The recent super reform changes makes it an opportune time to revisit how life cover in super should be funded as well as how it should be paid to eligible beneficiaries from super upon death.
From 1 July 2017, advisers have additional considerations when recommending life cover through super. These include:
Funding of premiums
- removal of the 10% rule
- reduction in the concessional and non-concessional contribution cap
- reduction in the income threshold for Division 293 tax
- increased spouse contribution tax offset income threshold.
Death benefit payment
- removal of anti-detriment payment on member benefits
- removal of the 'prescribed period'
- introduction of the pension transfer balance cap.
Funding premium issues
While it may be possible to fund life cover with a client's existing super balance or super guarantee contributions without making a personal contribution, the client's balance may be eroded. For this reason our analysis will assume that premiums are funded via super contributions.
Removal of 10% rule
The removal of the 10% maximum earnings condition has made it possible for employees to claim a tax deduction on personal super contributions. It might be easier to make a personal deductible contribution rather than setting up a salary sacrifice arrangement. This change can make it easier to fund life cover premiums through super with concessional contributions but it should be noted that it is necessary to lodge the valid Notice of intent to claim a deduction form with the fund within the necessary timeframes prescribed in section 290-170 of ITAA 1997. Specifically, clients will need to ensure that they provide the notice to the trustee and receive acknowledgement from the trustee before the earlier of:
Reduction in concessional contribution cap
- lodging their income tax return for the financial year in which the contribution was made
- 30 June of the financial year following the contribution
- commencement of an income stream based in whole or part of the contribution
- any lump sum withdrawal is made
- any amount is rolled into a new fund
The reduction in the concessional contribution cap to $25,000 means additional concessional super contributions to fund life cover premiums may be restricted.
From 1 July 2018, clients may be able to accumulate the unused concessional cap and use the accumulated unused amount up to five financial years later. This change means clients face a trade-off between using part or all of their concessional contribution cap in a particular year over using that concessional amount in a future year. For example if in the current financial year a client is expected to be on the 34.5 per cent tax bracket (including Medicare levy) they may benefit from making a concessional contribution, however, the client may benefit more by saving their concessional amount if in a subsequent year they expect their marginal tax rate to increase to 47 per cent (including Medicare levy).