Jeffrey Scott, Head of Product at ClearView

Many clients and advisers are focused on minimising tax at this time of year.

For clients who are thinking about protecting their assets and income, an easy and common way to obtain a tax deduction is to purchase an income protection policy.

The ATO has been approving deductions for premiums paid on income protection policies for over 35 years.

However, the ATO has recently started scrutinising the deductibility of income protection premiums.  It is asking some taxpayers to substantiate the entire deduction they have claimed for the income protection premiums paid.

Unless the taxpayer can substantiate the amount of premium relevant to the tax deduction, the tax deduction will be denied.

The ATO doesn't seem to have a problem with basic income protection policies that replace a percentage of the taxpayer's income, normally around 75%, in the event of injury, disease, or illness.

What the ATO appears to have an issue with are the ancillary benefits that are attached to income protection policies.  Some taxpayers are claiming tax deductions for the ancillary benefits which are treated as capital payments and are not taxable. These include ancillary benefits that:

• Provide a lump sum payment in the event of Total and Permanent Disablement (TPD);
• Provide a lump sum payment in the event of specific injuries such as broken bones; or
• Provide a lump sum payment in the event of traumatic events such as cancer, heart attack, stroke or paralysis. 

Other ancillary benefits that are treated as income payments will still have that proportion of the premium tax deductible.

ATO guidance

For income protection policies that provide lump sum TPD benefits, the ATO has provided guidance that normally 10 per cent of the income protection premiums would not be tax deductible.

For income protection policies that provide lump sum trauma benefits, the ATO has provided guidance that normally 5 per cent of the income protection premium would not be tax deductible.

These benefits are often calculated as a multiple of the monthly income protection benefit (for example, six times the monthly benefit) and paid as a lump sum when the life insured suffers critical illnesses such as cancer, heart attack, stroke or paralysis. The ATO has determined that since these benefits would be paid regardless of whether or not the life insured was absent from work, the benefit does not replace lost income but rather is a capital payment.

For income protection policies that provide lump sum specified injury benefits, the ATO has provided guidance that normally 5 per cent of the income protection premium would not be tax deductible.  These benefits are often calculated as a multiple of the monthly income protection benefit (depending upon the severity of the injury) and paid as a lump sum when the life insured breaks particular bones such as leg, arm, foot or hand. The ATO's rationale behind this ruling is that since these benefits would be paid regardless of whether or not the life insured was absent from work, the benefit does not replace lost income but rather is a capital payment.

Why is the ATO focusing on ancillary benefits?

According to APRA, the total amount of income protection premiums held outside superannuation totalled $3.6 billion as at 31 December 2017.   Assuming that up to 10 per cent of these premiums are attributable to ancillary benefits that provide capital payments (as opposed to income payments), the ATO could potentially be missing out on up to $180 million in taxation revenue each year ($3.6 billion x 10% x 47% top marginal tax rate with Medicare Levy). 

The table below provides an indication of the tax deductibility of the respective components of income protection premiums, based upon previous ATO rulings.

Deductibility of income protection premiums

TYPE OF COVER	ANCILLARY BENEFITS	TAX DEDUCTIBILITY
Income Protection	None	100%
Income Protection	Lump Sum TPD	Approx. 90%
Income Protection	Extras Cover (Critical Illness and Specified Injuries)	Approx. 95%
Income Protection	Lump Sum TPD + Extra Cover (Critical Illness and Specified Injuries)	Approx. 85.5%

Inside superannuation

Where taxpayers have chosen to hold their income protection policies within superannuation, there is no specific deductions for the income protection premiums as these premiums are deductible to the trustee of the superannuation fund, not the member of the fund.  For the 2017-2018 financial year, taxpayers (members) of superannuation funds can claim tax deductions of up to $25,000 made to superannuation funds as concessional contributions. Members need to be aware that they must submit a valid notice of intent to claim a tax deduction to the superannuation fund and they must receive a valid confirmation from the superannuation fund before they submit their tax return to the ATO.  These concessional contributions may then be used to pay for income protection premiums within the super fund.
 
Where income protection policies are split between inside and outside superannuation (super linked), and the premium outside super contains either TPD Lump Sum Benefits, Specified Injury Benefits, and/or Critical Illness Benefits, it is likely that only a small proportion (if any) of the premium will be tax deductible.

Claiming a tax deduction on income protection premiums is common practice but it's important to understand which ancillary benefits are eligible for tax deductions.  If in doubt, contact your life insurance company.

 

(Australian Associated Press)

Education Minister Simon Birmingham has braved a dozen toddlers at a Canberra childcare centre to remind hundreds of thousands of families they have a month to sign up to new subsidies.

The Turnbull government is combining existing subsidies for childcare into a single means- and activity-tested payment.

But almost half a million eligible families haven't updated their Centrelink account details via myGov in order to receive the new funding.

While 673,000 families have updated their information, another 489,000 still need to make the switch.

Senator Birmingham says he isn't disappointed by the low uptake but reminds families yet to sign up of the importance of updating their details to ensure there is no disruption to their payments.

"We know many families are time poor but this is about giving them the support they need and deserve to pay their childcare bills," he told reporters on Wednesday.

"And it's worth the 10 minutes or so it might take to update your details because ultimately you'll be hundreds or possibly thousands of dollars a year better off."

