Adviser Tax Guide ONECARE 1 JULY 2014 ANZ WEALTH

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1 Adviser Tax Guide ONECARE 1 JULY 2014 ANZ WEALTH

2 This guide is current at 1 July 2014 and is subject to change. Updated information will be available free of charge from onepath.com.au or by calling It is for Adviser use only. OneCare is issued by OnePath Life Limited (OnePath Life) (ABN , AFSL ) and OneCare Super is issued by OnePath Custodians Pty Limited (OnePath Custodians) (ABN , AFSL , RSE L ). Potential policy holders should read the Product Disclosure Statement (PDS) available at onepath.com.au or by calling and consider whether this product is right for them. The information provided is of a general nature and does not take into account a potential policy holder s personal needs and financial circumstances. Potential policy holders should consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. While we believe that material contained in this guide is correct at 1 July 2014, no warranty of accuracy or reliability is given and no responsibility is accepted for errors or omissions. The taxation considerations are based on our view of the law currently in force and its interpretation by the courts and the Commissioner of Taxation. The law and its interpretation may change, and thus affect the taxation considerations for potential policy holders. This tax guide sets out general information as to the possible taxation consequences of various events in relation to the covers available under OneCare. It does not represent tax advice and potential policy holders should seek independent tax advice specific to their particular circumstances. 2

3 2 3 OneCare arranged through an individual The following table illustrates the tax treatment of policies in which the life insured is the policy owner. Type of cover Life (including where the policy was assigned for no consideration e.g. policy assigned to spouse) Policy owned and premium paid by individual Receipt of claim amount by individual/ nominee Not assessable 1 TPD Not assessable 2 Terminal Illness Not assessable 3 Trauma Not assessable 2 Income Secure Assessable 4 Business Expense Assessable 4 Living Expense unless held for income replacement purposes Assessable if held for income replacement purpose 4 Child Not assessable 5 Extra Care includes cover for Accidental Death, Terminal Illness, and Extended Needle Stick Injury. For tax implications relating to Extended Needle Stick, please refer to the tax treatment of Trauma. 3

4 The following table illustrates the tax treatment of policies in which the life insured is the policy owner and the employer pays the premium as part of the employment terms. Type of cover Life TPD Terminal Illness Trauma Income Secure Payment of premium by employer Fringe Benefits Tax (FBT) payable FBT payable FBT payable FBT payable Receipt of claim amount directly by individual Not assessable 1 Not assessable 2 Not assessable 3 Not assessable 2 No FBT payable 6 Assessable 4 Extra Care includes cover for Accidental Death, Terminal Illness and Extended Needle Stick Injury. For tax implications relating to Extended Needle Stick Injury, please refer to the tax treatment of Trauma. 4

5 4 5 arranged through a superannuation fund The following table illustrates the tax treatment of policies which are owned by the member s superannuation fund. Type of cover Payment of premium by fund Receipt of claim amount by fund Payment of claim amount by fund to member/ beneficiaries Receipt of claim amount by member/ beneficiary Life 7 Not assessable 1 8 Taxed as either a death benefit superannuation lump sum 9 or income stream 24 TPD 10 Not assessable 11 8 Taxed as either a superannuation lump sum 12 or income stream 25 Terminal Illness Income Secure 7 Not assessable 3 8 Tax free as a superannuation lump sum Not assessable 15 8 Taxed as income 4 Note: Trauma is not available through Super. Extra Care includes cover for Accidental Death and Terminal Illness. 5

6 arranged through an employer The following table illustrates the tax treatment of policies which are owned by the employer of the life insured. Type of cover Life TPD Terminal Illness Trauma Income Secure Payment of premium by employer FBT may be payable 16 FBT may be payable 16 FBT may be payable 16 FBT may be payable 16 No FBT payable 6 Receipt of claim amount by employer Payment of claim amount by employer to employee Receipt of claim amount by employee Assessable 17 Taxed as a Death Benefit Employment Termination Payment 18 Assessable 17 Taxed as a Life Benefit Employment Termination Payment 19 Assessable 17 If paid on termination of employment, generally taxed as a Life Benefit Employment Termination Payment 19 Assessable 17 If paid on termination of employment, generally taxed as a Life Benefit Employment Termination Payment 19 Assessable 17 Taxed as income 4 Extra Care includes cover for Accidental Death, Terminal Illness, and Extended Needle Stick Injury. For tax implications relating to Extended Needle Stick Injury, please refer to the tax treatment of Trauma. 6

