Superannuation changes introduced in 2017 have opened new opportunities whereby employees can use their superannuation to fund their insurance needs. These changes saw the timely abolition of the 10% rule. Under that rule employees were prevented from making additional deductible personal contributions – even though those deductions did not breach concessional contribution caps. Effective from the start of the past financial year should an employer’s compulsory superannuation contribution fall below an employee’s concessional cap then the employee can make a deductible personal contribution to their fund and have the fund pay their insurance premium – providing of course that the payable premium keeps the additional contribution below their cap.
This results in a number of key benefits for the employee:
First of all, it can substantially reduce the net cost of insurance. Many types of insurance are not deductible for tax purposes and, based on personal circumstances, some definitely should be held outside super. By holding insurance within a superannuation fund and paying the premiums by use of deductible personal contributions we can achieve a better net result. To illustrate this assuming an employee earns $100,000 p.a. and would be paying 39% (37% plus 2% Medicare) on income above $90,001. On a pretax scenario the employee would need to earn $8,197 to fund an annual premium of $5,000. By funding through superannuation the actual cost of insurance is reduced to $5,000 per annum.
Secondly it can go a long way to prevent erosion of retirement savings.
One of the major issues we see when funding premiums through superannuation is the negative impact it may have on a member’s balance and resulting erosion of their final entitlement. This significant dilution of member benefits can be avoided by empowering the employee to top up their super.
What about contribution Tax one may ask.
There remains a lot of confusion regarding the imposition of the 15% Contributions tax. While the personal contribution is included as assessable income in the hands of the super fund this is offset by the tax offset for the insurance premium being paid effectively reducing the contributions tax to zero.
But a word of caution – seek the advice and guidance from your financial planner before setting any strategy into place.
It is assumed that all personal contributions into a superannuation fund are non-concessional contributions. The member must issue a “notice of intention” to claim a tax deduction to the trustee of the superannuation fund. Failure to do so will negate the opportunity to claim the tax benefit.
Holding insurance within your superannuation fund is not always appropriate nor the best way and professional advice should always be sought prior to any decision. Seek an appointment with your financial adviser at Highview to discuss this and other strategies.
If you have further queries, speak to your Highview expert today:
Cranbourne: 03 5990 1000
Prahran: 03 9529 1566
Mornington: 03 5911 2100
Ringwood: 03 8899 9797
Source: Article written by David Glen and TAL Life Ltd, InterPrac Financial Planning Quarterly Insight Spring 2018 Newsletter