Under social security legislation, amounts set aside for funeral expenses are generally exempt under the income and assets tests. However in some cases, clients may have a combination of these products, which may impact how they are assessed.
The three main ways that clients prepay their funeral expenses are:
- funeral bonds
- prepaid funerals
- burial plots.
Funeral bonds
A funeral bond is an investment offered by a friendly society or life insurance company that provides benefits upon the death of the nominated person that must be applied to funeral expenses. A funeral bond cannot be accessed prior to the nominated person’s death.
Under social security legislation, up to two funeral bonds per client are an exempt investment where the total amount invested is up to the allowable limit (ie $15,000 in 2023/24 and indexed yearly). Each member of a couple may invest $15,000, resulting in an exempt investment for the couple of $30,000.
If a funeral bond is jointly owned, the total amount invested cannot exceed $15,000 (2023/24) to qualify as an exempt investment.
Note, it is the total amount invested in the funeral bond that is measured against the $15,000 (2023/24) threshold. If the value of the funeral bond increases due to investment earnings to exceed $15,000, the investment earnings are disregarded and the funeral bond remains an exempt investment.
The allowable limit is indexed on a yearly basis. If an investor invested in a funeral bond in an earlier year within a lower allowable limit, the investor can, subject to the product rules, make a top-up contribution so long as the new total contribution amount does not exceed the latest indexed limit (ie $15,000 in 2023/24).
Prepaid funerals
A prepaid funeral is where a person makes an advance payment for funeral services for themselves or their partner.
Prepaid funerals are an exempt investment, regardless of the amount paid. The limit of $15,000 does not apply to pre-paid funerals.
Some pre-paid funerals are paid for with a funeral bond assigned to a funeral director. If it meets pre-paid funeral conditions, that is, a contract for future services, it is treated as a pre-paid funeral, not a funeral bond.
Burial plots
A burial plot is a specific spot or right to a place at a general location, such as an area of a cemetery. It also includes an interment niche or a mausoleum, or having the right to be buried in a certain place, even if the plot is not specified.
Burial plots are exempt investments, regardless of the amount invested.
What if the client has a combination of funeral investments?
In some cases, clients may have a combination of a prepaid funeral, burial plot and/or funeral bond.
Under the Centrelink rules, where a client has both a prepaid funeral and a funeral bond, the funeral bond will not qualify for an asset exemption. However, in all cases, a burial plot and/or prepaid funeral are exempt.
The following table summarises the Centrelink treatment of different combinations of funeral investments:
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Disclaimer
The information contained in this update is based on the understanding Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) and Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) has of the relevant Australian laws as at the article date. As these laws are subject to change you should refer to our website at www.cfs.com.au or talk to a professional adviser for the most up-to-date information. The information is for adviser use only and is not a substitute for investors seeking advice. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including AIL, nor CFSIL, accepts responsibility for any loss suffered by any person arising from reliance on this information. This update is not financial product advice and does not take into account any individual’s objectives, financial situation or needs. Any examples are for illustrative purposes only and actual risks and benefits will vary depending on each investor’s individual circumstances. You should form your own opinion and take your own legal, taxation and financial advice on the application of the information to your business and your clients.
Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.
AIL and CFSIL are also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.