Social Security Planning in an Economic Downturn

1. Social security planning during an economic downturn and other issues Wayne Belford ING Australia

2. 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

3. Bonuses

4. 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

5. How good can it be? Single Income Bonus $950 Sue’s Tax bonus $950 Pete’s Tax bonus $950 + + Back 2 School - Eva $950 Back 2 School - Bob $950 Back 2 School - Zoe $950 + + + $5,700 tax free!

6. 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

7. Net tax liability Medicare levy surcharge Net tax payable plus Medicare levy plus less Tax offsets Tax offsets include franking credits but exclude Family Tax Benefits

8. 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

9. 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.

10. 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)

11. Case study - Dianne Dianne has no net tax liability and hence receives no Tax bonus

12. Case study - Dianne What if Dianne claimed $1,000 less in deductions on personal contributions? (variation notice) She now qualifies but was it worth it?

13. Case study - Dianne Dianne has paid an extra $15 in tax to receive the $950 bonus

14. 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

15. 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

16. 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

17. 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…

18. 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

19. 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

20. 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

21. 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

22. 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…

23. 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

24. 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

25. 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

26. 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 21-24) • Sickness Allowance • Special Benefit (if recipient under pension age at 14 October 2008)

27. 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

28. 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

29. Change in definition of “partner”

30. 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)

31. Proposed income assessment changes

32. 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

33. 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.

34. Industry proposals 1. Align the current social security income test rules for income streams • i.e. allow a deductible amount based on purchase price and relevant number (term or life expectancy) OR 2. 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

35. 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

36. Case study • Martin is a single CSHC holder • Does not receive age pension due to assets • Requires income of $55,000 pa • 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

37. 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

38. Reviewing social security entitlements in a decreasing market

39. 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

40. 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

41. 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 re-assessment request

42. Centrelink and frozen funds • Frozen funds • Fund may continue to pay income only; or • Both income and asset are frozen

43. 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

44. Hardship Provisions v Pension Loan Scheme Hardship • No age criteria • Cannot get income support or gets reduced amount due to assets test but would have qualified under the income test • Asset cannot be sold or borrowed against • Gifting provisions have not been triggered • Person is in “severe financial hardship” • Payment is calculated using special formula – max amount is max pension rate PLS • Must be of age pension age or over • Cannot get pension or gets reduced amount due to income or assets test • Must have Australian real estate as security • Loan establishment costs payable by applicant • Compounding interest will be charged fortnightly (5.25% pa) • PLS pays an amount up to the maximum rate of pension + PA + RA

45. 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

46. Entitlement to social security payments after redundancy or re-entering the workforce

47. 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

48. 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

49. 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

50. 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