Tara (00:56):
Welcome to episode three of the Art of Estate Planning Podcast, and our topic today is all about how your superannuation strategy can impact on the Centrelink childcare subsidy for beneficiaries. So Carrie, you're an expert on this topic. Can you lead us through it?
Carrie (01:20):
Tara. Tara. Tara... I'm one of those childless cat ladies that JD Vance warned you about. So it's like when you said, let's do this podcast, you're like, I promise nothing's technical and I, I am this much on this topic both being not a childcare person. I mean, I know that it exists and I know that there are some thresholds and stuff like that. And I'm going to talk a little bit about maths again today. Thanks very much, Tara, but certainly I'm here to listen today and give unsolicited advice. So
Tara (01:53):
Well look, to be honest, Carrie, this is something that I had never ever given a single thought to until I personally had kids that had to go through the childcare system and now I'm like, wow, that childcare subsidy is really quite important and very relevant for my family. And this came up because maybe like 18 months ago, I randomly came across an article that one of our beautiful TT precedents club members had shared where they were saying the way that a test data delivers the superannuation benefits to their beneficiary. So either directly from the super fund to the beneficiary or whether it goes to the beneficiary, but through the hands of the legal personal representative and the estate and then is distributed as part of the estate distribution, that decision can actually affect the beneficiary's access to the Centrelink childcare subsidy, which is pretty wild because I think no one is giving any consideration to that at all. So why is that even a thing, right?
Carrie (03:07):
But anyway, okay.
Tara (03:08):
Yeah, so just to wind it back a little bit, so we all know what we are talking about, the childcare subsidy, and I should have looked up what this was on the Centrelink website. I'm just winging it from my lived experience, but basically it's a subsidy that you get from Centrelink that is means tested or income tested. So even if you don't get any other Centrelink benefits, a lot of people with children going to childcare would still be eligible for the childcare subsidy and the percentage of the subsidy, it's like a rebate on the fees that you pay for your child to be in childcare. So the percentage of the rebate or subsidy that you receive depends on your income threshold. And so some people get 80% all the way through to 50 down to 20 I think, and then you might, if you earn too much income as a family, then you just don't get it all together. I'm also, as I was saying that, I was like, is there an economist going to tell me that there's a difference between a rebate and a subsidy?
Carrie (04:13):
There's going to be someone in the comments, Tara, this is a legal adjacent podcast. There's going to be someone that has to have an opinion. Just to clarify too, this was something that was just so interesting to me. It's 90% I understand of the rebate is 90% if you earn under 83,200, $280 worth of income each year. But then there's also you've got to meet these requirements, one of which is immunisation of your child matching all the immunisation. So yes, we can think that it's everybody with children, but it's not. There's some specific requirements in there as
Tara (04:47):
Well. Oh yes, sorry. You are so right. Yes. And yeah, the government uses it as a big stick, I suppose, to enforce compliance on those fronts. But the main message I guess I want to say is that if you are working with a test data who has adult children with children who are in childcare and they're currently receiving the childcare subsidy, the way that test data structures their super nominations could impact the income test satisfaction of the adult beneficiary, which impacts whether they get the childcare subsidy or not.
Carrie (05:28):
And just to clarify Tara too, that's an income only test. It's not an asset test you can have, it's an income only.
Tara (05:34):
Yeah, it's just income. And it's like anyone who's been through this notes, you get these dreaded myGov notifications where you have to guess at the start of the financial year what your family income is going to be. And it's quite complicated I think because take off your negative gearing deductions and don't do your super contributions are impacting the calculation as well. Have you
Carrie (06:02):
Seen that meme Tara with other guy that tells jokes about different professions and he talks about the tax system in Australia being so convoluted, we're going to make you guess what your tax payable is and if you get it wrong, we're going to punish you for it.
Tara (06:16):
That's exactly it. No, that's it. So you have to guess at the start of the financial year, guess what your income is going to be and then when you lodge your tax return, they reconcile what your income actually was and then you either, if you've underestimated, so you said your income was lower than you thought it was and you got a higher subsidy, then you have to pay it back to, it's very stressful, especially being self-employed.
Carrie (06:46):
I already get anxiety when I get anything in myGov anyway, so to get that on a regular basis would stress me out. This is why I don't have children. Tara.
