Superannuation and Retirement

$__________ is needed for a SMSF to be cost-effective

$200,000 in the fund

Defined contribution

a superannuation scheme in which the contributions are predetermined with no end benefit expressly guaranteed

Defined benefit

a superannuation scheme in which the end benefit is determined by a formula, generally comprising years of service, final salary and a percentage factor

Private sector funds are

are also known as corporate funds, and would be Non-Public Offer. Many large company employers operate superannuation funds for their employees, e.g. Telstra, Australia Post, Qantas, the major Banks.

The trustee board of a Standard employer sponsored superannuation funds is required to

comprise an equal number of employer and member (employee) representatives, although a professional independent trustee may be appointed if the parties agree

Multi-employer superannuation trusts allow

corporate funds to pool their assets for investment purposes while retaining their individual or corporate identity. These funds offer a wide range of investment options. They are growing in popularity among employers of all sizes.

contributions made by employers on behalf of eligible employees to complying superannuation funds is

deductible to the employer

Superannuation fund choice allows

employees to nominate the superannuation fund to which their superannuation contributions are made

SMSFs are regulated superannuation funds with fewer than

five members all of whom are trustees or directors of the corporate trustee. No member can be an employee of another member unless they are related

ees and charges applying to small superannuation accounts under $1,000 must not

generally be more than any investment returns in the relevant year of income.

The prime purpose of the withdrawal and re-contribute strategy

is to increase the amount of the tax-free component held by the fund

A trustee who breaches a fault liability provision can only be convicted if

it can be proven beyond reasonable doubt that his/her contravention was intentional or reckless

Why do people salary sacrifice?

it's to gain a tax saving based on the different rates of tax paid, i.e. personal (marginal) income tax rates and superannuation tax rates.

The bring forward rule allows (non-concessional cap)

two future years worth of cap

Members should be kept aware of the fund's:

- structure - financial position - investment strategy - performance

The ABS has commented that "between 30 June 1990 and 30 June 2010, the proportion of Australia's population aged under 15 years

Decreased

Two types of superfunds

Defined benefits, defined contributions

Is a person to withdraw their benefit from superannuation upon reaching age 65,

No

The Low Income Superannuation Tax Offset the payment is a Government super payment of up to

$500 per financial year to help low income earners save for their retirement by compensating low income individuals for the 15% tax on concessional contributions made on their behalf by their employer or by themselves. It applies to concessional contributions made from 1 July 2012 where an individual's income is less than $37,000

Components pre 1 July 2007:

- CGT exempt component - Pre-July 1994 concessional component - Post-June 1994 bona fide redundancy and early retirement payments - Post-June 1994 Invalidity Component - Pre 1 July 1983 service component - Undeducted contributions - Post 30 June 1983 service component

the following employees are excluded from superannuation choice:

- Commonwealth employees (some exceptions may apply) - Employment made under: An Australian Workplace Agreement (AWA) A state industrial award that specifies a nominated superannuation fund Employees belonging to certain defined benefit funds.

There is a number of benefits flowing from making both concessional and non-concessional contributions to superannuation. These can be summarised as follows:

- Concessional contributions are taxed at 15% rather than at marginal tax rates (or are not taxed if they are non-concessional contributions) - Tax on the earnings of a superannuation fund is only 15% rather than taxed at marginal tax rates - There is no tax on the earnings of a superannuation fund which is in the pension phase. Exceptions from July 2017 on Transition to Retirement (TTR) pensions. Earnings on a TTR pension are taxed at 15% just as if the balance was in a superannuation accumulation account - When the member retires after age 60 there is no tax on withdrawals from the fund; the pension income or lump sum - There is no limit to the amount of lump sums or pension income that can be withdrawn once a person has met a full condition of release

Advantages of a SMSF:

- Control - Flexibility - Tax effectiveness and savings - Cost savings

At present there are three main areas of government-encouraged retirement income. They are:

- Government provided means-tested age pension funded by general revenue - Mandated superannuation contributions provided by employers - Voluntary superannuation contributions by individuals or employers which may attract tax concessions

Those able to make contributions to superannuation are:

- Individuals - Spouses - Self-employed - Spouses

Cooper recommendations (regarding trustee responsibilities) , supported by the Government are:

- Legislation should be passed to provide the ATO with the power to issue administrative penalties against SMSF trustees on a sliding scale reflecting the seriousness of the breach. The penalties should not be payable from the corpus of the fund, and may be applied jointly or severally against the trustees or trustee directors - SIS legislation should be amended to provide the ATO with the power to issue relevant persons with a direction to rectify specified contraventions within a specified reasonable time. A breach of a direction should be a strict liability offence - The ATO should be given the power to enforce mandatory education for trustees who have contravened SIS legislation - Government, after appropriate industry consultation, should amend legislation to remove SMSF trustee administrative burdens that are identified as unnecessary

ASIC is primarily responsible for regulating the consumer protection and market integrity aspects of superannuation, particularly in the area of disclosure to members. Other functions are:

- Licensing superannuation fund trustees that elect to be Australian Financial Services (AFS) Licensees - Making standards for internal dispute resolution procedures and approval of external dispute resolution (EDR) schemes for the purposes of an AFS Licence - Consumer protection powers in relation to financial services (including superannuation under the Competition and Consumer Act ("CCA")

Types of benefit payments (withdrawals)

- Lump sum payments - Income payments

Superannuation money is categorised as

- Preserved, Cannot be withdrawn - Restricted non-preserved, When a suitable condition of release is met (often associated with severing/change of) employment - Unrestricted non-preserved, Can be accessed as a lump sum or pension income stream

Employer sponsored superannuation funds, these include:

- Private sector funds - Multi-employer superannuation trusts - Industry funds - Public sector funds (only gov employees) -Retirement Savings Accounts (RSA)

Account based pensions have a number of beneficial features which include:

- Regular income payments on a fortnightly, monthly, quarterly, half yearly or yearly basis can be made to the pensioner - Beneficial taxation - Income payments can be varied to suit changing circumstances, subject to a prescribed minimum. - There is no loss of capital on death. Any remaining balance is paid to beneficiaries or the estate as a death benefit - A reversionary pension can be put in place at the time of initial purchase or, alternatively, the remaining account balance can be paid out to the spouse/dependant/estate - Lump sum commutations are allowable at any timeprovided a condition of release has been met

Non employer sponsored superannuation funds

- Self Managed Superannuation Funds (SMSF) - Small APRA Funds (SAF)

Superannuation Industry (Supervision) Act 1993 (SISA) is the main legislation which regulates

- Superannuation funds (generally, funds receiving contributions) -Approved deposits funds (funds receiving benefits rolled over from a super fund; unable to receive contributions) -Deferred annuities (akin to an ADF, agreeing to pay the benefit to a person as an annuity after a specified event, such as retirement) -Pooled superannuation trusts (a collective investment vehicle in which trustees of other funds invest by purchasing units) -Any superannuation product.

Concessional contributions include the following:

- Superannuation guarantee contributions (SGC) - Salary sacrifice contributions - Personal concessional contributions

Not all in the workforce are eligible for, and hence not all have gained the benefit of, SG. Exclusions include:

- Those under age 18 yrs and working less than 30 hours per week - Wages less than $450 per calendar month - That part of Ordinary Times Earnings above the indexed Maximum Contributions Base - Foreign executives with a specified visa class - Those covered by international social security agreements - Resident employees paid by non-resident employer for work done outside Australia - Salary or wages paid during parental leave - Salary or wages paid during eligible community service activity, or active service in Defence Force Reserves, and paid by the employee's usual employer while the employee is absent from his or her usual employment -private/domestic nature work less than 30 hours per week.

The rules relating to who can contribute to superannuation are based on age.

- Up to age 65 contributions can be made on your behalf by yourself, your eligible spouse and employer - From age 65-75 a work test must be satisfied (except for mandated contributions)

Rules for superannuation contributions:

- a complying self-managed fund can accept mandated employer contributions for members to satisfy Superannuation Guarantee or Award obligations - an individual under 75 years of age who has been gainfully employed on at least a part time basis during a financial year can contribute non-mandated (voluntary) contributions to a complying self-managed fund. Before accepting the contribution in a financial year, the trustee must be satisfied the person was gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in that financial year - any person who has money in another superannuation fund, Approved Deposit Fund or any other form of rollover investment could establish their own self-managed fund and transfer their benefits to their own fund, subject to satisfying the other fund that the self-managed fund is a complying fund

These funds are exempted from some or all of the prudential requirements of the SISA that larger funds are subjected to. For example:

- an APRA licence is not required - the extensive reporting to members is not required - the extensive reporting to members is not required

Conditions of release can include any of the following:

- attaining age 65 - leaving an employer (for restricted non- reserved) - retirement after age 57 (increasing to age 60) with no intention to work again - an arrangement under which the member was gainfully employed has ended after turning age 60 - permanent incapacity - death - severe financial hardship - compassionate grounds - leaving the country permanently (those on temporary visas) - if any of the benefits are classified as unrestricted nonpreserved - attaining preservation age (restricted access, income only)

If contributions are received for a member who has not supplied their TFN:

- concessional contributions will be taxed at the highest personal marginal tax rate plus Medicare levy - non-concessional contributions cannot be accepted and will be returned to the contributor

Penalties for non compliance, as introduced from the "Stronger Super" recommendations

- criminal and civil sanctions will be introduced for illegal early release scheme promoters - amounts illegally released early will be taxed at the superannuation non-complying tax rate, with an additional penalty that takes into account the individual circumstances -legislation will be amended to enable the ATO to enforce the requirement for SMSF assets to be separated from personal or employer assets -new regulatory powers for the ATO to prevent and penalise breaches of the superannuation legislation

Initial considerations for setting up a SMSF include:

- decide the trustee structure: individual trustees or a corporate trustee - all members must be trustees or directors (subject to the single member exceptions and the allowed variation to appoint a second trustee)) - check that no intended member is disqualified from being a trustee/director -the investment strategy the fund should pursue -whether life or disability insurance is to be purchased

Administrative considerations when setting up SMSF:

- if necessary, set up the corporate trustee - preparation of the trust deed - apply for Tax file number, nominate the Public Officer - apply for fund ABN - consider GST registration - opening a bank account for the trustee/fund - establish the complying status of the fund - taking minutes of meet - keeping member, accounting, tax and meetings' records - have processes to confirm a member is not disqualified from being a trustee/director - when required, appointing an auditor and other advisers

Reasons for contributing to a superannuation fund include the following:

- it is compulsory for employers to contribute a set rate to superannuation on behalf of their employees - tax deductions/offsets to contributors - provision of life and disability insurance - protection of funds and financial security for members' dependants - provision of a lump sum or pension income to retirees - concessional tax environment on contributions and investment earnings within the funds

Product Disclosure Statements are now required and must include information such as:

- product specifics, such as restrictions on contributions, benefits and preservation - investment strategies of the fund - description of fees and charges - general information, including taxation, cooling-off period, complaints resolution and yearly information.

compulsory superannuation support under the SG scheme is not payable where an individual worker is:

- receiving less then $450 per month (gross) - employees under age 18 working less than 30 hours/week - engaged in domestic/private work of less than 30 hours per week -a non-resident who works outside Australia - a resident paid by a non-resident and who works outside Australia

A SMSF cannot acquire assets from a member or an associate of a member other than

- securities listed on the Australian Stock Exchange (ASX) - widely-held unit trusts - business 'real property' in certain circumstances

Regulations governing the tax offset for spouse contributions include:

- the contributing spouse will receive an 18% income tax offset for contributions up to $3,000 per annum to a superannuation fund or RSA for their spouse - the full offset is available where total income of the spouse is below $37,000 per annum assessable income, including total reportable fringe benefits amounts and reportable employer super contributions (RESC) for the financial year, was less than $40,000 - the $3,000 @ 18% will attract the maximum tax offset of $540 - the offset phases out gradually as a spouse's total income increases to $40,000. Above this limit no tax offset will be available

To be a complying fund the trustee of a superannuation fund must satisfy the following criteria:

- the trustee of a fund must make an irrevocable election to become a Regulated Superannuation Fund under SISA - the trustee must be either a corporation or the fund's sole or primary purpose is to provide a pension under SISA when an individual may be the trustee - the fund satisfies the sole purpose test and is carried on as a genuine fund for the provisions of retirement benefits for members and/or their dependents

In noting the significant role SMSFs play in Australia's superannuation system, the Government believes it is important that:

- there be appropriate oversight of SMSF service providers - fund investments are consistent with the purpose of superannuation - fraudulent activity is curbed.

