The federal government encourages people to save for retirement in a variety of ways. Mainly, the government gives superannuation tax concessions.
There are three points at which tax is important to your superannuation: when money goes into the fund, while it is there, and when it comes out.
Money contributed to superannuation can be taxed at 15% (or effectively 0%, if the contributor earns $37,000 or less and qualifies for the low-income super contribution concession; 30% if the contributor earns over $300,000), but it can also gain the contributor a tax benefit.
Money in a superannuation fund can make income and capital gains that are taxed at concessional rates while the fund has not yet started to pay a benefit, but are not taxed after the fund has started to pay a benefit. Money that comes out of the fund is not taxed, unless the money comes out before the beneficiary has turned 60 years of age, in which case a benefit for which a tax deduction has been claimed is taxed but with a 15% offset (or 10% if the contribution was untaxed). There may also be tax free components of a lump sum and a low rate cap concession that reduce tax on lump sums taken below age 60.
Superannuation income is not treated as income for tax purposes, meaning that other earned income benefits from a lower marginal rate. Public sector superannuation is treated differently. Disability income streams are also treated differently.
What is a superannuation trust?
Virtually all private sector superannuation schemes in Australia are organised through the legal device of a trust. A trust is a form of ownership of property in which one person (the trustee) is the legal owner of the property, but is under a legal obligation to use the property exclusively for the benefit of another person (the beneficiary). In the case of a superannuation trust, the rights and obligations of the trustee and beneficiaries (often called “members”) are set out in a document called a “trust deed”.
The trustee of a superannuation fund may be a company or one or more individual people. Some commercial organisations (usually associated with insurance companies or banks) act as trustees for a large number of employers under a single trust deed.
Some public sector superannuation schemes are not set up as trusts. The rights of members of these schemes depend on the legislation governing them.
The legal principles governing the law of trusts were developed in cases concerning trustees who administered, without payment, sums of money made available to the beneficiaries through gifts and wills. As will be apparent from this chapter, these principles are, arguably, inappropriate to determine the rights of members of modern superannuation schemes, where the benefits are provided in a commercial context, frequently in substitution for wages under awards and contracts of employment.
The Superannuation Guarantee (Administration) Act 1992 (Cth) has the practical effect that an employer must contribute 9.5% of “ordinary time earnings” as superannuation for its employees into a superannuation fund unless the employee:
•is paid less than $450 a month;
•is aged 75 or over;
•is not a resident of Australia and the work is done outside Australia; or
•is under 18 and working 30 hours a week or less (ss 27, 28).
Contributions are made to “complying” superannuation funds or retirement savings accounts and should be made within 28 days of the end of the relevant quarter.
The 9.5% is calculated against ordinary time earnings up to a quarterly limit. In the 2015–2016 financial year, this limit is $50,810. The Australian Taxation Office (ATO) has provided guidance about what “ordinary time earnings” means in Superannuation Guarantee Ruling SGR 2009/2, which is available on its website (at www.ato.gov.au/super). ATO rulings provide guidance only and do not have the force of law.
Different rules apply to “defined benefit” superannuation schemes (for an explanation of defined benefit superannuation schemes, see “Types of benefits”).
If the employer and the fund agree, an employee may make further contributions, within strict limits, under “salary sacrifice” and other arrangements. This can mean that instead of paying tax at the individual’s marginal tax rate on the amount “sacrificed”, tax is paid at a concessional rate of 15%. This will still usually be a lower tax rate than the marginal rate that would otherwise apply. Tax on concessional contributions for persons with pre-tax earnings of $300,000 or more is 30%. Tax on concessional contributions for persons with pre-tax earnings of $37,000 or less is 15%, but the person receives a refund of up to $500 as a Low Income Super Contribution, meaning the tax is effectively 0%.
In the 2015–2016 financial year, the maximum that can be contributed and attract a tax deduction is $30,000, or $35,000 if the contributor was 49 years or over on 30 June 2015.
No tax benefit is obtained by a simple voluntary contribution by an employee, although the income and capital gain later obtained on that contribution is taxed at concessional rates.
Self-employed persons (those who earn 90% or more of their income from self-employment) may obtain tax deductions up to the age-based limits referred to in “Salary sacrifice”.