The minister said although arrangements were in place to ensure families who failed to meet the July 2 deadline didn't miss out, it would take time to repay withheld money once they had signed up.

Required information includes estimated income for 2018/19 and approximate work hours for both parents.

Under the new system, both parents must be working, studying, volunteering or searching for work at least eight hours a fortnight to be eligible for the subsidies.

Families with annual incomes under $186,958 will no longer face a cap on the amount of fee rebate the government will pay each year.

For those earning more than this, the annual cap will lift from $7500 to just over $10,000 a child.

Labor early childhood education spokeswoman Amanda Rishworth said not enough had been done to alert families to the impending deadline.

"It is (the government's) responsibility. There is a lot more they could have done. They could have worked with centres who are at the coalface," Ms Rishworth said.

"They haven't done that. Instead they've done a slick advertising campaign on TV and nothing else."

Labor claims one in four families will be worse off under the changes and the majority of those missing out are in the lowest two income brackets.

Whether you're affected by fluctuating interest rates or or by a change in your personal circumstances, the pressure of maintaining regular mortgage loan repayments can be overwhelming at times. Here is some information to help you understand the available alternatives.

What to do before it gets worse

If you're about to miss a mortgage payment or already have, rest assured there is help available. Taking a big breath and raising the issue with your lender is the best thing you can do in fact, the earlier you do that, the more options your lender will have to assist you.

Failing to resolve the situation may force the lender into taking action against you. This can include:

• Fees being applied.
• A higher default interest rate on missed payments.
• Taking recovery action on your home loan, forcing a property sale.
• Enforcement charges, plus court and legal costs.

A two-way relationship

Your lender will want to help you maintain your mortgage. One option is to give your lender a hardship notice. It looks like this:

• First, you contact your lender to explain the situation, which may require a person-to-person meeting at their office.
• Before the meeting, consider what options are available and define a 'plan of attack'. This will show the lender that you're proactively searching for an answer. After all, people are more likely to want to help you if they can see you're trying to help yourself.
• Whatever plan you decide on, you can give your lender a hardship notice orally or in writing that you are unable to meet your obligations your lender can guide you in this.
• Your lender has 21 days from receiving your hardship notice to ask you for any further information it requires. If it does not require further information, it has 21 days from receiving your hardship notice to decide whether or not it will agree to change your loan.
• Depending on your situation, the lender may come back with a scenario to ease payments for the short term, increasing them later. This may escalate your overall loan costs, but you will maintain your home and mortgage, and will be better off in the long run.
• Your lender must give you a notice as to whether or not it agrees with to change your loan following a hardship notice. If the lender does not agree, it must give you reasons why.

Lenders do have an obligation to consider your request, so don't think that it's a lost cause. If the lender will not assist you, you may be able to make a complaint to an external dispute resolution scheme of which your lender is a member. Your lender can give you details of how to contact that scheme.

Helpful support

Believe it or not, you're not on your own every month there are mortgage holders having issues with making payments, and just as there are legal rights for home buyers, there are also legal services for mortgage holders.

Perhaps there are also other financial issues, or bills, that also need attention, in which case free advice is available from the Financial Counseling hotline on 1800 007 007.

Albeit a difficult and somewhat embarrassing issue, you can speak to your mortgage broker about your loan issues. They will explain your options, suggest a plan, and work with you to minimise worries and achieve a resolution.

Whether you're a client or not, if you require more information or advice contact your local broker as soon as possible. They can help with sorting through what options are available to resolve your financial difficulties.

Visit Moneysmart.gov.au, another great resource for tips to help you keep up with your mortgage repayments.

Source: Your Loan Hub

On May 8, the Turnbull Government delivered its third Federal Budget. There are a number of proposed benefits and measures that you should be aware of as they may impact you. The attached flyers for retirees and pre-retirees, and couples and young families summarise some of the proposed measures for young couples, families and retirees with useful case studies and tables. The proposals outlined need to pass through Parliament before becoming law and may change through the process. If you would like to discuss the policy measures and their potential impact on your own situation, please do not hesitate to contact us.

Christian Edwards
(Australian Associated Press)

Reserve Bank of Australia boss Philip Lowe says there should be no surprises when he makes his quarterly statement on the health of the economy this Friday.

Speaking in Adelaide on Tuesday after the RBA held Australia's official cash rate at its record low 1.5 per cent, Dr Lowe said his upcoming Statement on Monetary Policy "should not contain any surprises".

"This year and next, our central scenario remains for the Australian economy to grow a bit faster than 3 per cent," he told an RBA board dinner function.

While unemployment is lower and lower inflation is returning to around the middle of the target range, the bank expects any progress on these fronts to be gradual.

Dr Lowe said the nation's weak household spending and sluggish wages growth remain a concern for the economy.

"While we might like faster progress, it is encouraging that things are moving in the right direction," he said.

The Reserve Bank board is also closely monitoring global risks including the management of China's "very significant" build-up of debt.

The other prominent concern Dr Lowe flagged was the possible escalation of protectionist measures in the United States and elsewhere.

"The very clear lesson from history is that this would be bad for growth," Dr Lowe said.

"As a country that has prospered through openness, Australia has a lot resting on this not happening."

Dr Lowe said if the economy met the expected performance of a steady gain in wages and inflation, and a gradual reduction in the jobless rate, it was "reasonable to expect that the next move in interest rates will be up".