The 2017 superannuation changes provide new opportunities for you to finance the cost of your life insurance needs.
The 10 percent rule is history! This rule prevented employees making additional tax deductible contributions into superannuation, even though their additional contributions were within the concessional (tax deductible) contributions cap.
Outline of new measures
From 1 July 2017, you may make personal deductible personal contributions into superannuation, provided that you do not exceed your concessional contribution cap. This means that any unused concessional contribution cap amounts can fund insurance arrangements in a tax effective way.
For example, consider the situation where your employer makes a $15,000 contribution into your super during the income year ended 30 June 2018. You now have the capacity to make an additional deductible personal contribution of $10,000 in the 2018 income year. If your insurance premium is $5,000 per annum, you can make a tax deductible personal contribution of $5,000 to a superannuation fund, and have the superannuation fund pay the requisite premium.
How does this benefit you?
(i) Substantial out of pocket cost reduction
Funding insurance through superannuation in this way can substantially reduce the cost of insurance. Unfortunately, the cost of insurance outside superannuation is generally not deductible for tax purposes. If we structure an insurance arrangement in super funded by deductible personal contributions, we can achieve a substantially different out of pocket cost outcome for you. For example, if you earn $90,000 per annum in 2017/2018, you will have a marginal tax rate of 39 percent. In order to fund an annual insurance premium of $5,000, you must earn $8,197 before tax. Using the insurance in superannuation route, you can reduce the out of pocket cost of this insurance to $5,000 per annum. The out of pocket cost reduction is based on your marginal tax rates. The higher the marginal tax rate, the greater the reduction.
(ii) No erosion of retirement savings
A major criticism is that insurance in superannuation erodes retirement savings. This is certainly true when we are using superannuation balances to fund life insurance costs. However, in this instance there is no erosion of retirement savings. The $15,000 employer contribution made on your behalf is not eroded by this arrangement.
(iii) No contributions tax
Everyone gets confused over the imposition of the 15 per cent contributions tax. The good news is that the above arrangement does not carry a 15 per cent impost.
Your personal concessional contribution is included in the assessable income of the recipient superannuation fund, but there is an offsetting tax deduction within the superannuation fund for the premium paid on life cover. This means that the contributions tax cost is reduced to zero via this tax deduction. Your insurance arrangements in super therefore do not carry any costs in addition to the premium paid.
One word of warning
Beware the notice formalities
Personal contributions into superannuation are presumed to be non-deductible (“non-concessional”) contributions, unless you provide the superannuation fund trustee with a notice of intention to claim a tax deduction. If a notice is not provided, and other associated formalities are not completed within the prescribed time periods, no deduction may be claimed for the contribution in question. This means that you need to observe these provisions meticulously and diligently to ensure that you do not lose this valued tax deduction.
The insurance in superannuation landscape has changed dramatically with effect from 1 July 2017. Speak to your financial planner to ensure your life insurance arrangements give you the best possible outcomes.
For more information please speak with our financial advisors at Leenane Templeton Wealth Management. Call (02) 4926 2300