Social security planning during an
economic downturn and other issues
Wayne Belford
ING Australia
Agenda
•
Bonuses announced 3 February 2009
•
Change in definition of “partner”
•
Proposed income assessment changes
•
•
Adjusted taxable income
•
Super salary sacrifice
Reviewing social security entitlements in a decreasing market
•
•
•
FaHCSIA valuation of managed funds and shares
Entitlement to social security income support after a redundancy
•
Waiting periods
•
Activity test
Voluntarily paying a higher accommodation bond to increase
social security entitlement
2
Bonuses
3
How good can it be?
• Couple, Peter and Susan
• Sue earns $60,000 in 2007/08
• Peter works part time and earns $15,000 in 2007/08
• 3 children
• Eva – 17 years old
• Zoe – 13 years old
• Bob – 6 years old
4
How good can it be?
Sue’s Tax
bonus $950
+
Back 2
School - Eva
$950
+
+
Pete’s Tax
bonus $950
Back 2
School - Zoe
$950
+
Single Income
Bonus $950
+
Back 2
School Bob $950
$5,700 tax free!
5
Tax bonus
Conditions
• Must be Australian resident taxpayer
• Must enter tax 2007/08 return by 30 June 2009 (or
have dispensation)
• Must have a net tax liability in 2007/08
• Must have taxable income of less than or equal to
$100,000 in 2007/08
• If under 18, must be excepted individual or have
excepted income
6
Net tax liability
Net tax payable
plus
Medicare levy
plus
Medicare
levy
surcharge
less
Tax offsets
Tax offsets include franking credits but exclude Family
Tax Benefits
7
Tax bonus
• No application necessary
• Payments commence from April 2009
• Bonus is non-assessable non-exempt income
• Bonus is not assessable as income for Centrelink or
DVA benefits
8
Case study - Doris
• Doris (80) receives the age pension
• Doris’ only other assessable income is $3,000 from a
small term deposit
• Will Doris qualify for the tax bonus?
No, the low income tax offset and senior Australians’ tax
offset will combine to give her no net tax liability.
9
Case study - Dianne
• Dianne (62) is a sole trader who owns a book store
• In 2007/08 Dianne had income from her business of
$48,000 and deductions of $10,000
• Dianne also had income from a share portfolio of
$5,000 (fully franked)
• Dianne has made personal contributions for which a
deduction of $20,000 has been claimed (bringing her
taxable income to $25,143)
10
Case study - Dianne
Tax payable
$2,871
Medicare levy + surcharge
$377
Offsets (including credits)
$3,393
Net tax liability
($145)
Dianne has no net tax liability and hence receives no
Tax bonus
11
Case study - Dianne
What if Dianne claimed $1,000 less in deductions on
personal contributions? (variation notice)
Tax payable
$3,021
Medicare levy + surcharge
$392
Offsets (including credits)
$3,393
Net tax liability
$20
She now qualifies but was it worth it?
12
Case study - Dianne
Additional tax paid
$150
Additional Medicare levy
$15
Reduced offsets
$0
Reduced contributions tax
$150
Dianne has paid an extra $15 in tax to receive the $950
bonus
13
Case study - Jim
• Jim (45) qualifies for the full ($950) tax bonus
• Jim’s income is likely to be around $30,000 in
2008/09 (all employment income)
• Jim uses his bonus to make a personal contribution
to super
Bonus amount
$950
Co-contribution
$1,425
Total benefit
$2,375
14
Single Income Family bonus
Conditions
• Must qualify for Family Tax Benefit (FTB) Part B for
the period including 3 February 2009
• Available to those who receive FTB Part B
periodically or in a lump sum
15
Single Income Family bonus
• Payments commence from 11 March 2009 (for
periodical FTB Part B beneficiaries)
• Bonus is exempt income (i.e. tax free)
• Bonus is not assessable as income for Centrelink or
DVA benefits
• Bonus is a flat rate of $950
16
Case study – Roger and Mary
• Roger (42) and Mary (38) have one child, Sharon (6)
• In 2008/09, Roger’s only income will be his salary
($165,000)
• Mary earns $10,000 per annum from investments
Roger and Mary would be excluded from receiving FTB
Part B as Roger’s income is above $150,000
But…
17
Case study – Roger and Mary
• Roger implements a salary sacrifice arrangement in
February which reduces his income to $145,000 for
2008/09
• Mary claims FTB Part B in late 2009 after she and
Roger enter their 2008/09 tax returns
Provided they hadn’t made a previous claim for the
same period and met the Family Assistance Office rules
for making a claim for a previous period, Mary will now
receive approx $1,580 in FTB Part B plus $950 as the
Single Income Family bonus for the 2008/09 year
Note - Subject to proposed changes in the income definition
18
Back to School bonus
Conditions
• Must qualify for Family Tax Benefit (FTB) Part A for
