Superannuation

Superannuation is a complex area of financial planning. As such, the information provided below is not comprehensive, nor is it intended to provide the total solution for your superannuation needs. However, we would like to provide you with a level of knowledge to answer your general questions. To ensure completeness and accuracy to your personal situation, we recommend that you consult your Avenue financial planner (Click here to refer to our Branch Locations).

We have all heard that the Australian population is ageing. This is applying pressure on the Government to provide retirement income support, given that the number of people in retirement is increasing in proportion to the number of people in the workforce. Therefore, the Government has the dilemma of either increasing taxes from those in the workforce to provide a greater pool of funds for retirement income support, or to find an alternate source for retirement income.

So in an effort to reduce the social security bill, the Australian Government is actively encouraging people to save for their own retirement. Establishing superannuation as an investment option that receives concessional tax treatment has done this. The introduction of compulsory employer superannuation contributions and encouraging personal superannuation via tax concessions has also promoted superannuation as an effective investment vehicle for retirement.

Getting Money into Super

How Much Can Be Contributed to Super?

There is generally no limit to the amount that may be contributed by, or on behalf of, a member of a superannuation fund within a financial year. However, the member will be personally liable to excess tax on contributions made within a financial year that are over government set contribution caps.

Contribution Caps - Summary Table

Contribution caps limit how much may be contributed to an individual's super in a particular financial year without the member incurring excessive contributions tax. The caps apply to all individuals. Contributions from all sources are added together to determine if the caps have been exceeded. The table below summarises the contribution caps for individuals for 2009/2010.

Concessional contributions

A concessional contribution is generally one made to a complying superannuation fund which is taxable and included in the super fund's assessable income. In most instances, this will occur because the contributor is entitled to claim a tax deduction for the contribution.

Examples of concessional contributions are:

• Employer contributions (including superannuation guarantee & salary sacrifice contributions)
• Personal contributions made by a member for which a tax deduction is claimed.
  

Non-concessional contributions

A non-concessional contribution is generally a super contribution to a complying superannuation fund which is not included in the fund's assessable income. It is generally a contribution made by the member with after-tax money.

Contribution Eligibility Rules - Summary Table

In order to make a contribution into a superannuation fund it is necessary to be eligible under superannuation law to make that contribution. The following table summarises the rules for when a person is allowed to contribute or receive contributions to a super fund for the 2009/10 financial year.

Work Test

A member meets the work test if the member has been gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in the financial year.

• The work test does not apply to people who at the time of the contribution are under the age of 65.
• The work test, if applicable, must be met prior to the contribution being made.
• From age 65, a member must meet the work test to make member contributions or receive voluntary employer contributions.
• From age 75, a member may not make member contributions or receive voluntary employer contributions regardless of the member's work status.
• Mandated employer contributions may be made at any age without the member meeting the work test.
  

Gainfully Employed

Gainfully employed is employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.

Tax File Numbers

If the fund does not have a member's tax file number (TFN) on record, a member has 30 days from the date of the member contribution to supply the fund trustee with a TFN, otherwise the fund trustee must refund the contribution.

A super fund does not have to return employer contributions where a TFN has not been quoted; however, this will trigger no-TFN contributions tax.

In-specie Contributions

In-specie contributions are those made using assets other than cash. They may be made at any time by a person who is not a related party of the fund provided that all other relevant superannuation provisions are met and subject to the trust deed. A person who is a related party of the fund can make an in-specie contribution provided that the asset contributed is one that the fund is permitted by superannuation law to acquire from a related party (eg. listed shares, managed funds or business real property acquired at market value).

The market value of the asset being contributed in-specie determines the amount of the contribution to be counted towards the relevant contribution cap.

Tax Deductions for Personal Super Contributions

From 1 July 2007, a person may claim a tax deduction for 100% of personal contributions made to super, provided certain criteria are met. Personal contributions, where a tax deduction is claimed, are concessional contributions, which are subject to a person's concessional contributions cap. Excess concessional contributions are taxed an additional 31.5%. See your Avenue adviser to see if you are eligible to claim a personal tax deduction for your contributions to your super.