7 6 7 arranged through business owners self, joint, and cross ownership arrangements 20 Self ownership each business owner takes out a policy on his or her own life. Joint ownership all of the business owners jointly take out a policy on all of the business owners. Cross ownership all of the business owners (except the life insured) jointly take out a policy on the life insured. Type of cover Life TPD Terminal Illness Trauma Payment of premium by business owner No FBT payable No FBT payable No FBT payable No FBT payable Receipt of claim amount by business owner (self ownership) Receipt of claim amount by business owner (joint or cross ownership) Not assessable 1 Not assessable 1 Not assessable 2 Assessable 21 Not assessable 3 Not assessable 3 Not assessable 2 Assessable 21 Extra Care includes cover for Accidental Death, Terminal Illness, and Extended Needle Stick Injury. For tax implications relating to Extended Needle Stick Injury, please refer to the tax treatment of Trauma. 7

8 arranged through an employer key person capital 22 The following table illustrates the tax treatment of policies which are owned by the employer of the life insured as a key person. The taxation treatment of key person insurance policies is a complex area that is impacted by circumstances within individual businesses. Employers seeking to obtain these policies for a key person should seek taxation advice. Type of cover Life TPD Terminal Illness Trauma Payment of premium by employer Receipt of claim amount by employer Not assessable 1 Assessable 21 Not assessable 3 Assessable 21 Note: Income Secure would not normally be used for key person capital arrangements because capital purposes would usually require a lump sum, not an income stream. Extra Care includes cover for Accidental Death, Terminal Illness, and Extended Needle Stick Injury. For tax implications relating to Extended Needle Stick Injury, please refer to the tax treatment of Trauma. 8

9 8 9 arranged through an employer key person revenue 23 The following table illustrates the tax treatment of policies which are owned by the employer of the life insured as a key person. The taxation treatment of key person insurance policies is a complex area that is impacted by circumstances within individual businesses. Employers seeking to obtain these policies for a key person should seek taxation advice. Type of cover Life TPD Terminal Illness Trauma Income Secure Payment of premium by employer Assessable 17 Assessable 17 Assessable 17 Assessable 17 Assessable 17 No FBT payable Receipt of claim amount by employer Extra Care includes cover for Accidental Death, Terminal Illness, and Extended Needle Stick Injury. For tax implications relating to Extended Needle Stick Injury, please refer to the tax treatment of Trauma. 9

10 Footnotes All provisions referred to relate to the Income Tax Assessment Act The receipt of the claim amount is capital in nature however it is Capital Gains Tax (CGT) exempt under section (1) Item 3 which provides that the original beneficial owner of the policy may disregard any capital gains/losses on a policy on the life of the individual. However, the exemption is not available if the person who receives the policy proceeds was not the original owner, and gave consideration for the transfer of the policy. 2. The receipt of the claim amount is capital in nature; however, it is CGT exempt under section (1)(b) which provides that capital gains or losses are disregarded on compensation or damages you receive for any wrong, injury or illness you or your relative suffers personally. 3. See note 1. In addition, ATO Taxation Determination 2007/4 and minutes of National Tax Liaison Group (NTLG) CGT and Losses Sub-committee meeting in November 2005 take the view that the expression policy of insurance on the life of the individual is not confined to the common law meaning of that term. The expression also includes a life insurance policy to the extent that it provides for a payment to be made in an event that results in the death of an individual. Essentially a terminal illness benefit is a pre-payment of a death benefit. 4. The receipt of the claim amount is revenue in nature. Section includes proceeds from insurance for loss of assessable income as statutory income and thus is included as assessable income. Where the amount has been paid from superannuation, this treatment is based on the assumption the payment is made to a person because of their temporary inability to engage in gainful employment and has satisfied the temporary incapacity condition of release. 5. The receipt of the claim amount is capital in nature; however, it is CGT exempt under section (1)(b) which provides that capital gains or losses are disregarded on compensation or damages you receive for any wrong, injury or illness you or your relative suffers personally. A relative is defined in section as the a. spouse b. parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the person, or of that person s spouse, or c. spouse of a person referred to in paragraph (b) 6. It is an Expense Payment Fringe Benefit; however, the taxable value under FBT should be reduced to nil because the employee should have been allowed an income tax deduction had the employee paid it personally. 7. Premiums for death are deductible under section as a superannuation death benefit, section (a). This includes premiums for Terminal Illness which is considered to be a pre-payment of a death benefit. 8. Section Item 1 provides that a complying superannuation fund cannot deduct anything for superannuation benefits. The definition of superannuation benefit in section 307-5(1) includes a payment to you from a superannuation fund because you are a member and a payment to you from a superannuation fund, after another s death, because the other person was a fund member. 9. If paid to a death benefits dependant, the payment is tax free, section If paid to a person who is not a death benefits dependant (tax non-dependant), the element taxed in the fund (of the taxable component) is taxed at a maximum rate of 15% (plus Medicare Levy of 2%). The element untaxed in the fund (of the taxable component) is taxed at a maximum rate of 30% (plus Medicare Levy of 2%), section Special tax concessions apply to lump sum death benefits paid to tax non-dependants in respect of a person who died in the line of duty e.g. police or defence force personnel, section Premiums for Total and Permanent Disability (TPD) are deductible under section as a disability superannuation benefit, section (b). From 1 July 2011, where broader insurance cover is provided and the insurance policy does not specify the deductible portion of the premium, superannuation funds must either obtain an actuarial certificate or use a percentage specified in the regulations. 11. The claim amount is capital in nature; however, it is exempt from CGT under section (1)(b). The NTLG CGT Losses Sub-committee meeting in November 2005 discussed the application of section to the trustee of a trust (on face value reading of the provision, it does not appear to apply to trustees) in respect of compensation received in his or her capacity as trustee. However, Australian Taxation Office (ATO) practice was considered through various ATO Taxation Determinations and Taxation Rulings issued and it was confirmed that the ATO would treat payments under a policy of insurance to trustees as exempt provided that the requirements of section are satisfied in respect of the beneficiary. 12. If the member is 60 years or over, payment is tax free, section If the member is under 60 years and over their preservation age, payment is taxed at 0% rate up to the low rate cap of $185,000 (2014/15). The remainder is taxed at a maximum rate of 15% (plus Medicare levy of 2%), section If the member is under preservation age, payment is taxed at a maximum rate of 20% (plus Medicare levy of 2%), section