the period including 3 February 2009
• Available to those who receive FTB Part B
periodically or in a lump sum
• Those aged under 19 on 3 February 2009 in receipt of
the Disability Support Pension (DSP) or Carer
Payment (CP) also qualify
19
Back to School bonus
Payments
• $950 payable for each child aged 4-18 (inclusive)
used to calculate the rate of FBT Part A for the period
including 3 February 2009
• $950 payable to each individual aged under 19 on 3
February who is in receipt of the DSP or CP
• Only one back to school bonus payable in respect of
each individual
20
Back to School bonus
• Payments commence from 11 March 2009 (for
periodical FTB Part B beneficiaries)
• Bonus is exempt income (i.e. tax free)
• Bonus is not assessable as income for Centrelink or
DVA benefits
21
Case study – Christine
• Christine (42) is a single mother who works full time
• Christine has two children, Charlie (12) and Betty (9)
• Christine will earn $120,000 in 2008/09 from her job
as a accountant
• Christine has no other income
Christine would be ineligible for FTB Part A as her
adjusted taxable income exceeds her cut-out threshold
of $111,082
However…
22
Case study – Christine
• Christine implements a salary sacrifice arrangement
in February which reduces her income to $105,000
for 2008/09
• Christine claims FTB Part A in late 2009 after she
enters her 2008/09 tax return
Provided she hadn’t made a previous claim for the
same period and met the Family Assistance Office rules
for making a claim for a previous period, Christine will
now receive approx $1,820 in FTB Part A plus $1,900 in
Back to School bonuses
Note - Subject to proposed changes in the income definition
23
Training and Learning bonus
Conditions
• Must qualify for a designated payment for the period
including 3 February 2009
• If an individual is used to qualify for a Back to School
bonus they will not receive a Training and Learning
bonus
24
Training and Learning bonus
Payments
• Flat rate of $950 per person
• Bonus is tax exempt (i.e. tax free)
• Bonus is not assessable as income for Centrelink of
DVA benefits
25
Training and Learning bonus (eligible payments)
• Youth allowance (only FT students and apprentices)
• Austudy
• ABSTUDY (if incl living allowance)
• An education allowance under
• the Veterans’ Children Education Scheme; or
• the Military Rehabilitation and Compensation Act Education and
Training Scheme
• FTB Part A (for each eligible, FT student dependant aged 2124)
• Sickness Allowance
• Special Benefit (if recipient under pension age at 14 October
2008)
26
Increased Education Entry Payment
Conditions
• Those eligible for an Education Entry Payment
(EdEP) between 1 January 2009 and 30 June 2010
will receive an additional $950
• EdEP is available (if eligible training is undertaken) to
a range of income support payment recipients
The increased EdEP is exempt from tax (i.e. it is tax
free) and not assessable as income for Centrelink or
DVA benefits
27
Administrative scheme
Provisions were included to allow a new scheme to be
created should the existing bonuses not fully achieve
their goals
Example – payments for those who have FTB children
aged 19 or 20 who study full time
28
Change in definition of “partner”
29
Change in definition of “partner”
• From 1 July 2009, the definition of “partner” will include persons
of the same sex as well as persons of the opposite sex.
• Will affect all current and new Centrelink and DVA recipients
• Will generally result in a reduction in payment amount for
income support recipients
• (i.e. couple rate is less than two single rates)
30
Proposed income assessment
changes
31
Proposed income assessment changes
•
New definition of adjusted taxable income (ATI) affects
Commonwealth Seniors Health Card (CSHC) holders
and Family Tax Benefits
•
•
From 1 July 2009, ATI will also include
•
income from income streams and lump withdrawals from
super (from a taxed source) if over the age of 60 and
•
Super salary sacrificed amounts
Super salary sacrificed amounts will be added back to
income for all income support recipients
•
Currently excluded if under age pension age
32
Example
Ron holds a CSHC at the start of 2009/2010.
He is drawing down $20,000 pa from an allocated pension which
consists of 100% tax-free component.
He also intends to withdraw a lump sum of $10,000 from an existing
super fund in the same financial year
Under the current rules, the above amounts would have
been ignored for the purpose of assessing the CSHC
From 1 July 2009, the $20,000 will be included in Ron’s
ATI. An additional $10,000 will be added to his ATI when he
withdraws the lump sum.