Employer Tax Deductions for Super Contributions

From 1 July 2007, employers may claim a tax deduction for 100% of any super contributions made on behalf of employees to a complying super fund. The age-based limits that previously applied were abolished from 1 July 2007. While there is no longer any limit on the amount of contributions which an employer may claim as a tax deduction, an employee is unlikely to want their employer(s) to make contributions in excess of their concessional contribution cap because of the excess tax imposed on the individual.

An employer may claim a 100% tax deduction for super contributions made on behalf of employees either:-

• on or before the day that is 28 days after the end of the month in which the employee turns 75, or
• where the employer was required to make the contribution by an industrial award, determination or notional agreement preserving State awards that is in force under an Australian law.

Government Co-contribution for Super Contributions

The Government co-contribution is an initiative introduced on 1 July 2003 to assist eligible low to middle income earners in saving for their retirement.

The maximum Government co-contribution for 2009/2010 is $1 for every $1 of eligible personal super contributions for a financial year up to a maximum co-contribution of $1,000 (subject to individual reductions).

Until 1 July 2007, the self-employed were unable to claim a Government co-contribution. Now, the self-employed may be able to claim a Government co-contribution if they meet the eligibility criteria.

The Government co-contribution does not count toward either the concessional or the non-concessional cap.

Preservation of Superannuation

Superannuation has been established for the sole purpose of providing retirement benefits. As such, access to benefits is restricted, with all superannuation contributions and earnings from 1 July 1999 being compulsorily preserved, that is, cannot be paid out as a benefit until certain criteria are satisfied.

Benefits are generally not accessible in super until a condition of release has been met. Where a trustee of a regulated super fund is reasonably satisfied that a member has met a condition of release, the member's preserved benefits in the fund at that time become accessible.

Conditions of Release

• Retirement on or after preservation age
• Attaining age 65
• Death
• Permanent incapacity
• Termination of gainful employment (restricted non-preserved amounts)
• Terminal medical condition
• Termination of gainful employment with a standard employer-sponsor of the regulated super fund on or after 1 July 1997 where the member's preserved amounts in the fund at the time of the termination are less than $200
• Being a lost member who is found, and the value of whose benefit in the fund when released, is less than $200

Preservation Age

As outlined above, preserved components of superannuation are not accessible until retirement from the workforce on or after Preservation Age. Until recently, this age was fixed at age 55, however, the applicable age is to increase to age 60, using a sliding scale based on the date of birth of investors. This scale is as follows:

Transition to Retirement

From 1 July 2005, a new condition of release was introduced, known as the ‘transition to retirement' condition of release.

There are no work or retirement tests related to this condition of release. A person may or may not be working and still access super under this condition of release.

A transition to retirement income stream is an account based income stream or annuity. The total amount of payments in any year are limited to a maximum of 10% of the account balance at the start of each financial year.

The minimum income payments are shown in a table further on and are the same as other account based income streams. A transition to retirement income stream must meet the new account based pension and annuity standards.

Your Retirement Benefits

As a general 'rule of thumb', most retirees are reasonably comfortable with a retirement income of 60% of what they were earning at work. This income needs to keep pace with rises in the cost of living and it needs to be achieved without prematurely depleting your capital.

As a general 'rule of thumb', most retirees are reasonably comfortable with a retirement income of 60% of what they were earning at work. 

To build up the 'nest egg' required to produce that sort of income, you would need regular contributions of approximately 18% of your earnings over your full working lifetime if you were a male. In the case of a female, this rises to more like 20% given the longer life expectancy of women.

So the answer to the question 'How much is enough?' depends on assets you have accumulated to date, your age now, how you see your career developing, at what age you are likely to retire and the standard of living you will be comfortable with during retirement. It also highlights the need to plan and establish an effective strategy well before your actual retirement date.