There is no tax on voluntary contributions that did not attract a tax deduction (called “non-concessional contributions”). However, for a person aged under 65 years, only $180,000 per year, or $540,000 over three years, may be contributed on a non-concessional basis. A person aged 65 or over can contribute up to $180,000 a year on a non-concessional basis.
Employees and certain self-employed people with annual assessable income and reportable fringe benefits between $35,454 and $50,454 will get a government “co-contribution” of up to $500 for an eligible personal contribution of up to $1,000 to a complying superannuation fund or retirement savings account. The maximum 50% matching contribution amount is paid if the person’s “total income” is $35,454 or less, reducing gradually to nil for incomes of $50,454 and above.
Taxpayers can claim a tax offset of up to $540 made on behalf of their spouse with an income less than $13,800.
Until 1 July 2013, if an account had $1,000 or less in it, it could not be reduced by fees that are greater than the amount earned by the account. Currently, this protection does not apply.
The superannuation surcharge was abolished from 1 July 2005.
Reasonable benefit limits were abolished from 1 July 2007.
Before age 65, a person can make further tax deductible contributions even if they are not working. Between ages 65 and 75, a person can make further tax deductible contributions so long as they work for at least 40 hours in a period of 30 consecutive days.
There is no longer any obligation to draw down monies from a superannuation fund at any age. However, not taking a pension when one is available means the loss of the benefit being that a fund paying a pension is not taxed on its investment returns.
Most eligible termination payments (now known as “employment termination payments”) cannot be rolled over into superannuation. (For further information, see Taxation.)
When a worker goes from one job to another, they may be required to join a different fund. It is important that the money in the previous fund is not forgotten. The money can be moved or “rolled over” to the new fund. The ATO keeps a register of “lost” money. Contact the ATO if you think you have lost track of superannuation money (see “Contacts”).
An alternative for people who have many small jobs is to start a “retirement savings account” with a financial institution, into which all employers can pay small amounts of superannuation.
If employers do not contribute 9.5% as described above, a “superannuation guarantee charge” has to be paid to the ATO, which then contributes the net amount to superannuation to benefit the employee. This is calculated against an employee’s “salary or wages”, which may be more than the employee’s ordinary time earnings. See Superannuation Guarantee Ruling SGR 2009/2, available on the ATO website (at www.ato.gov.au/super).
The levy is only payable in respect of employees, not contractors. Difficult questions arise about whether a person is a contractor. For example, the High Court has found that a bicycle courier employed as a contractor was an employee, but a motor vehicle courier was a contractor. The ATO website (at www.ato.gov.au) has a “guide to contractors” tool to help work out if a person is an employee or a contractor.
From 1 July 2003, the employer should pay superannuation guarantee contributions at least once each quarter, on 28 October, 28 January, 28 April and 28 July in each year. The employee should be notified on a pay slip, letter or email. If these amounts are not paid, then the employee could be disadvantaged if the company becomes insolvent. If notification is not received at the appropriate time, contact the superannuation fund or the ATO. In United Super Pty Ltd v Built Environs Pty Ltd  SASC 339, it was held that a super fund was in breach of trust and in breach of contract when it did not inform a member that payments by the employer had ceased.
However, the ATO is not active in enforcing payment; the charge is paid only if the employer is still solvent and the employee misses out on benefits.
Choice of superannuation fund
From 1 July 2005, about half of Australia’s employees are able to choose the superannuation fund into which their contributions are paid. The choice made could have a big effect on the type and amount of benefit available, and it is worthwhile considering the benefits available before a choice is made.
The first thing to consider is the type of benefit you currently have and the varieties of fund available. If the employee does not nominate a fund, the employer will pay the benefit into a default fund. All default funds (except “retirement savings account” funds) have to offer minimum age-based death insurance from 2007 and many funds provide some level of liability insurance.
There are two basic types of benefits: defined benefits and accumulation benefits.
The defined benefit fund pays a set benefit, usually a multiple of the worker’s annual salary, perhaps averaged over the three years before retirement on ceasing work. The worker has to have a considerable number of years of service before the full benefit is paid. If the worker leaves before the minimum number of years for a full benefit, the benefit is usually calculated on years of service and salary. This has the effect that the higher paid and longer serving employees benefit the most. The investment performance of the fund does not affect the benefit paid. The employer takes the risk of the investment performance of the fund.