Financial considerations when setting up a SMSF:

- transferring account balances from other existing superannuation funds: proof of SMSF complying status will be required - investment options for the transferred balance and contributions - ongoing investment management and records

The small accounts protection standards apply to a 'protected member'. This term describes a member of a regulated superannuation fund:

- who is not an excluded member - whose withdrawal benefits are less than $1,000 and contain an employer financed benefit

These are the basic factors in the operation of a trust:

-A trust is a legal entity that operates under the provisions of the trust law and superannuation and corporations law which allows assets to be administered on behalf of a group of investors (the fund's members). -The trustees hold all assets. -The trustees may appoint a manager who is responsible for the day-to-day operation of the trust. -In an accumulation fund (or accumulation sections within defined benefit funds), the member of the superannuation fund/accumulation section holds a proportionate beneficial interest in all of the fund's assets, and receives a proportionate share of income and/or capital growth or losses. This can vary across any investment options a member is able to choose. -In a defined benefit fund, the defined benefit fund's assets are not allocated between individual members but are pooled. At any point of time a member's defined benefit and the minimum benefit prescribed by law can be determined. If it's necessary to distribute the fund, the amount will be calculated by the fund's actuary using financial assumptions suitable for that purpose.

Final result of super balance depends on:

-Individual response -Education -Risk profile -Investment conditions -Time -Compounding

Trustees are required to meet certain administrative obligations, including:

-Keeping accurate and accessible accounting records as required by the SISA -Ensuring accuracy of accounts and statements for each financial year -Maintaining documents and operating in accordance with its Responsible Superannuation Entity (RSE) Licence conditions -Lodging returns with APRA.

Engagement contracts should ensure that managers:

-Provide information on the investments and their returns -Provide enough information to the trustees to enable them to make a judgement about the investment manager's capabilities in managing the assets of the fund.

In planning for retirement there are some general principles of planning the level of retirement income needed. These include:

-Replacement income -Indexation of income -Guarantee of income -Capital to be used up -Range of income sources -Expenditure needs of retirees.

Required retirement income may be influenced by:

-Socioeconomic factors eg - change of accommodation, overseas travel, activities, etc -Economic factors eg payment of outstanding debt, capital sum needs.

Where can a self-managed super fund invest (applies to all funds)?

-Sole purpose test - Restrictions on borrowing for investment purposes - Limited recourse borrowing arrangements - Restrictions on 'in-house' assets and transactions with members - Investment strategies of the funds (must be stated) - Acquire assets from a member - Lend money - Investments at arms length

There are several other pieces of legislation which provide for the regulation of superannuation entities. They are:

-Superannuation Safety Amendment Act 2004 - Financial Services Reform Act 2002 - Financial Sector (Collection of Data) Act 2001 - Superannuation Supervisory Levy Act 1991 - Superannuation (Financial Assistance Funding) Levy Act 1993 - Superannuation (Resolution of Complaints) Act 1993

The regulators play an important role to:

-Support the government's retirement planning policies, which recognises the need for superannuation as an important vehicle in the provision of retirement incomes in the future -Enforce compliance, which provides security of members' benefit entitlements -Ensure the tax concessions provided by the government are not wasted -Secure members' benefits to provide public confidence in the concept of saving for retirement, and to encourage the growth of superannuation savings.

APRA has established an extensive superannuation fund review program. When subject to review, the review will examine whether:

-The fund's assets exist and are securely held, and whether the trustees have the capacity to maintain the security of those assets into the future -The fund has properly documented its governing rules, financial records, minutes of trustee meetings and reports from advisers and to members -the fund has complied with the SISA requirements -Strategies have been formulated and implemented for the prudent investment of fund assets -The duties and responsibilities of everyone involved in the management of the fund are clearly defined -It appears that those duties and responsibilities are being carried out properly.

Trustees' fiduciary duties are:

-To act honestly in all matters concerning the fund -To take the same care, skill and diligence as an ordinary prudent person would take in dealing with the property of another for whom that person felt a moral obligation -To ensure the trustees' duties and powers are performed in the best interest of the beneficiaries and their dependants -To keep the assets of the fund separate from any assets held by the trustee's personal assets and those of the employer-sponsor or their associates -To not enter into any contract or arrangement that would adversely affect the trustees' ability to exercise its functions and powers -To formulate and implement an investment strategy for the trust, having regards to liabilities, risk/return, diversification and liquidity considerations -To monitor and maintain the fund's reserves and formulate a strategy to prudently manage those reserves -To allow beneficiaries access to trust's information and records.

The importance of superannuation increases as the nature of the Australian society changes. These changes may include:

-greater numbers of aged people because of falling birth rates, increased longevity, patterns of migration, etc -the nature of the workforce, changing patterns of work, changes to retiring age and conditions of work -expectations of different generations -society's attitude towards aged people -discrimination against women -recognition of the Third Age.