Tara (06:55):
Yes, and I just want to say recognise cost of living crisis, COI crisis, the childcare subsidy is really important for a lot of families, especially when you're juggling maybe part-time work or one parent or partner going back to work and then calculating the cost of the kids being in care versus work or choosing to look after them at home and all of that. So I never gave it two hoots before I had children, but now that I have a few more wrinkles and grey hairs and a little bit more life experience than I did when I was 25, I am going, oh, this is really interesting part of the equation that I've never really thought about. So that's why I wanted to give it a little bit of airtime. So I guess the main message is if a person makes their BDBN and they nominate for their children to receive the super directly, so visualise this BDBN where it's got child a, child B, child C, a third, a third, a third, right?
(08:02):
So the super just goes straight to them directly, doesn't hit the estate, nothing to do with it. When that child who's received that lump sum super and life insurance is calculating their income for the purposes of filling in myGov what their family income estimate might be, they have to include that lump sum super gift and it's calculated in there. So if they received, I don't know, $300,000 of super or is that too high? I don't know, $200,000 of super as a gift, when their parent died, their income is their normal income plus that $200,000, which is probably going to blow them out of the limits for getting the Centrelink subsidy that year.
Carrie (08:50):
So I'm just breaking this down for making it carry proof. As I say, it's not treated as a capital asset. It's kind of treated as income effectively that they receive.
Tara (09:00):
So the super affects the beneficiary's income calculation for Centrelink and also for the division 2 93 tax calculations, which I don't actually want to go into because that's new tax. Me neither,
Carrie (09:14):
Because I don't even know what you're talking about.
Tara (09:17):
It's that new tax where if you earn over $255,000 per year as at the date of recording this anyway, there's extra 15% tax on, sorry, it's the limit is 250,000, not 255,000. So it says an extra 15% tax on whatever you earn above 250,000. So say you earned 255,000, then that 5,000 over the 250,000 threshold would be taxed at an extra 15%. So yeah, I don't want to go into that. That's not really, that's another level of complexity, but it's basically they sort of in my mind go hand in hand where if the super that you receive as an inheritance is paid directly, then it goes towards your income calculation for the purposes of Centrelink and also division 2 9 3 versus if they pay or nominate the legal personal representative in the BDBN and it goes from the fund to the legal personal representative, and then under the will the child or spouse receives the super that way it's not included, it's not factored into the income calculation. So you just get that money and you are happy as Larry, what genius
Carrie (10:43):
Thought about this? Do you know wonder is there a driving force behind why they've done it that way or
Tara (10:51):
I would really hope that it's an oversight.
Carrie (10:54):
Yeah, it must be, but yeah,
Tara (10:57):
I don't know. I personally don't know of any policy reason for that.
Carrie (11:04):
You're working at Services Australia or for the A TO and the answer to this, please reach out to us.
Tara (11:10):
I mean it's also the same in terms of that Medicare levy. So if you receive the super directly from the super fund, not through the estate, so there's A-B-D-B-N to the beneficiary directly and there's tax payable. So say it is to an adult child who's not a death benefit dependent for tax purposes, then there's that 2% Medicare levy on top. So instead of the tax rate being like 15% or 30%, it's 17% and 32%. Whereas if you paid it through to the legal personal representative and those super benefits pass through the estate first, the Medicare level isn't payable. So if the tax apply, it's 15% and 17, no, sorry, 15% and 30%. So I don't know if it's connected with that.
Carrie (11:59):
That's wild. When you think about 2% doesn't sound like a lot, but when you're talking like a $2 million life insurance policy, $2 million insurance, superannuation benefits, that's a lot of money.