To clarify any issues you may have, it is imperative to contact a qualified Financial Planner (Click here to refer to our Branch Locations). There are many potentially expensive pitfalls for the unwary. A professional adviser will be in a better position to help you to avoid them and put you on the right track. Your Avenue financial adviser can tailor a retirement strategy to suit your circumstances and develop a superannuation portfolio that will allow you to enjoy a comfortable retirement.

Taxation Issues

In Australia, benefits can still be taken as either lump sums or income streams. This section looks at the taxation of these payments received.

Taxation of Super Lump Sums

Taxation of super lump sums - taxable component

Tax-free component

In all cases, regardless of age, the tax-free component of a super lump sum is not assessable income and is not exempt income. No tax is paid on these amounts.

Taxable component

The taxable component of a super lump sum may be either a taxed element or an untaxed element.

Taxed element

The taxed element is that part of a lump sum which has been created by contributions made to your superannuation fund and the income earned on those contributions, both of which have been taxed at the 15% superannuation rate. For most superannuation funds, the taxable component is wholly a taxed element.

Untaxed element

Specific provisions provide for limited situations where there is an untaxed element. Where a super benefit contains an untaxed element, that amount has not been subject to fund tax (up to 15%). For this reason, higher tax rates are applied to untaxed elements.

Situations where there is an untaxed element

• Super benefits paid from untaxed super schemes contain an untaxed element where no contributions and earnings tax have been paid. These schemes are generally run by the Australian Government and State and Territory governments. These generally apply to public servants, and fall into two broad categories, public sector super schemes and constitutionally protected funds.
• Where a super benefit is paid from a super fund that came into operation on or before 5th September 2006, the trustees of certain untaxed super schemes may give the recipient written notice specifying an amount as the untaxed element.
• Superannuation holding account payments and SG Shortfall amounts paid by the Commissioner of Taxation to the individual.
• Certain death benefit super lump sums that include insurance benefits paid from a taxed super scheme.

Tax offset if under age 60

For people under the age of 60, the entire taxable component is assessable income. However, a tax offset is available to ensure that the maximum rate of tax paid does not exceed the rates in the table above.

A super provider withholds tax at the maximum tax rates in the table above. Tax withheld is credited against tax debts, so if a person is on a lower marginal tax rate than the rates at which tax is withheld, they may be entitled to a refund when they lodge their tax return.

Low rate cap

The low rate cap for 2009/10 is $145,000, subject to indexation in later years and decreases according to individual circumstances.

The low rate cap applies to people age 55 to 59. It is the amount of taxable component that receives a rebate so that the taxed element is effectively taxed at 0%, and the untaxed element is effectively taxed at 15% (special rules apply if both taxed and untaxed elements are received within the same financial year).

Decreases

A person's low rate cap for a financial year is reduced (but not below zero) by:-

• the taxable component of super lump sum benefits received in previous financial years, that received the low rate cap offset in those years, and
• taxable components of super lump sum benefits received in the same financial year, with the taxed element taking priority for the rebate.
  

Indexation

The low rate cap is indexed annually to AWOTE, in $5,000 increments. That is, the indexation has to be at least $5,000 before the low rate cap will rise.

Taxation of Super Income Stream Benefits

15% tax offset

A 15% offset applies where:

• the taxable component forms part of the recipient's assessable income, and
• the recipient is aged preservation age (currently 55) to age 59, or
• the income stream is a death benefit, or
• the income stream is a disability super benefit.

Tax offset = 15% x taxable component (taxed element)

Retirement Income Streams

What Happens When You Retire?

The first consideration should be whether to take your retirement benefits as a lump sum or a retirement income stream. This will depend on many factors at the time of your retirement. You should seek qualified assistance to make this important decision. Your Avenue representative is qualified to assist you in this process.

Retirement income streams can take the form of pensions or annuities. There is generally little difference between a pension and an annuity as they are similar income streams but paid from different providers. Super funds generally provide pensions and an annuity is paid under a contract with a life company or registered organisation.

Retirement income streams can take the form of pensions or annuities. Super funds generally provide pensions and an annuity is paid under a contract with a life company or registered organisation.

