Super, insurance and exit fees: The 1 July changes

Super, insurance and exit fees: The 1 July changes

From 1 July 2019, new laws prevent superannuation providers from eroding member balances with unwanted or unnecessary insurance and exit fees. Plus, inactive accounts with low balances will be moved to the ATO to try and unite the unclaimed super with its owner.

These changes do not apply to self-managed superannuation funds or small APRA funds.

Insurance inside your fund

Up until 30 June 2019, superannuation providers were required to provide members with appropriate life and total and permanent disability (TPD) insurance inside superannuation on an ‘opt out’ basis. That is, the insurance was automatically put into place when you became a member of the fund.

The problem is that for a lot of people, such as young people with no dependants and those with insurance cover elsewhere, these default insurance premiums are a key factor in eroding their superannuation balances. And in many cases, people simply did not realise they had insurance inside their funds.

New laws that came into effect on 1 July 2019 prevent superannuation providers from maintaining ‘default insurance’ for any member with an account that has been inactive for a continuous period of 16 months unless that person has elected to maintain the insurance. An inactive account is one where no contributions or rollovers have been received in the previous 16 month period.

For everyone else, insurance will remain a default on new and existing superannuation funds unless you specifically opt out.

What to do if you are affected

If you are affected, you need to make a decision about whether the insurance held in your fund is valuable to you. Often insurance cover through superannuation is cheaper than what you might be able to access elsewhere. Also, the premiums come out of your fund so they don’t impact on your cashflow. However, if the insurance is unnecessary or duplicated, the premiums will simply erode your account.

Employer default super funds generally provide death and TPD cover. This basic cover may be available without health checks. You can usually increase, decrease, or cancel your default insurance cover. Your super fund’s website will have a product disclosure statement (PDS) which explains the insurer they use and details of the cover available.

If you are affected, the insurance you hold inside your super fund may be cancelled unless you take action. If you choose to, you can keep your insurance by contacting your insurer (login to your insurer’s website and follow the links or call them to find out how to make the election) or by making a contribution. The election cannot be made over the phone to your fund.

Your superannuation provider is obliged to let you know if your insurance is about to be cancelled.

Low balance super accounts moved to ATO

Australians have over $17.5 billion in unclaimed superannuation. From 1 July 2019, superannuation providers will be required to report and pay inactive low-balance accounts to the ATO. Twice a year, super funds will report and pay:

  • unclaimed super of members aged 65 years or older, non-member spouses and deceased members.
  • unclaimed super of former temporary residents.
  • small lost member accounts and insoluble lost member accounts.
  • inactive low-balance accounts.

A low balance account is one with less than $6,000. These new rules mean that if your superannuation account has less than $6,000, and the account has been inactive for 16 months, the balance will be transferred to the ATO who will attempt to consolidate your superannuation.

Reducing fees and charges

From 1 July 2019, exit fees including fees on partial withdrawals have been abolished for all superannuation fund members regardless of their superannuation account balance.

Where a superannuation fund member’s final account balance is less than $6,000 in a year, new caps apply to the fees that providers can charge. From 1 July 2019, administration and investment fees and other prescribed costs on these accounts will be capped at 3%. If the fund has charged more than 3%, the excess needs to be refunded within 3 months.

Single touch payroll exemption for directors and family members

The ATO has provided a concession from single touch payroll for payments by small employers to closely held payees.

Single touch payroll (STP) was extended to cover all employers on 1 July 2019. For directors of their own company or for family businesses employing family members, there are some practical problems with STP – sometimes they don’t know exactly what their salary or wages are for the year until just after the end of the financial year. STP however demands that payments are reported to the ATO in real time.

A new concession allows payments made by small employers with 19 or less employees to closely held payees, such as directors and family members, to be exempt from STP until 1 July 2020. Payments to arm’s length employees will need to be reported using STP.

There is no need for entities to apply to the ATO for the concession, although the ATO will need to be notified of closely held payees. For 2019-20, employers using the concession will report as they have in the past, issuing payment summaries at year end to affected employees.

Who is a closely held employee?

A closely held payee is someone who receives non-arm’s length payments, that is, they are directly related to the entity from which they receive payment. For example:

  • family members of a family business
  • directors or shareholders of a company
  • beneficiaries of a trust

What happens after 1 July 2020?

From 1 July 2020, employers making payments to closely held employees will have the option of reporting these payments quarterly. The ATO expects the employer to make a reasonable estimate of year-to-date amounts up to and including the last pay day of the relevant quarter. Three methods could potentially be used for this purpose:

  • Withdrawals taken by the payee (but don’t include payments of dividends or payments which reduce liabilities owed by the business to the closely held payee).
  • Calculating 25% of the total salary or director fees from the previous year or the year of the last lodged tax return of the closely held payee.
  • Vary the previous years’ amount (to take into account trading conditions) within 15% of the total salary or directors fees for the current financial year.

If a business chooses to report closely held payees quarterly, they will have until the due date of their 2021 tax return to finalise the information that has been reported for the year and make any adjustments to the amounts that have been reported.

There are some practical problems still to be worked through, like what happens if you overestimate income and pay too much superannuation? Unlike tax payments, superannuation cannot normally be refunded if contributions exceeded the amount that was required to be paid.

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