A brave new financial world

This has been the most unusual end of the financial year in my more than 30 years in financial services. The entire Australian population has been affected by COVID-19 and financial services has not been immune from this impact.

The Australian Budget that is normally delivered annually by the Treasurer in May has been postponed until October, 2020. We have also witnessed both sides of politics at the State and Federal levels work together to put a range of measures in place to financially assist Australians and weather the economic uncertainty associated with COVID-19.

Below are details of some of the most significant changes associated with COVID-19.

FINANCIAL ASSISTANCE BENEFITS

1. The Coronavirus Supplement

The Coronavirus Supplement is an additional fortnightly $550 payment for individuals on top of eligible income support payments, intended to be in effect for up to six months from 27 April, 2020. It will be automatically added to the following eligible income support payments: JobSeeker Payment; Partner Allowance; Widow Allowance; Sickness Allowance; Youth Allowance; Austudy; ABSTUDY; Living Allowance; Parenting Payment; Farm Household Allowance; or Special Benefit.

2. Deeming rates

From 1 May, 2020, deeming rates used to assess benefit eligibility under the Income Test have been reduced: from 1.0% to 0.25% for the lower tier; and from 3% to 2.25% for the higher tier. For singles, the first $51,800 of their financial assets has the deemed rate of 0.25% applied, while anything over $51,800 is deemed to earn 2.25%. For couples, the first $86,200 of their combined financial assets has the deemed rate of 0.25% applied, while anything over $86,200 is deemed to earn 2.25% 

3. JobKeeper payments

Eligible employers will be reimbursed a fixed amount of $1,500 per fortnight for each eligible employee stood down as long as their job is kept open. JobKeeper payments can be made for the period beginning 30 March, 2020.  The Government made the first payments to eligible employers in the first week of May 2020. 

SUPERANNUATION

1. Minimum payment amount for a superannuation income stream

For the next two financial years, the minimum pension drawdown rates have been reduced by 50%. This will allow members of superannuation funds to retain more of their capital in retirement while we are experiencing volatile investment markets and low fixed interest returns. 

2. Early access

If a member of a superannuation fund has been financially affected by COVID-19, they may be able to access some of their superannuation early. Eligible citizens and permanent residents of Australia or New Zealand can apply for:

Up to $10,000 in 2019/20 if they submit an application through myGov by 30 June, 2020; and 

Up to a further $10,000 in 2020/21 if they submit an additional application between 1 July, 2020 and 24 September, 2020.
In order to access these amounts, a member must meet one of the following criteria:

1. Currently unemployed; 
2. Receiving either Jobseeker payment, parenting payment, special payment, farm household allowance, or youth allowance for Jobseeker (unless undertaking full-time study or new apprentice); 
3. On or after 1 January, 2020:
   1. Were made redundant; 
   2. Had working hours reduced by 20% or more; or 
   3. As a sole trader there was a reduction in turnover of 20% or more.

Specified temporary residents are permitted early release of superannuation under specific circumstances. 

There is no tax to be paid on funds released and these will not need to be included in an individual’s tax return. It may only be paid to an Australian bank account.  An application can't be withdrawn or cancelled once it has been submitted.

When advisers are discussing early release of funds from super with their clients, they should remind them that accessing super early will affect super balances and may affect future retirement income, due to a reduction in longer term savings due to compounding or realising losses in the current volatile investment market. It may also result in loss of life insurance as the member’s account may have insufficient assets remaining to pay premiums, if the member’s account has been inactive (no contributions or rollovers), or the account balance falls below $6,000. For inactive accounts and low balances, members can retain their insurance if they notify the trustee of the superannuation fund in writing (i.e. – opt in).

RESPONSIBILITIES OF FINANCIAL ADVISERS

The Australian Securities and Investments Commission (ASIC) has made a series of amendments to advice requirements in relation to COVID-19.  

Where a client requests urgent advice due to adverse economic effects of COVID-19, an adviser has up to 30 days to provide a statement of advice (SOA), but must inform the client of a cooling off period if they are acquiring a new product.

Where the COVID-19 advice is in relation to the early release of superannuation of an existing product held by the client, the adviser will only need to provide a record of advice. The record of advice must stipulate: basis for early release; client circumstances that makes early release necessary; the implications of early release of super benefits; and any remuneration or benefits received by the financial adviser. The advice provided to the client may not have eventuated from unsolicited contact from the adviser, and the fee charged cannot exceed $300.

Similarly, where the financial adviser is providing advice due to the adverse economic effects of COVID-19 in relation to existing products held by the client, a record of advice may be used instead of an SOA, where an SOA has been provided previously. The record of advice must include: a brief explanation of the changes in the client’s relevant personal circumstances; the basis on which the recommendations are made; any remuneration, benefits or other interests received by the financial adviser; and any additional charges or any loss of benefits.

EXISTING EOFY STRATEGIES

While there is still economic uncertainty due to COVID-19, advisers should remind their clients there continue to be opportunities to benefit from traditional end of financial year tax and super contribution strategies. 

INCOME PROTECTION PREMIUMS

Policyholders who pay their income protection premiums by 30 June, 2020 are eligible to claim a tax deduction for the premiums in the 2019/2020 financial year. If they delay paying the premiums until July, then the tax deduction will be deferred until the 2020/2021 financial year. 

For individuals who are currently applying for cover, the policy must be in-force and the premiums received, that is, debited and banked, by 30 June, 2020, for the policy holder to claim a tax deduction for the 2019/2020 financial year. 

While there is no cap to the tax deductions in relation to income protection premium payments, taxpayers must remember that the entire income protection premium may not be tax deductible. Where a portion of the premium is attributable to a capital payment (rather than an income payment), then that proportion of the premium is not tax deductible (i.e. specified injury benefits and trauma benefits). 

If the life insurance product provider does not itemise the proportion of the premium attributable to the capital and income components, then the Australian Taxation Office (ATO) has the right to deny the deduction. 

GOVERNMENT SUPER CO-CONTRIBUTIONS

The economic impact of COVID-19 has caused some workers to lose their jobs, and others to have significantly reduced incomes. Depending on a client’s level of income, they may qualify for a Government co-contribution this financial year. The member must have made at least one eligible personal super contribution to their super account during the 2019/2020 financial year, and be less than 71 years old at 30 June, 2020. 

The member must have a total superannuation balance (across all funds and all accounts) of less than the transfer balance cap at 30 June, 2019 ($1.6 million for 2019/2020 financial year).  

They cannot have exceeded their non-concessional contributions cap of $100,000 for the 2019-2020 financial year, and they must have lodged their tax return. 
Working from home deductions

The ATO has always permitted tax deductions for working from home, with strict limitations, documentation and record keeping conditions. With so many Australians working from home due to COVID-19, the ATO has modified the record-keeping requirements for the 2019/20 financial year.  

The shortcut method allows taxpayers to claim a deduction of 80 cents for each hour they work from home due to COVID-19 to fulfil employment duties (and not just carrying out minimal tasks) (COVID hourly rate). A taxpayer is not required to have a dedicated area of the home set aside for working, but must have incurred additional expenses as a result of working from home due to COVID-19. A record of the number of hours worked from home as a result of COVID-19 must be kept (timesheets, diary notes or rosters). 

Jeff Scott is head of advice strategy at MetLife Australia.