Tara (12:11):
Yeah, yeah. It's not insignificant. So I guess my question is though, our client is the test data or the member of the superfund, right? Is it up to us to think about a potential beneficiaries access to a Centrelink subsidy or can we wash our hands of this
Carrie (12:36):
Sounds of water rushing in the back behind me? I mean Tara, I learned from the best. For those that dunno, Tara trained me as a junior, rarely like doing estate planning without involving their financial advisory team because I just think that there is only so much that we can extend our knowledge to, and particularly when it comes, I mean, as I said, I have a very bad relationship with maths. I had to do algebra this morning, which was fun. So I think that again, that concept that we talked about, I think in episode one where we have to rely on the skill sets of other people to give clients advice and whether it's something that we make sure that we're covering off in what we write to clients that we are not financial advisors. We recommend that you get financial advice around the suggested strategy and how that might play out for you. Yeah,
Tara (13:23):
Look, I think a big theme of this podcast is going to be financial advisors are awesome and we should always try and involve them in the estate plan. I've sort of thought about this a lot and when you actually look at the pros and cons of paying super to the beneficiary directly versus to the legal personal representative and then through to the beneficiary, there's actually quite a lot of factors to weigh up. There's even things like just the timing of receiving the benefit payment because if it goes through the estate, yes, we are not going have that Medicare levy issue, we're not going to have the Centrelink income threshold issue, but the estate can take a lot longer to be administered and wind up. And so the beneficiary sitting there waiting much longer than if they had received it directly from the fund. We've got the asset protection issues. There's a whole host of issues around the sophistication of the binding nomination and contingency planning, particularly if it's a public offer or industry fund. So we actually put together a list comparing all of the factors to think about when it comes to advising a test data or member of a fund about whether you should make your binding nomination to the beneficiaries directly or to the legal personal representative. I think there's four or five criteria on each of the pros and cons list for
Carrie (14:56):
Each. Can you imagine trying to do this with one of those online wills? This sort of stuff is the very reason why people need tailored financial and estate planning advice, like legal advice for these things. Because what hope, if I'm sitting here going division 2 9 3 of the tax act, what is that? And understanding what you're just telling me about the css, and I consider myself a reasonably intelligent person. I've got two degrees that suggests I know what I'm talking about. So I just don't understand how that's wild that there are so many things. If you are a consumer, an individual, and you're looking at what options you have and you see this $200 will, I mean that's so appealing for so many different reasons. But then if you're not seeing this stuff behind the curtains, that's insane, isn't it? Yeah. There's so many different things to think about.
Tara (15:48):
Yeah, absolutely. Carrie. And I think the thing that really hurts is the people who can't afford to access experienced estate planning advice, those families, their children are probably the ones who really rely on that Centrelink childcare subsidy as well. So it's just a real slap in the face because if they're doing the free or the cheap online will, they're probably not even getting their super nominations done because those services don't cover super strategy. So then there's no nomination or a very no person who hasn't had legal advice is sitting there writing my legal personal representative on their binding form when they started their work with their employer and set up their super fund.
Carrie (16:41):
I mean, what about those scenarios, Tara? Where the beneficiaries, if there's no nomination or a non-binding nomination and they don't have any choice about how to receive that, right? They're saying, please don't pay it to me direct because it's going to affect what I'm receiving under the childcare subsidy. Please pay it into the estate. But because the super fund want to tick and flick flicker risk box, it just, yeah, I mean, I've always held a little bit of a belief that sometimes the legal system is not designed to actually help marginalised people, but certainly when you're hearing very real things like that, just Yeah, I mean, I think that in a lot of areas we seem to have this concession for death that if someone passes away, we're going to give you a few exemptions. I mean, I make a joke that I've lost two parents now and for about 12 months after I'd be like, oh, sorry, my dad just died. Or Sorry, my mom just died. You get, people are, there's a lot more flexibility, but when you see stuff like this play out in a way that's really not that way, it just feels really unfair.
Tara (17:43):
Yeah, it is really unfair. And I think that this is just a matter of the clashing of too many systems and no one really seeing that through line and realising the consequence of it. Look, to be the devil's advocate, I suppose. It's like, okay, this is just a subsidy from the government. It's like a bonus perhaps leaving aside whether quality childcare should be an inherent right in our society. We won't go there today, but
Carrie (18:18):
It's too soon. Sorry,
Tara (18:19):
It's too soon. The people who are losing out on this subsidy because of poor structuring of the super nomination, they're getting a significant windfall and an inheritance probably. We hope It's not just enough to mean they don't get the subsidy, but not enough to really do anything with, hopefully it's a decent amount. So if that's the case, should they just suck it up? It's only for one year. It's not like you lose it forever because it's reassessed every year. So it is just this one year that your parent died salt in the wound. I was going to
Carrie (18:57):
Say just when your parent died.
