Andep Financial Planners | Knowledge Bank
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Knowledge Bank

Level and stepped premiums, how can they change?

Insurance premiums can either be stepped or level, their features are set out below.

Level premiums: insurance premiums do not increase with age, however the premium is more expensive than a stepped premium to begin with. Level premiums do not change if the insurer changes its rates for new business.

Stepped premiums: insurance premiums increase with age, they start out cheaper but become more expensive long term.  Stepped premiums are set at the insurers’ current rates for the appropriate age, sex and smoker status.  They can not be increased because of a change in the insured person’s health.

What are the differences between any occupation and own occupation total and permanent disability (tpd) insurance?

Any occupation: the insurer pays the benefit if the individual is unlikely to engage in gainful employment for which they are reasonably qualified by education, training or experience.

Own occupation: this definition is much narrower and the insurer pays the benefit if the individual can no longer work in their own occupation.  This is commonly used by professionals, for example if a surgeon who damages their hands could still work as a medical consultant however they would likely take a pay cut as a result.  Any occupation insurance would not take this potential pay cut into consideration and would not pay out a benefit therefore people in certain jobs are more suited to any occupation insurance.

From 1 July 2014 own occupation TPD is unavailable through superannuation.  This is because although a person may satisfy the insurer they can no longer work in their own occupation they will often not meet the superannuation fund’s TPD condition of release.  In this case the insurance proceeds will need to remain in the fund until the person reaches retirement age.  There are some newer policies, often called “Super Link” policies, which offer own and any occupation TPD, with two thirds of the premium funded inside of superannuation and one third funded outside of superannuation.  The insurance benefit will be paid by the superannuation fund after a TPD event if the person meets the any occupation definition.  If the person only meets the own occupation definition the benefit will be paid outside of superannuation.

Can an smsf’s borrowings through a bare trust be increased?

No, as the terms of the limited recourse borrowing arrangement (LRBA) must remain the same as when the asset was purchased. If a loan is refinanced this almost always significantly changes the terms of the loan so a new bare trust is required.

Can properties under borrowing arrangements be sold and replaced in the same bare trust?

No, assets which can be held and sold separately must be held in separate bare trusts. Generally, the trustee of a bare trust cannot buy new assets once established and must own only one asset. Purchase of a new property will require a new bare trust and trust deed.

Note: borrowing through a superannuation fund is different from borrowing personally. One cannot use an existing unencumbered property as security for a loan as the only security which can be used is the asset being purchased under the LRBA.

Can self managed superannuation funds (smsfs) borrow money to purchase assets?

SMSFs can borrow money under very limited circumstances to purchase assets like property, shares and managed funds.

Funds can borrow money under a limited recourse borrowing arrangement (LRBA). This is often done through a bare trust where the asset is held in the trust until the loan is repaid. The trustees of the bare trust must not be the same as the SMSF’s trustees, often a corporate trustee (with the trustees as directors) will be used.

An LRBA ensures that only the asset held in the trust can be used as security for the loan which protects the SMSF’s other assets from creditors.

The asset must be single acquirable asset as defined under superannuation law i.e one property or a parcel of shares in one company acquired at the same time.

Where an SMSF has borrowed money to buy property generally the asset cannot be improved whilst the loan is still outstanding. This prevents SMSFs undertaking property development.

The fund has beneficial ownership of the asset for the course of the loan, regardless of whether it is held in a bare trust. Any investment earnings such as rent go to the SMSF trustee.

What are the capital gains tax (cgt) implications when selling property held by a self managed superannuation fund (smsf)?

Typically, property purchased using a limited recourse borrowing arrangement in an SMSF is held in a bare trust where the trust’s trustee holds the property’s title only. However since the trust is not a reportable entity for taxation, all expenses and gains should be lodged in the SMSF’s annual return.

The amount of CGT payable depends on whether the fund is in accumulation or pension phase when the asset is sold. If the member is in accumulation phase earnings are taxed at 15% if the asset has been held for less than 12 months and 10% if it has been held for more than 12 months. If the member is in pension phase then no capital gains tax is payable on the sale of assets supporting an income stream, regardless of the period of time the asset was held.

What happens to an smsf on the death of a trustee?

What happens will differ depending if the fund has an individual trustee or corporate trustee and how many members remain in the fund.

The SMSF has a corporate trustee

All members of the SMSF must also be a director of the company which is set up as the corporate trustee.  If a member dies their legal personal representative (LPR) will act as a director of the trustee company until death benefits are paid.  For an SMSF with a sole member that sole member but either be the sole director of the trustee company or be one of only two directors.  A corporate trustee structure can be more costly however it can be useful for estate planning.

Only one trustee remains

Although single member SMSFs are allowed, under trust law there must not be a single trustee who is also the sole beneficiary.  After a trustee dies usually their legal representative (i.e the executor of their estate) will act as trustee in the interim.  If only one trustee remains then a new trustee must be named within six months of the death of the other trustee.  This person does not have to be a member of the fund but they must be either a relative of the remaining member or they must not be an employee of the member (unless they are a relative also).  This will often be an adult child, another relative or a close friend.

Two or more trustees remain

The legal representative of the trustee who has died will usually act as trustee.  They must then resign before death benefits begin to be paid and within six months of the death of the trustee.  As long as two or more trustees remain in the fund after the representative has resigned the SMSF can continue.

Can you explain taxable and tax free components of superannuation?

The law is that components were crystallised at 30 June 2007. Funds then classified as tax free remain so and the balance of any account is taxable.

Personal (non concessional) contributions are added to the tax free amount. Once a pension commences, the proportions of taxable and tax free are locked as they are at that time. The proportions continue to apply while the pension is paid and, at the end (by death or “commutation”) of the pension, the locked proportions are used to re-establish dollar amounts. When funds are blended the dollar amounts are added. As a consequence, on an account with positive returns, the sooner a pension is commenced, the higher tax free proportion that is locked in.

The definition of tax free contributions includes

  • government co-contributions,
  • low-income superannuation contributions,
  • contributions relating to personal injury payment and
  • under the small business Capital Gains Tax concessions contributions from the disposal of an active asset.

Complications may arise if:

Funds come from an untaxed source (often public sector funds) or a life insurance policy.

Source: http://www.ato.gov.au/Individuals/Super/In-detail/Receiving-benefits/Withdrawing-your-super-and-paying-tax/

What is an anti detriment payment?

Anti detriment payments are payable on death when a life insurance policy is held inside a superannuation fund.  They are an additional payment made by the fund’s trustee to take into account the tax paid by the superannuation fund attributable to the life insured’s taxable component.  The trustee is then able to claim a tax deduction to re-coup this amount.

Formula to calculate the payment:

((0.15 x P) / (R – 0.15 x P)) x C

P= number of days in component R that occur after 30 June 1988 up to the date of payment.

R= total number of days in the service period that occur after 30 June 1983 up to the date of payment.

C= the taxable component of the lump sum.

It is not available if the life insurance is paid out as part of a terminal illness condition of release or when the death benefit is paid as a pension.

Payments are only payable to the deceased’s spouse, former spouse, child (including those over 18) or the estate for the benefit of the member’s spouse, former spouse or child.  The former spouse must also be a dependent for Superannuation Industry Supervision (SIS) act purposes or receive the benefit as a beneficiary of the estate.

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