It is surprising how little some people know about ACC
And how little attention clients (and some accountants) pay towards understanding what type of policy is right for them. With a little tweaking, thousands of dollars can be saved in ACC levies.
For the self-employed person there are two main ACC policies – CoverPlus and CoverPlus Extra. CoverPlus is the default scheme you are placed on. If you have an accident and can’t work, ACC will cover up to 80% of your taxable income based on the most recently completed financial year.
CoverPlus Extra allows you to choose your level of cover, and ACC will pay 100% of this agreed value if you have an accident and can’t work. You can choose this policy whether you are a sole trader, partner in a partnership or shareholder-employee in a company. Its is designed for those who aren’t paid PAYE wages (as those on PAYE wages have their ACC paid for by their employer). The minimum cover you must have is $33,972 and the maximum cover you can have is $109,235.
CoverPlus Extra is great for those who have fluctuating income (like farmers) as it is based on an agreed level of cover rather than the prior year earnings like with CoverPlus. The key advantage of this is when it comes to claim time, there is no requirement to prove loss of earnings. This greatly reduces stress as generally at this time you are not in the best mental or physical state to be filling out paperwork.
CoverPlus Extra is also great for if you want to nominate a level of cover higher or lower than your actual earnings. This is particularly helpful in an industry where the milk price can vary significantly within the season. For example, you want to make sure you have enough cover to pay someone to manage the farm while you are injured. Your prior year income might have only been $50,000 but you need to pay a manager $80,000. CoverPlus Extra gives you certainty and peace of mind that you can afford to hire someone and keep the farm running. On the flip side, your prior year earnings might be $100,000 but you only need to pay a manager $80,000. CoverPlus Extra saves you paying ACC levies on the $20,000 difference.
Another situation of where CoverPlus Extra is great is when you are newly self-employed with no earnings history and want security to know that you are covered in the event of an accident.
The table below highlights the difference in cost between the two policies.
|$100,000 (last year)
|$50,000 (agreed value)
|Annual ACC Levy
When working with our clients on what level of ACC cover, they need we always come back to the question of, how much are they going to need in the event of an accident? In a minor accident you may be able to continue managing the farm from the couch, and so only need enough cover to pay the relief milker. In a more serious accident, you may be in hospital and your partner is also with you in hospital so is unable to supervise the replacement worker. In this case you need a highly capable manager who has the knowledge to step in at a moments notice. With wages increasing at a phenomenal rate currently, you are best to overestimate the cost of replacement staff. Managers are currently paid anywhere from $85,000 to $120,000 which is significantly different to a year ago. This highlights the need to regularly review your ACC cover.
Also bear in mind that the agreed level of cover is before tax, so you need to factor that into the equation.
Some of our most budget conscious clients have the lowest level of cover and know that their business can afford to soak up the cost of extra staff if an accident were to occur. They may live off the smell of an oily rag, or their partner earns an income outside the business that could prop up the business in order to save costs on levies.
It is important to note that loss of income due to illness is not covered by ACC. This is where some clients prefer to also have income protection insurance, and your insurance broker can provide advice on the best mix of cover to have.
Every situation is different for every client which is why it is important your accountant knows your business inside and out. It is a conversation that your accountant should be having with you at least annually to ensure your level of cover is kept appropriate for your changing needs.