Tara (18:59):
Yeah, it's just rub some salt in that wound. And look, kids are only, you only get this from potentially, I think like five I should know because I have two little kids, but I think it's only five years that they, once they're in prep when they're turning six, I don't think they get it. So it is just like a short time on the timeline and perhaps you're just really unlucky that this perfect storm of
Carrie (19:25):
Bureaucracy hit you. I just think though practically how that plays out for someone. So I'm going to use my brother as the example here, and I hope, sorry David if you're listening to the podcast, but so we lost our father like nine, 10 weeks ago and we get a little bit of super, okay. My father owned a business, so was not really an employee for a very long time. So it's not a huge balance as you would expect someone of his age. When I think about my brother getting his inheritance, let's say I think about the way, so lost, his father gets a little bit of money and decides he's probably going to use the money to buy his first home for him and his two children and his wife. And so he does that thinking, right? And then June next year when they do the reassessment, he's then going to get a bill. And so that just mechanically how that plays out, it just, yeah, I dunno. Maybe it's the socialist, my inner socialist is just saying that someone had to die to get that. And I mean, you're right. We've always got to play the devil's advocate. That's a lot of money in anybody's eyes, but when it comes to things like actually buying a house now, it's actually not a lot of money. So it's interesting how that plays out and it makes me a bit sad really.
Tara (20:43):
Yeah, and depending on how many days the children to care, that bill could be really huge, really significant. If you've been factoring in that you're getting an 80% subsidy, a 50% subsidy, and then you've got to pay the entire cost back, that's huge. It's really big. So what's our role, I think to sort of bring this back, rather than just having a rant about the state of our Tara public policy, bringing this back to the practitioner, I do think that there's potentially an argument that this is aligned too far. It's hard though, right? Because when I talk about testamentary trust, we have hardly talked about testamentary trust. But if anyone knows me, you will know. I'm a huge fan of testamentary trust. It's actually the main thing I talk about at work and at home. No, I'm kidding. But we talk about the benefit of testamentary trust because of the income tax flexibility for the beneficiaries and the asset protection benefits for the beneficiaries.
(21:49):
So this is also another factor that impacts on the beneficiaries, but our main duty is to the member of the super fund slash the test data. This is, I'll tell you where I think I've landed. So I was mentioning before we've got these pros and cons lists of when it is good to pay the super two beneficiaries directly versus when it's good to pay it to the legal personal representative. And we have that in our precedent PAC for self-managed Superfund BD bns, which we make available to lawyers. So as part of that pack, we have a number of flyers because as we said, even we're getting confused about super, right? It's so complex. So we've done a lot of work there to try to create tools for lawyers to communicate these complex rules about super really clearly and straightforward to clients so that they're empowered to make the choices and be part of that advice process.
(22:49):
And one of those tools that we have is this summary of when is it good to pay to the BDBN directly pay the B2B n to the beneficiary directly and the pros and cons, and when is it good to go to the legal personal representative? And I think if you are sitting down with a testator and advising them on their super strategy, which if you're doing a comprehensive estate plan for them, I really hope that's included in the scope, then this would just be one of the range of factors to think about. I do think it is important enough to have it as one of the considerations to factor into account, but probably not the main or the driving consideration. And if there's a lot of other reasons encouraging why you need to pay the BDBN in a different way, then I don't think that this Centrelink subsidy should be the main
Carrie (23:48):
Thing it's talking about before, Tara, that when that balancing up of what you've got to consider when you're tailoring an estate plan to someone, I mean, it's like the gospel according to Kerry Packer. Anybody who doesn't try and minimise their tax needs, their head read. And I'm reluctant to mention him as being someone to look up to, but certainly I think it's a consideration. But as you said, there are so many different things. What are the actual objectives of the test data? Is it to, particularly when things like directing superannuations directly to beneficiaries can be a really big strategy for minimising what's going into the estate for family provision applications in all states, but New South Wales, new South Wales, get your, but I think that the tax part is just like it should be a nice tick, but it shouldn't be the driving thing behind the whole strategy.
Tara (24:42):
Yes, totally. Don't let the tax tail wave the strategy dog. I dunno if that analogy worked, but you know what I mean. Look, I thought this was actually going to be a really quick episode, but it has taken a little while to explain and look, I don't think anyone is going to be an expert on this topic after listening to us too, but hopefully we have put this topic on your radar at least, and something to think about, and next time you are with the baby boomer testators looking to do their super nominations, it might just plant a little seed of is this worth bringing up and factoring into the mix. Carrie, anything else you want to add?
Carrie (25:25):
No, no. I've whinged enough in the podcast, Tara, so
Tara (25:29):
Well, I know you hate maths, so sorry for picking another mathy type topic.
Carrie (25:34):
So yeah, I just think it's so wildly interesting and hopefully we've piqued a few people's interest in understanding that.
Tara (25:41):
Thank you again for listening and reach out, we'd love to hear from you if you've got any insights, comments, or ideas for future episodes.