Introduction to Super Income Streams

A super income stream refers to those income streams that may be commenced using accrued super benefits, whether during the lifetime of the fund member or to one or more of their dependants following the member's death.

A super income stream may be commenced within the same fund in which those benefits accrued, or it may be purchased with a super rollover benefit.

In order to receive concessional taxation treatment, an income stream must meet the relevant Superannuation standards. New minimum standards apply from 1 July 2007. Pensions that commenced before 20 September 2007 and meet the previous regulations are deemed to meet the new minimum standards.

There are essentially four different types of super income streams that can be paid.

• Account based income streams - these are broadly equivalent to old allocated pensions and annuities except they only have a requirement for minimum income payments and do not have a maximum income payment requirement unless it is a transition to retirement income stream. Transition to retirement income streams, which have additional payment standards, are a subset of these income streams. SMSFs may only provide account-based income streams.
• Non-account-based (RCV) income streams - these are flexible income streams that do not have an identifiable account balance but may be commutable and have a residual capital value. There is no restriction on the term of the income stream, but there is a requirement for a minimum annual income payment.
• Lifetime (nil RCV) income streams - there are two types of lifetime income streams available: the existing ‘complying' lifetime income stream and a new commutable lifetime income stream.
• Fixed term (nil RCV) income streams - a commutable income stream payable for a fixed term based on the recipient's age at commencement.

Pro-rata rule and ‘1 June rule'

Where an income stream commences part way through the financial year, the minimum income payment is pro-rated based on the days remaining in the year. The 1 June rule may also apply, allowing income payments to be deferred to the following financial year for an allocated pension or annuity commenced after 1 June in a financial year.

Where an income stream commences part way through the financial year, the minimum income payment is pro-rated based on the days remaining in the year. The 1 June rule may also apply, allowing income payments to be deferred to the following financial year for an allocated pension or annuity commenced after 1 June in a financial year.

Account-based income stream - minimum annual income payments

In order to meet the payment standards, the terms of an account-based income stream must ensure that a minimum income payment is made at least annually. There is no maximum income payment that must be paid (unless it is a transition to retirement income stream where the maximum annual income payment is capped at 10% of the account balance). A fund may choose to impose a maximum payment under its own rules or it may permit any level of income payment in excess of the minimum to be drawn at the choice of the member.

Minimum income percentage factors

Commutations

Account-based income streams must generally be commenced with unrestricted non-preserved benefits and may be commuted at any time. However, prior to either a full or partial commutation, either a pro-rated minimum income payment must have already been paid during the financial year or the remaining account balance is sufficient to ensure that at least the minimum annual payment could be paid.

Commutations may also be made, regardless of the level of income payments made, to pay:

• Death benefit;
• Surcharge liability;
• Family law payment splitting amount;
• Cooling-off amount; or
• Release authority amount.

Transition to Retirement Income Streams

Transition to retirement income streams are a particular type of account-based income stream. They can be commenced with super benefits at any time after the recipient reaches their preservation age.

In addition to the payment standards outlined above, transition to retirement income streams:

• Have a maximum annual income payment of no more than 10% of the account balance at the start of each financial year (or on commencement for the first year), and
• May, subject to the rules of the provider, only be commuted in cash once the recipient has met a condition of release such as permanent retirement after preservation age (55) or reaching age 65.

Treatment on Death

Death benefit payments

A super death benefit is a payment to someone from a super interest, after another person's death, because the other person held the super interest.

Super not part of an estate

Super does not automatically form part of a person's estate. For this reason, a person's Will may not have any power over the distribution of any super death benefits upon the person's death. A person's Will will only have effect where a super death benefit is paid to the deceased's legal personal representative because of a binding death benefit nomination or on trustee discretion. When the death benefit is paid to the deceased's estate, a Will can direct the proceeds of that super money to the appropriate beneficiaries.

Super does not automatically form part of a person's estate. For this reason, a person's Will may not have any power over the distribution of any super death benefits upon the person's death.