33
Industry proposals
1.
Align the current social security income test rules for
income streams
•
2.
i.e. allow a deductible amount based on purchase price and
relevant number (term or life expectancy)
OR
Calculate the tax-free amount of an income stream according to the
components.
•
This is the less favoured proposal as it is likely to be complex to
administer
No industry proposals regarding lump sum
withdrawals and salary sacrifice
34
Alternatives?
•
Should proposals become law, consider combination
super/non-super investments
•
No tax payable using SATO
•
$25,867 pa income for singles
•
$37,950 pa income for couples
35
Case study
•
Martin is a single CSHC holder
•
•
Requires income of $55,000 pa
•
•
Does not receive age pension due to assets
Currently not paying tax
Allocated pension - $600,000 balance
•
Annual payment
$45,000
•
Other assessable income
$10,000
•
2008/09 assessable amount is
$10,000
•
•
Martin retains CSHC until 30 June 2009
From 1 July 2009 assessable amount will be $55,000
so Martin will lose CSHC
36
Case study
•
Consider withdrawal of $300,000 prior to 1 July 2009
•
Allocated pension - $280,000* balance
Annual payment (min)
$14,000
Other assessable income
$10,000
Bank account $300,000 at 6%
$18,000
Assessable amount for CSHC $42,000
Withdraw from bank account to make up additional requirements
•
Tax assessable amount $28,000
•
No tax payable
* Balance allows for earnings and minimum annual payment during 2008/09
37
Reviewing social security entitlements
in a decreasing market
38
Re-assessment of social security entitlement
• Generally two updates per year for shares & managed
funds
• Extra-ordinary update 3 November 2008 to reflect market values
on 13 October 2008
• (i.e. after large share market falls in first half of October)
• Client may still request additional update(s) at any time
39
Timing the claim or application for re-assessment
• Client(s) may have applied for:
• income support due to drop in value of investments but claim was
rejected; or
• a re-assessment of existing income support but little, if anything,
changed
• Share values are received by FaHCSIA every two weeks
• Managed fund values (unit priced) are received every 4
weeks
• Consequently, values may be up to 6 weeks old at the
time of requesting a review
40
Timing the claim or application for re-assessment
• What action can client take?
• Check with Centrelink or DVA when last re-valuation of
their data base occurred and when next update is due
• May then be worth submitting new claim or new reassessment request
41
Centrelink and frozen funds
• Frozen funds
• Fund may continue to pay income only; or
• Both income and asset are frozen
42
Centrelink and frozen funds
• Centrelink will continue to assess both categories under
the income and assets test
• To have funds excluded, client would need to satisfy the
Hardship Provisions
• Pension Loan Scheme available for part-rate pensioners
• Generally, company would need to have ‘failed’ (e.g.
appointment of a receiver or administrator) for the
investment to be disregarded
• Current frozen mortgage funds not in this category
43
Hardship Provisions v Pension Loan Scheme
Hardship
PLS
• No age criteria
• Must be of age pension age or
over
• Cannot get income support or
gets reduced amount due to
assets test but would have
qualified under the income test
• Cannot get pension or gets
reduced amount due to income
or assets test
• Asset cannot be sold or
borrowed against
• Must have Australian real estate
as security
• Gifting provisions have not been
triggered
• Loan establishment costs
payable by applicant
• Person is in “severe financial
hardship”
• Compounding interest will be
charged fortnightly (5.25% pa)
• Payment is calculated using
special formula – max amount
is max pension rate
• PLS pays an amount up to the
maximum rate of pension + PA
+ RA
44
Hardship provisions
• Definition of “severe financial hardship”
• The person’s total fortnightly income (inc. pension) is less
than max rate pension or allowance
• Readily available funds less than allowable limit
• Includes Age Pension, DSP, Carer, Austudy
• Single
$14,614.50
• Couple
$24,414.00
• Includes NSA, Parenting Payment, Widow Allowance
• Single
$6,000
• Couple
$10,000
• There are no other options to improve financial situation
45
Entitlement to social security payments
after redundancy or re-entering the
workforce
46
Entitlement to social security payments after
redundancy or re-entering the workforce
• Under Age Pension age, Newstart Allowance is the
primary payment (unless disability exists)
• No more partner payments so Newstart is generally only
option for partner
47
Does the person need to serve a waiting period?
