Superannuation schemes and benefits

Contributed by Paul Bingham and Graham Young and current to 1 September 2005

Saving for retirement is encouraged by government in a variety of ways, mainly by giving superannuation tax concessions.

There are three times at which tax is important – when money goes into the fund, whilst it is there, and when it comes out. Money contributed to superannuation can get the contributor a tax benefit. Money in a superannuation fund can make income and capital gains, which are taxed at concessional rates. Money that comes out of the fund is taxed again, but there are concessions there too.

CONTRIBUTIONS

Superannuation Guarantee

The Superannuation Guarantee (Administration) Act 1992 (Cth) has the practical effect that an employer must contribute 9 per cent of salary or wages (including commission but excluding fringe benefits) as superannuation for its employees into a superannuation fund unless the employee is paid less than $450 a month; is 70 or over; is not a resident of Australia; or is under 18 and working less than 30 hours a week.

Contributions are made to “complying” superannuation funds or retirement savings accounts. The 9 per cent is calculated against the “superannuation salary” stated in the relevant award, a statute, an agreement with the employee, or in the trust deed of the superannuation fund that applies to the employee.

Salary sacrifice

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 per cent, plus, if applicable, the super surcharge (see below). This will still usually be a lower tax rate than the marginal rate that would otherwise apply. In 2003-4, the maximum that could be contributed for a person under 35 was $13,233; for a person 35-44 was $36,754 and for a person 50 and over $91,149.

Personal contributions

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 per cent or more of their income from self employment) may obtain tax deductions for the first $5000 and three-quarters of the remainder (up to set limits) of superannuation contributions.

There is no tax on voluntary contributions which did not attract a tax deduction (called “undeducted contributions”).

Co-contribution

Employees with annual assessable income and reportable fringe benefits up to $58,000 will get a government “co-contribution” of up to $1500 for an eligible personal contribution of $1000 to a complying superannuation fund or retirement savings account. The maximum amount is paid if the person’s salary is below $28,000, reducing gradually to nil for incomes over $58,000.

Low earning spouse

Taxpayers can claim an 18 per cent tax rebate on superannuation contributions of up to $3000 made on behalf of their low income or non-working spouse.

Small accounts

If an account has $1000 or less in it, it cannot be reduced by fees that are greater than the interest earned by the account.

Super surcharge

There is an extra “surcharge” on benefits in respect of contributions made by people earning above $99,710. The maximum surcharge rate is applied at $121,075.

The maximum surcharge rates reduce to 13.5 per cent for 2004-05, and 12.5 percent for 2005-06 and succeeding years.

Reasonable benefit limit

Amounts of superannuation benefit above the reasonable benefit limit (RBL) (currently $619,223 for lump sums and $1,238,440 if half the superannuation is taken as a complying pension) are taxed at the highest marginal rate. This means that any contributions made when the contributor has more than the relevant amount in the fund gain the contributor no further tax advantage.

Age restrictions

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. At this age, a person must start drawing money from super unless they worked for at least 240 hours in the previous financial year. From age 70-75, a person can make personal contributions, but an employer can’t make voluntary contributions on the person’s behalf. After 75, the person must draw down money from super.

Lost superannuation

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 it if you think that you have superannuation money you have lost track of.

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.

SUPERANNUATION GUARANTEE LEVY

If employers do not contribute 9 per cent 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.

Difficult questions arise about whether a person is a contractor. The levy is only payable in respect of employees, and not contractors. The High Court has recently found, for example, that a bicycle courier employed as a contractor was an employee, but a motor vehicle courier was 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 Fund or the Australian Tax Office (see “Contacts” below). In United Super Pty. Ltd. v Built Environs Pty. Ltd. [2001] SASC 339, it was held that a super fund was in breach of trust and breach of contract where 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 like insurance. Section 178(6A) of the Workplace Relations Act 1996 (Cth) provides that if an employer has not paid superannuation they were required, under an award or order, to pay on behalf of a person, the court may order the employer to restore the person, as far as practicable, to the position they would have been in if the employer had not failed to pay. Arguably, this could include any insurance benefit that would have been payable.

VARIETIES OF SUPERANNUATION FUNDS

There is a variety of superannuation providers. For many employees, their award or other agreement requires contributions to a particular fund. Often, the fund is one controlled jointly by employers and unions, a so-called “industry fund” covering many employees in a particular industry. For example, CBUS (the Construction and Building Unions Superannuation Fund) covers many workers in the building industry. These funds are generally run on a non-profit basis, so that 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, for example a life insurance company, sets up a commercial fund which 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 or the Public Sector Superannuation Scheme.

The Commonwealth government has not yet required employers to provide a choice of funds.

The Government Employees Superannuation Board (GESB) manages and administers the GES Fund, which is the superannuation fund for current and former Western Australian public sector employees. The scheme comes under the jurisdiction of the Superannuation Complaints Tribunal (see further below).

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 his or her retirement to a commercial trustee who invests the funds. Banks and other institutions also provide retirement savings accounts which 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 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.

MONEY IN THE FUND

Tax Concessions

The basic tax rate on benefits paid (once above a certain threshold) is 15 per cent. This is in addition to the 15 per cent tax on contributions. But 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 per cent on their income and 10 per cent on their capital gains. 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 per cent.

TYPES OF BENEFITS

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 what 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.

TAKING BENEFITS

Taxation

When benefits are paid to a member, further tax may be payable. This area is extremely complex, and it is wise to obtain specialist advice before dealing with a benefit.

The amount of tax payable depends in part on when the contribution was made. For example, the part of a lump sum relating to contributions made before July 1983 is taxed at 5 per cent, whereas contributions made later may be taxed up to 30 per cent.

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 20 per cent or 30 per cent up to the RBL.

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.

Pensions and lump sums

Benefits can often be taken either as a lump sum, or as a pension. There can be taxation advantages of taking a pension. For example, as noted above, taking the benefit as a pension can significantly increase the tax advantage, as the RBL is double that of a lump sum.

There has been considerable change in the types of pensions available. From September 2004, the “complying pension” (in fact, an annuity), which used to be 100 per cent exempt from the social security assets test, is now only 50 per cent exempt.

There are now three different types of pension:

• an allocated pension, which does not attract the pension RBL or have the 50 per cent assets test exemption, but which allows flexible income payments, is commutable, and can be invested in growth assets;
• a growth pension, which does attract the pension RBL, does have the 50 per cent assets test exemption and can be invested in growth assets, but does not allow flexible income payments and is not commutable; and
• a complying annuity, a growth pension which does attract the pension RBL, does have the 50 per cent assets test exemption, but does not allow flexible income payments, is not commutable and cannot be invested in growth assets.

It is important to take professional advice about the type of pension that you choose, as there are considerable differences between them.