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Lecture 8

Lecture 8 - Social Security and Financial Planning

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LECTURE 8 – SOCIAL SECURITY AND FINANCIAL PLANNING Eligibility  Qualifying criteria vary from one pension or benefit type to another but typically require applicants to meet certain age and residency requirements.  Most social security payments are means tested in order to provide benefits to people most in need. Administration  Centrelink (est 1997) is charged with the responsibility of making social security payments and providing other services on behalf of the Commonwealth Government. Types of Payments  Age Pension — a safety net income for people who are unable to fund their retirement adequately. o The Age Pension represents approximately 25 per cent of average weekly earnings. o The Age Pension was introduced in Australia in 1909 to meet the basic living expenses of older people.  Disability Support Pension — for people with disabilities, illness or injury preventing them from working full- time.  Carer Allowance — income supplement for someone who provides daily care for a person with an illness or a disability.  Austudy — payments for people undertaking qualifying study who are 25 years or over.  Youth Allowance — an allowance for full-time students aged 16–24, or those temporarily incapacitated for study.  Newstart Allowance — for unemployed people aged 21 or more but under the eligible age for the Age Pension. People in receipt of the allowance must be willing to search for and accept suitable paid work.  Widow Allowance — an allowance paid to women 50 years of age or over who have no recent work experience and are widowed, divorced or separated Qualifying Age (Age Pension)  The Age Pension is paid to individuals who meet certain age and residency criteria. o For males, the minimum qualifying age is 65 years. o For females, the qualifying age is progressively increasing to 65 years with the eligible age established by the pensioner’s date of birth. Means Testing  Two tests are used to determine the Age Pension - the Assets Test and the Income Test. o Each test is applied and the one which produces the lower pension entitlement is the applicable test.  When advising a client, it is important to establish which test applies, as this may have an important bearing on the type of investment strategies recommended to the pensioner. Asset Test – Types of Assets to Include:  financial investments, including cash, bank accounts, listed shares and securities, managed investments and loans to family members  personal items and house contents such as clothing, hobby collections, paintings, art and electrical appliances (but not fixtures such as stoves)  motor vehicles, caravans and motor bikes  real estate, including holiday homes  businesses and farms  the surrender value of life insurance policies  gifts above $10,000 per income year or $30,000 in a five year period. Asset Test – Types of Assets which are Excluded:  Your principal family home and any permanent fixtures such as wall-to-wall carpet and wall heaters, and either: o Up to 2 hectares of privately used surrounding land on the same title document as the home, or o All land greater than 2 hectares on the same title document as the home if you are eligible for the new rules for farmers and rural homeowners  Life interest (not created by you or your partner)  Granny flat interest (if the amount paid is above the difference between the homeowner and non-homeowner allowable assets levels)  The value of any right or interest you have in a sale/lease back home (if the deferred payment amount under the contract is more than the difference between the homeowner and non-homeowner allowable asset levels)  Any reversionary, remainder and contingent interest (not created by you)  Any interest you have in an estate before the estate is able to be finalised  Any medal or decoration for valour you have as long as you do not have it for investment or hobby purposes  Aids for disabled people  A gift car provided by the department of veterans' affairs  If you sell your principal home the proceeds of the sale will be exempt for up to 12 months, as long as you are planning to use the proceeds to buy another home. o This exemption can be extended for up to an additional 12 months if you are experiencing delays beyond your control in acquiring a new home.  The value of any accommodation bonds for hostels  The value of your and/or your partner's investment in a first home saver account  Any assets you have in superannuation and rollover funds if you are under age pension age  For the exceptional circumstances relief payment, farm assets are exempt  The value of a cemetery plot for you or your partner, and either: o Prepaid funeral expenses, or o Up to two funeral investments/bonds that cost no more than $10,250 in total Asset Tests Limits  The pension Asset test ‘free area’ is currently $181,750 for singles and $258,000 for couples combined.  The rate at which excess assets affects the pension is $1.50 per $1000 singles or couples combined. Insert Example on Page 3 Here Income Test – Income which is included:  Deemed income from financial investments  Gross income from earnings, including fringe benefits  Employment income salary sacrificed into superannuation  Net income from businesses, including farms  Family trust distributions or dividends from private company shares  Net income from rental property  Total net losses from rental property  Income from boarders and lodgers  Superannuation  Reportable superannuation contributions (salary sacrificed contributions) o Reportable superannuation contributions include discretionary superannuation contributions. These are also referred to as concessional or before-tax contributions. For example: o Voluntary salary sacrificed superannuation contributions made by you or on your behalf by your employer. These contributions are above what is required by law, such as the industrial award or the superannuation guarantee levy (currently 9%) o Total superannuation contributions made by you as a self-employed person, for which you can claim a tax deduction.  Non-Australian pensions and income  Any income from sources outside Australia  Income from income stream products, such as annuities and allocated products.  Reportable superannuation contributions, and o Include discretionary super contributions for example:  Voluntary salary sacrifice super contributions made by you or on your behalf by your employer  Total super contributions made by you as a self-employed person for which you can claim a tax deduction  Total net losses from rental property or investment income. o Total net investment losses will be included as income and used to work out eligibility for some centrelink and family assistance office payments. Centrelink and the family assistance office already include the amount lost from rental properties in assessable income for affected payments. Together, net losses from rental properties and net losses from financial investment are known as total net investment losses. o It is important that losses are recorded from investment earnings only, not capital losses. Investment earning includes taxable
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