Public service schemes and company schemes are often of this sort. The benefits are generous in comparison to the accumulation funds discussed below, and these schemes are becoming rarer. Advice should be taken before moving funds out of this sort of scheme.
The other sort of scheme, the accumulation fund, repays contributions together with whatever investment income has been obtained. This means that the final benefit paid depends on the amount originally contributed (less tax and administration fees) and whatever return the investment of that amount has produced, for the time it has been in the fund. Obviously, the contributor (rather than the employer) takes the risk of poor investment performance, or that (for example) the share market is depressed at the time of retirement.
Varieties of superannuation funds
There is a variety of superannuation providers.
For many employees, their award or other agreement used to (but in many cases no longer does) require contributions to a particular fund. Often, this fund is controlled jointly by employers and unions, a so-called “industry fund” covering many employees in a particular industry. For example, the Construction and Building Unions Super fund covers workers in the building industry, although most funds are now trying to attract members outside their traditional base. These funds are generally run on a non-profit basis, so administration fees are usually low. Employers and unions are represented on the board of the trustee, which makes decisions about where the contributions are invested and what benefits are available to members.
In other cases, the employer has set up or arranged a particular fund for its employees, and the employer effectively provides the administration for the fund. Increasingly, employers are turning over such funds to professional administrators that charge commercial fees for administration. These are usually referred to as “company schemes”.
In other cases, the employer chooses a “master trust” type of arrangement, in which a large financial organisation (e.g. a life insurance company) sets up a commercial fund that can service many employers. Often, the fund is invested with the associated life insurer or by the associated funds manager.
Employees of the Commonwealth Government have their superannuation paid into the Commonwealth Superannuation Scheme, the Public Sector Superannuation Scheme or the PSS Accumulation Plan.
Employees of state government instrumentalities have their own superannuation schemes. These have been much amalgamated and in some cases had benefits reduced in recent years. There is still a variety of schemes and benefits, such as the Emergency Services Superannuation Scheme and VicSuper. Some of these schemes are controlled by an Act of Parliament and administered by the Government Superannuation Office. Appeals from decisions of the Government Superannuation Office can be taken to the Victorian Civil and Administrative Tribunal. Other schemes are controlled by a trust deed and a trustee.
There are also superannuation schemes available to individuals outside the employment context. Most large financial institutions provide a master fund type scheme in which the individual makes contributions to provide for their retirement to a commercial trustee who invests the funds. Banks and other institutions also provide retirement savings accounts that have the same function, although they seem to produce lower returns than others.
Individuals (usually self-employed people) can also set up private superannuation funds (the so-called DIY or self managed super funds). In such a fund, each member has to be involved in the management of the fund, and there are strict limits on what can be done with the money. Such funds are not economically feasible if the amount of funds is less than about $250,000.
Features of superannuation funds
Usually, defined benefit schemes are much more generous than accumulation type schemes. Therefore, a person in a defined benefit scheme will usually be better off staying in such a scheme than shifting to any type of accumulation scheme.
If a person is already in an accumulation type fund, then there are probably four main things to consider before either deciding to stay in the current fund, or shifting to a new fund.
1 The first thing to consider is the investment performance of the fund. The main job of a superannuation trustee is to invest your money to generate strong consistent returns. It is dangerous to judge a fund only on the performance in the past year, so it is a good idea to look at the investment performance of the trustee over the past 5 or 10 years.
Take into account, also, that a variety of investment options are usually available to fund members. For example, there may be a conservative (capital stable) option, a balanced option and a growth option, depending on the member’s appetite for risk. So, it is worthwhile looking at the investment performance of the trustee in respect of each available option. In addition, some funds take into account ethical and environmental considerations in their investment decision-making.
2 The second thing to consider is the trustee’s fees and charges. An average superannuation fund charges about 1.3% (of the funds under management) for investing and administering the fund. Some public sector funds charge less than 0.5%. Some funds charge 3%. Because “industry” funds and public sector funds are not-for-profit, the fees charged by these funds should be lower than the fees charged by the funds run for profit.