Issues raised by stronger super (cooper review)

-that fees in superannuation are too high; -that choice of fund in superannuation has failed to deliver a 'competitive market that reduces costs for members -that there is too much tinkering in superannuation

There are various ways in which superannuation funds can be classified. They include classifications which are made according to:

-the terms of retirement benefit calculations -sponsorship of funds -legislation -tax treatment

Thus, there are three main parts to a trust:

-the trust deed -the trustee of the trust -the members of the trust.

Complying superannuation funds are generally taxed at

15% on contributions and fund earnings

Capital gains of superfund will be taxed at

15% or 10% if the asset was owned for over 12 months

The government contribution rate is currently

50% with $500 being the maximum Government contribution

The preservation age is being raised from

55 to 60, it is currently 57

The spouse receiving the spousal contributions must be under age:

65 or 70 if the member satisfies the work test

Current aged pension ellegibility age is

65, will increase to 67 by 2023

Superannuation Guarantee is currently

9.5% with plans to increase to 12% by 2025

SMSF's can elect to be regulated by the

ATO

Who can now claim a tax deduction for concessional contributions to superannuation?

All individuals under the age of 75

Superannuation Guarantee policy was announced in

August 1991, and started in 1992 at 3%

Contribution caps

Concessional - $25000 and Non-concessional - $100000

Replacement income

the ratio of retirement income to final year of employment income

Change to aged pension age

From 1 July 2017 the qualifying age for the Age Pension will increase from 65 years to 65 years and 6 months. It will then increase by 6 months every 2 years until 1 July 2023. when it will be 67 years for males and females

The ATO administers the

Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997, Superannuation Guarantee (Administration) Act 1992, various other Tax Acts and associated Regulations with which apply to funds.

The ABS has commented that "between 30 June 1990 and 30 June 2010, the proportion of Australia's population aged over 65 years

Increased, over 85 has doubled

Concessional contributions are assessed on a

Per person basis

The ABS has commented that "between 30 June 1990 and 30 June 2010, the proportion of Australia's population aged 15-64 years has remained:

Relatively stable

Population feminisation

Since women live longer than men, old age brackets have more women than men, e.g. Age 80-89 57% more women

APRA oversees most parts of which act

Superannuation Industry (Supervision) Act 1993

As a result of the 2006 Budget, superannuation now consists of only two components

Tax free component and a taxable component, the taxable component is further broken down into the taxed and untaxed element

Change in super contribution laws:

The Government amendments to the legislation mean that the rate will remain at 9.5% until 30 June 2021 and then increase by 0.5 percentage points each year until it reaches 12%

If superannuation funds do not comply with the rules and regulations in every respect, they run the risk of being classified as a non-complying superannuation fund which is taxed at

The highest marginal tax rate of 45% plus Medicare levy of 2.00%

The reason why some politicians are able to access their generous superannuation benefits prior to the earliest available preservation age of 55 is because

They are not regulated under the superannuation Industry (Supervision) Act (SISA)

Cashing rules (from 1 July 2005) allows restricted access to superannuation benefits as a non-commutable pension once a member has attained preservation age. These pensions are known as:

Transition to retirement pensions

Contributions by employees who receive SG support are

not tax deductible

The trustees have a responsibility to ensure that someone who terminates employment between ages 57 and 60 is not likely to return to the workforce again. This is generally defined as

not working more than 10 hours per week

Government co-contribution are:

paid at 50% of contribution to a maximum of $500

Work test involves having been actively engaged in

paid employment for at least 40 hours in any consecutive 30 day period, in the financial year the contribution is made

With the need from 2004 for Trustees to be licensed by APRA and funds registered, the number of these types of funds has significantly

reduced

Two-tier penalties arise for a SISA provision where two offences exist: either

strict or fault liability

Small APRA Funds (SAF) are

superannuation entities regulated by APRA with less than five members that have an Extended Public Offer Entity Licence. The members of the fund are not trustees, instead an Approved Trustee (public trustee company with net tangible assets of $5 million) is appointed. Because the fund has an approved trustee, the fund can have employees as members

The legislation sets minimum levels of pension

that can be paid each year. Designed to last about 100 years

Also available to an eligible person via their tax return is a limited "spouse contribution offset". The offset is

the lesser of 18% of actual contributions up to $3,000 by the person to the account of their eligible spouse