• Ordinary waiting period
• If re-entering workforce, (generally) only the “ordinary
waiting period” will apply
• One week from time of claim
• Applies to allowances only
• Liquid assets waiting period
• Applies from termination of employment
• Max 13 weeks
• Applies to NSA, SA YA and Austudy
48
Income maintenance period
• Not technically a waiting period but usually acts as one
• Applies to Newstart, Widow’s Allowance, Youth
Allowance, Sickness Allowance, Austudy, Disability
Support Pension, Parenting Payment
• Applies from time of payment with no cap
• May be served concurrently with LAWP
• Based on lump sum termination payments
• Leave payments, rostered days off, ETPs, tax-free amounts
49
Example
• Colin (single) received the following termination
payments:
• Annual leave :
5 weeks @ $1,000 pw
• Long Service :
13 weeks @ $1,000 pw
• Tax-free amount :
$20,000
• ETP :
$15,000
• Colin has no other investments
50
Calculating the waiting period
1. Ordinary waiting period is 1 week
2. Calculate LAWP
•
•
Total liquid assets = $53,000
•
LAWP = ($53,000 -$2,500)/$500 = 101 weeks
•
However, max is 13 weeks – applies from date of
termination
OWP + LAWP = 14 weeks
51
Calculating the waiting period
3. Calculate the IMP
•
Annual & long service leave is 18 weeks
•
Tax-free payment $20,000/1000 = 20 weeks
•
ETP : $15,000/1000 = 15
•
Total IMP is 53 weeks
•
Applies from the date the termination payments were
made and may be served concurrently with LAWP
52
Entitlement to social security payments after
redundancy or re-entering the workforce
• Activity test will apply for Newstart Allowance
• Actively seeking & willing to undertake suitable work
• In some cases, a partial capacity to work will apply if there is
an medical incapacity
• Age 55 or more
• Can satisfy activity test by undertaking at least 30 hours per
fortnight of voluntary work, paid work or combination of the two
• Exemptions for
• people with unexpected caring responsibilities
• temporarily incapacitated
• major personal crisis
53
Self-employed
• Newstart allowance is not usually available to the self-employed
as a “top-up” when earnings are down
• Would need to satisfy Centrelink that they are still available for
other work and able to satisfy the activity test
54
Paying a larger accommodation
bond in exchange for lower fees
55
Paying a larger accommodation bond
• Technically most aged care fees and charges are
negotiable
• Published amounts are maximums only
• Some hostels may consider accepting a larger
accommodation bond in exchange for lower fees
• Common example is a reduction or waiving of the retention
amount
56
Case study
• Ron - single, non-homeowner, age pensioner
• Entering hostel – standard bond is $250,000
• Assets
• Bank accounts
$500,000
• Managed funds
$ 90,000
• Personal effects
$ 10,000
• Total
$600,000
• Current age pension $112.48 pf ($2,924 pa)
57
Case study
• After paying $250,000 bond, assets will be:
• Bank accounts
$250,000
• Managed funds
$ 90,000
• Personal effects
$ 10,000
• Total
$350,000
• Age pension rate increases to $420.40 pf ($10,930 pa)
58
Case study
• Hostel willing to waive the retention amount in full
• $3,504 pa for a maximum of 5 years
• Total savings possible is $17,520
• Larger bond of $325,000 will be payable
• i.e. an extra $75,000
• After paying $325,000 bond, assets will be:
• Bank accounts
$170,000
• Managed funds
$ 90,000
• Personal effects
$ 10,000
• Total
$275,000
• Age pension rate increases to $469.60 pf ($12,210 pa)
• (i.e. $1,280 pa more)
59
Case study - Summary
• Total savings/benefit in the first year
• $1,280 + $3,504 = $5,104
• Ron would be losing potential interest on the $75,000
• Say $75,000 @ 4% = $3,000 pa
• Ron is potentially better off by $2,104 pa
• This would be greater if interest rates further
decrease (or vice versa)
• “Full” bond is refunded to client on leaving or to estate
on death
60
Online technical support
61
Online technical support
• Technical Update 2009/02 – 2009 Government
stimulus package
• Technical Bulletin 41 – Tax offsets
• Links:
• “Australian Guide to Government Payments”
• “Family Assistance: Guide to Payments”
• Information on Family Tax Benefit qualification and payment
• Tax and Other Facts
62
Accessing the technical support library
63
Accessing technical support material
64
Disclaimer
This information is a summary based on ING’s
understanding of the relevant legislation.
It is general in nature and may not be relevant to
individual circumstances.
You should not do or refrain from doing anything
in reliance on this information without obtaining
suitable professional advice.
65