to the owner’s 85th birthday, and 70 per cent thereafter, as well as an income test concession of 40 per cent, are an attractive proposition for some clients.
In the past fortnight, the Department of Social Services has announced how innovative income streams issued through super will be assessed under these rules. Where such income streams are effectively a hybrid of a lifetime and an account-based or term income stream, only the lifetime portion will be eligible for the concessions. Centrelink will assess an innovative super income stream as multiple income streams.
Both the rules governing innovative superannuation income streams, and the social security means-testing concessions, are complex and require deeper analysis. wealthdigital subscribers can find more on the super rules here, and more on the means-testing rules here.
Catch-up concessional contributions also start to matter
The 2019/20 financial year is the first in which the unused portion of a previous year’s concessional contribution cap (i.e. that of 2018/19) can be carried forward. To do so a client must have a total superannuation balance of less than $500,000 at the end of June 30, 2019.
The strategic opportunities brought about by this change are immense. Transition to Retirement strategies can be ramped up, Capital Gains Tax bills can be controlled by deductions, high taxable incomes can be reduced and bonuses can be added to super tax-effectively. Catch-up contributions just became a staple of tax-management strategies.
Pension Loans Scheme grows teeth
The Pension Loans Scheme (PLS) is a Government-run reverse mortgage facility for social security recipients. The pensioner uses their Australian property as security for a loan provided by the federal Government. The loan is paid to the pensioner in the form of increased social security pension payments. Interest is charged on the loan at a rate set by the Government and the loan and interest is usually repaid when the property is sold or the pensioner dies.
From July 1, 2019, the PLS becomes available to both full pensioners, and those ruled ineligible by both the income and assets tests. Whereas previously the maximum fortnightly payments that could be made were 100 per cent of maximum amount of the recipient’s social security payment, this threshold is now increased to 150 per cent. This means that full pensioners can supplement their income with PLS payments, not just part pensioners.
The PLS is complex and wealthdigital subscribers can read more on its rules here.
Work bonus increase
The work bonus allows age pensioners to continue working into retirement without heavily reducing their pension entitlement. The maximum fortnightly employment income that can be disregarded under the work bonus increased from $250 to $300 on July 1, 2019, while the maximum unused bonus able to be carried forward also increased from $6,500 to $7,800. The work bonus now applies to self-employment income, as well as employment income, significantly broadening the potential clients it can benefit.
This $50 reduction in assessable income per fortnight can provide a pension increase of up to $650 a year.
Medicare levy Surcharge health insurance excess bump
The Medicare levy Surcharge is not payable by higher income earnings individuals and families provided they have private health cover including appropriate hospital cover. Such cover is allowed to have an excess, and this permissible excess increases from July 1, 2019. For individuals, the allowable excess increases from $500 to $750 and for families the increase is from $1000 to $1500. Such a change will allow policy holders to access lower premiums by having higher excesses without incurring the Medicare levy Surcharge.
Insurance in inactive, low-balance super accounts to be cancelled
From July 1, 2019, insurance held in a super account with a balance under $6000, that has been inactive for 16 months, will be automatically cancelled. An account can be saved from being considered inactive if an employer sponsor informs the fund that they intend to pay SG contributions of greater than the insurance premium. Insurance cancellation can also be avoided if:
- the member changes their investment options under the fund;
- the member makes changes in relation to their insurance coverage under the fund;
- the member makes or amends a binding beneficiary nomination;
- the member, by written notice given to the ATO Commissioner, declares the account is not inactive; or
- the superannuation provider is owed an amount in respect of the member.
Advisers and clients will need to be diligent to prevent unintended cancellation of insurance in super under this new rule.
Fee cap for inactive, small accounts
Inactive, low-balance accounts will also be subject to a fee cap in MySuper and choice products from July 1, 2019. Such accounts, defined as for the insurance amendment above, will be subject to maximum administration and investment fees of 3% per year. Balances are tested at the end of each financial year to determine if the cap applies. Pro-rated caps apply both if the member was not a member of the fund for the full year and in the first year the cap operates.
Throw in some automatic consolidation as well
July 1 also sees the ATO gain new powers to automatically consolidate inactive accounts with balances under $6000. The ATO’s powers do not extend to accounts that hold insurance but, should insurance lapse due to the account being inactive, clients could also find that, shortly thereafter, the account no longer exists. The ATO aims to roll inactive low-balance accounts into the super account held by that client that has the highest balance.
This provision does not apply to SMSFs, small APRA funds or defined benefits.
Anti-detriment payments no more
Anti-detriment payments on superannuation death benefits were created to ensure contributions tax paid over the life of a super account was refunded on the death of the member. Such payments had already been restricted to death benefits from the super of those who died before July 1, 2017, however even those payments have ceased as of July 1, 2019.
While a financial loss to certain beneficiaries, it does mean that recontribution strategies can now be executed without concerns about reducing potential anti-detriment payments. It also means that Self Managed Super Funds (SMSFs) that had created reserves to pay anti-detriment payments are going to need to very carefully commence distributing or repurposing those reserves.
The end of the Net Medical Expense Tax Offset (NMETO)
NMETO had been a useful tax rebate for those with high annual medical costs, particularly aged care residents. From July 1, 2019, NMETO is no longer available and may result in clients’ net medical costs increasing from the 2019/20 financial year onwards.
Students get less HELP
The Higher Education Loan Program (HELP) has changed significantly in 2019/20. Previously, there was no cap on the amount of HELP debt an individual could accrue. A cap of $104,440 now applies, with a higher cap of $150,000 for those currently studying medicine, dentistry or veterinary science.
The rates at which HELP loans must be repaid also ramp up in 2019/20, kicking in at an income of $45,880 and stepping up to 10 per cent for those earning over $134,572. Finally, HELP repayments will be aligned with the Student Financial Assistance Scheme to give clients one rate of repayment.
Home Care basic daily care fee now at 4 levels
The basic daily care fee paid by Home Care recipients now varies depending on the level of care required. Whereas previously a single fee applied to all recipients, now the 4 different care levels will each pay fees that increase slightly as the client’s care requirements increase.
Not everything changes though
There are a range of thresholds that did not increase on July 1, 2019. Some prominent ones include:
- The concessional contributions cap
- The non-concessional contributions cap
- The general transfer balance cap
- The rate of SG
- The rate of social security pensions
- Low Income Tax Offset
- Low and Medium Income Tax Offset (although the 2019/20 federal budget proposals may see different rates applied in 2018/19 and beyond)
- The basic daily care fees for residential aged care
wealthdigital subscribers can keep up to date with all the July 1 changes, including:
- Super rate and threshold changes
- Tax rate and threshold changes
- Centrelink rate and threshold changes
- DVA rate and threshold changes
- Aged care and threshold changes
- Centrelink rate tables
- Progress of Budget proposals
- 2019/20 personal tax calculations
- Q1 2019/20 Centrelink calculations
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Even in a year when little seems to have changes, advisers need to be on their toes. A returned government doesn’t mean everything remains unaltered, and the fulfilment of election promises may mean more change is on the way. Clever navigation of these changes can reap rewards for the clients of well-informed advisers.