3 The third thing to consider is the insurance benefits available. Death, disability and sometimes income protection benefits are some of the most significant benefits available in superannuation. It is generally cheaper to buy insurance through the superannuation fund because the fund can negotiate a cheaper price for volume. Often, insurance is available without reference to previous medical history. Look very carefully at the definition of “disability” in the insurance policy as this can be the difference between obtaining an insurance payout and the benefit being refused. Also, moving from one insurance policy to another can mean that the new insurer may require a health check.
4 The fourth thing to consider is the other type of services or benefits available. Some funds offer cheap home loans, financial products, newsletters or shopping and travel discounts.
Generally, benefits paid are only taxed if the beneficiary is below 60 years of age. The tax rate (once above a certain threshold) is 15% less than the beneficiary’s marginal rate. This is in addition to the 15% tax on contributions. However, the tax on benefits paid is payable only on retirement or earlier payout of benefits.
Superannuation funds have the advantage that they pay tax of 15% on their income and 10% on their capital gains on assets held for 12 months. This means that money in superannuation should grow more quickly than money invested in a person’s own name, so long as the person is paying a marginal rate of tax above 15%.
A person’s tax file number must now be given to the superannuation fund in order to avoid being taxed at the top marginal rate.
At age 65, a person can take their superannuation benefits. Before that age, a person must satisfy a “condition of release” to take superannuation benefits. Between ages 60 and 65, resigning from a job is a condition of release. If the person has reached “preservation age” (ages 55 to 60), a condition of release is that the trustee is reasonably satisfied that the person intends never to again become gainfully employed, either full-time or part-time (at least 10 hours per week).
If you are below your preservation age see “Preservation”.
If the beneficiary is 60 years of age or more, all pensions paid from a taxed source are tax-free. If the beneficiary is over 60 and retired, or is over 65 years of age, lump sums paid from a taxed source are tax-free. If the pension is not paid from a taxed source (such as certain government pensions) certain elements of the pension are taxed at a concessional rate.
If the beneficiary is between their preservation age (see “Preservation”) and 60 years of age, a lump sum up to the amount of $185,000 is free of tax. The amount of tax payable on pensions and the remaining part of any lump sum over $185,000 depends on the amounts of the tax-free component and the taxable component, the nature of the benefit and when the contribution was made. For example, the part of a lump sum relating to contributions made before July 1983 is not taxed, whereas the part relating to contributions made later may be taxed at the person’s marginal rate less the tax offset of 15% (therefore, a person on a 31.5% marginal rate would pay 16.5%). Further details are available in Withholding Schedule 33, “Tax Table for Superannuation Lump Sums” (NAT 70981), available at www.ato.gov.au/businesses.
It is no longer possible to access the concessional and non-concessional components other than in the proportion they bear to the whole of the fund (unless the fund is split into two funds).
The amount of tax payable may also depend on the age at which the benefit is taken. If the benefit is taken before age 55, the tax rate may be higher.
The taxation of benefits can also be delayed by “rolling over” the benefit into a particular type of fund, and letting it accumulate, rather than taking the benefit as soon as it is available.
The advantage of starting to take benefits is that capital gains and income into the fund are not taxed.
Benefits can often be taken either as a lump sum, or as a pension. There can be taxation advantages of taking a pension for those aged less than 60, but the tax-free initial amount of $195,000 applicable to a lump sum does not apply to a pension, and this could be disadvantageous.
There has been considerable change in the types of pensions available. Until recent tax and social security changes, there were five different types of pension, which had different features relating to the now abolished reasonable benefits limit, different social security features and different payment and investment features.
From 1 July 2007, any pension is allowed that meets certain minimum standards relating to minimum annual payments (e.g. the annual payment for a beneficiary aged 55–64 must be at least 4% and no more than 10% of the account balance).
From 20 September 2007, 100% of the assets of any pension are assets tested for social security purposes. It is important to obtain advice if a pension has been started before 20 September 2007. It may be worthwhile for people who have already started receiving a pension to see whether it would be worthwhile stopping the pension and commencing a new one.
For people aged over 55 and still working, there can be benefit in a “transition to retirement” pension, which allows a person to receive a superannuation pension with a 15% tax offset and still contribute to superannuation. Effectively, this could reduce the tax payable on the earnings whilst maintaining the previous gross cash income. The pension is not commutable until retirement or age 65.
It is important to take professional advice about the type of pension that you choose.