11 Superannuation terminal medical condition lump sum payments are tax free, section under section as a benefit consisting of an amount payable to a person under an income stream because of the person s temporary inability to engage in gainful employment, section (c) (including where the period of cover exceeds 2 years see ATO Tax Determination 2007/3). 15. Such payments are not considered to be assessable under sections or Premiums paid by employers under these circumstances are generally exempt from fringe benefits tax. However, a liability to fringe benefits tax may arise where the employer has entered into an arrangement with an employee to acquire a policy of insurance on the life of the employee and promises to pay any proceeds it receives from the insurer to the employee. An employer seeking to make such an arrangement as part of an employment contract should obtain advice from their tax adviser. 17. Assessable as ordinary income if the purpose of the insurance is to replace profits lost through the loss of the employee s services or to provide benefits to staff. 18. If paid to a dependant, taxable component is tax free up to the ETP cap amount of $185,000 (2014/15). The remainder is taxed at 45% (plus Medicare Levy of 2%), section If paid to a non-dependant, maximum rate of tax on taxable component is 30% (plus Medicare levy of 2%) up to the ETP cap amount of $185,000 (2014/15). The remainder is taxed at 45% (plus Medicare levy of 2%), section If the employee is at their preservation or over, payment is taxed at a maximum rate of 15% (plus Medicare levy of 2%) up to the ETP cap amount of $185,000 (2014/15). The remainder is taxed at 45% (plus Medicare Levy of 2%), section If the employee is under preservation age, payment is taxed at a maximum rate of 30% (plus Medicare Levy of 2%) up to the ETP cap amount of $185,000 (2014/15). The remainder is taxed at 45% (plus Medicare levy of 2%), section Self-ownership arrangements which support business succession agreements (including buy/sell or share purchase agreements) and joint or cross ownership arrangements involving business owners are together referred to as business succession arrangements in the OneCare PDS. 21. Section , which provides the exemption from CGT for compensation or damages received for any wrong or injury suffered does not include beneficial owners of insurance policies who are not the person insured or a relative of that person. However, an exemption may be available if the key person/owner is the employer or a relative, depending on the particular circumstances. Further advice should be sought. 22. An example of a capital purpose would be to repay a loan that would become repayable on death or disablement of the key person. 23. An example of a revenue purpose would be to provide funds to replace revenue lost as a result of a death or disability of the key person. 24. If the member died age 60 or over or the death benefits dependant is age 60 or over when receiving the benefit, the payments are tax free, section If the member died under age 60 and the death benefits dependant is under age 60 when receiving the benefit, the tax free component is tax free and the taxable component is included in assessable income and taxed at marginal rates, section A 15% tax offset may apply on the taxable component, section If the member is 60 years or over, the payments are tax free, section If the member is under age 60 when receiving the benefit, the tax free component is tax free and the taxable component is included in assessable income and taxed at marginal tax-rates. A 15% tax offset may apply on the taxable component, sections , and FBT may apply if the employer has entered into an arrangement with an employee. Please note: The taxation treatment and rates referred to in the above footnotes and this guide have been stated in general terms and where relevant are for a resident of Australia for taxation purposes and are not Temporary resident (i.e. a holder of a temporary visa under the Migration Act 1958, other than a retirement visa holder, Subclass 405 or 410). Clients should seek advice on the detailed tax rules for these types of payments and how they would apply to their own individual circumstances. 11

12 Connect with us Risk Adviser Services onepath.com.au/adviser/adviseradvantage OnePath Life, GPO Box 4148, Sydney NSW 2001 Australia and New Zealand Banking Group Limited (ANZ) ABN OnePath Life Limited (OnePath Life) ABN AFSL M3234/0714