Compulsory payment of benefits upon death

A member's benefits in a regulated super fund must be paid as soon as practicable after the member dies.

Form in which death benefits may be paid

Benefits may be paid in any one or more of the following forms:

• A single lump sum
• An interim lump sum and a final lump sum (not exceeding the balance of the benefits as ascertained in relation to the member's death)
• One or more pensions (subject to restrictions)
• Rollover for the purchase of one or more annuities (subject to restrictions)

Restrictions on death benefit pensions and annuities

On death, a member's benefits may only be paid in the form of a pension or annuity to a dependant beneficiary of the member (subject to certain restrictions for children) or to the deceased member's legal personal representative.

Child beneficiaries age 18 or more

If the dependant is a child age 18 or more, to pay a death benefit as an income stream, the child, at the time of death, must:

• Be financially dependent on the member and less than 25 years of age, or
• Have a disability that:
  • Is attributable to an intellectual, psychiatric, sensory or physical impairment or a combination of such impairments
  • Is permanent or likely to be permanent, and
  • Results in a substantially reduced capacity of the person for communication, learning or mobility; and the need for ongoing support services.

Otherwise, the death benefit must be paid to the child as a lump sum.

If death benefits are paid to a child of any age in the form of a pension or an annuity, the income stream must be cashed as a lump sum on the earlier of:

• The day on which the annuity or pension is commuted, or the term of the annuity or pension expires, and
• The day on which the child attains age 25 unless the child has a disability as described above.

Death Benefit Nominations

In the absence of a binding death benefit nomination, the payment of a death benefit is ultimately a matter of trustee discretion, subject to the payment standards and the governing rules of the fund. The trustee's decision must be fair and reasonable.

Non-binding Death Benefit Nominations

Some super funds may permit members to make death benefit nominations in a non-binding fashion. In such cases, members simply provide trustees with guidance regarding their preferred death benefit recipients, with trustees making the eventual decision in the light of all the relevant circumstances.

Binding Death Benefit Nominations

Alternatively, the trustee may provide greater certainty to members in making death benefit nominations by allowing the members to determine, with substantial certainty, the persons to whom death benefits would be paid. Provided the trust deed allows binding death benefit nominations and the regulations are complied with, a member's valid nomination binds the trustee.

Binding death benefit nomination notices must:

• Be signed and dated by the member;
• Be witnessed appropriately by two individuals who are not nominated beneficiaries of the member;
• Specify the proportion of the benefit to be paid to each nominated beneficiary;
• Only nominate beneficiaries who are either dependants or the legal personal representative of the deceased member's estate; and
• Be sufficiently clear and unambiguous for the trustee to act upon.

Other important issues involved with binding death benefit nominations are:

• The nominated beneficiaries must be either dependants or the LPR at the date of the member's death;
• The maximum term that an unchanged notice can remain in effect is three years;
• There may be provision for the governing rules of the fund to fix a shorter term; and 
• Binding death benefit nominations do not cover the form of the super death benefit (i.e. lump sum or pension).

Reversionary pensions

A pensioner may commence a pension as a reversionary pension, that is, a dependant is nominated at commencement of the pension to continue to receive the pension on the death of the original pensioner. Where a pension will continue to a reversionary pensioner upon the death of the primary beneficiary, there is no need for the primary beneficiary to make a binding death benefit nomination.

For members who pass away on or after 1 July 2007, the reversionary beneficiary must be a Superannuation dependant of the deceased, subject to the new restrictions for pensions paid to adult children.

Where to from here?

These examples need to take into account your current personal situation. There may be a need to construct your income stream using other types of pension investments or combine them with a Government funded pension.

Again, one needs to be aware of the fact that this is a potential minefield and a complex one at that. It will be foolhardy indeed for anyone to venture into this area without being armed with appropriate professional advice. Early attention to these issues will alleviate the need to act under pressure at a later stage.

Now may be the time to contact a qualified financial consultant at Avenue Capital Management (Click here to refer to our Branch Locations).