Managing Compliance with Superannuation Obligations – The Basics CHAPTER 10 Managing Compliance with Superannuation Obligations – The Basics

Useful Terms Accumulation Period of time during which a member of a superannuation fund is amassing retirement savings. Australian Prudential Regulation Authority (APRA) APRA supervises most superannuation funds and Approved Deposit Funds and Pooled Superannuation Trusts. Approved deposit funds (ADF) A fund that is regulated by APRA - it can receive eligible termination payments rolled-over from a previous employer, superannuation fund or ADF. Pooled superannuation trust A unit trust used only for investing assets of regulated superannuation funds, approved deposit funds and other pooled superannuation trusts which is regulated by APRA. Preserved Superannuation savings which cannot be withdrawn until a person has reached a certain age and has retired. Self-managed superannuation fund A superannuation fund to save for retirement, but unlike other fund types the members are the trustees and therefore are running the fund for their own benefit. Superannuation Regulated and low taxed savings scheme designed to encourage taxpayers to save for their retirement. Superannuation guarantee payment Compulsory superannuation contribution by employers on behalf of their employees – currently 9% or ordinary time earnings.

Philosophy and purpose of superannuation in Australia Superannuation can be defined as a “regulated and low-taxed savings scheme that is designed to encourage taxpayers to save for their retirement.” Money paid into a superannuation fund accumulates over time and is invested in shares, government bonds, property or other appropriate investments. Superannuation is the most effective investment vehicle for Australian investors to build wealth for retirement.

Philosophy and purpose of superannuation in Australia Preservation ages for accessing superannuation Date of birth Preservation age Before 1 July 1960 55 1 July 1960 – 30 June 1961 56 1 July 1961 – 30 June 1962 57 1 July 1962 – 30 June 1963 58 1 July 1963 – 30 June 1964 59 From 1 July 1964 60

Superannuation Guarantee and Employer Contributions In 1992, the Federal Labor Government revolutionised superannuation with the introduction of the superannuation guarantee charge which made it compulsory for employers to contribute superannuation contributions on behalf of their employees which expanded the coverage of superannuation to most employees. Currently, an employer must pay minimum superannuation contributions for eligible employees of 9% of their ordinary time earnings The superannuation guarantee payment must be paid into a complying superannuation fund, in most cases of the employee’s choice, at least four times a year – the cut off dates are 28 days after each quarter.

Proposed changes to employer contribution The Federal government has identified financial and social equity issues which will increase as Australia’s population continues to age. They have also identified and seek the future benefits of increased private and national savings for the community. As a result, the Federal government intends to increase future retirement savings and incomes by the phased increase of the superannuation guarantee from 9% to 12%. Superannuation Guarantee (Administration) Amendment Act 2012 (Cth) became law on 29 March 2012.

Proposed changes to employer contribution Proposed phased increase of compulsory superannuation contribution by employers Year Rate (%) 2013‐14 9.25 2014‐15 9.5 2015-16 10 2016-17 10.5 2017-18 11 2018-19 11.5 2019-20 12

Encouragement for workers to invest in their own superannuation savings Concessional taxation treatment applies to:- Contributions to funds Superannuation funds Superannuation benefits

How a superannuation fund works The assets within a superannuation fund and the performance of those assets is what determines how the fund performs. It is the responsibility of the trustee of the superannuation fund to choose and manage appropriate investments and to ensure investment choices comply with Superannuation Industry (Supervision) Act 1993 (Cth). A superannuation fund may invest in such assets as:- - cash - term deposits fixed income bonds residential and commercial property Australian and international shares.

Regulation of Superannuation Superannuation is controlled by an enormous tangle of tax and compliance rules governing superannuation trust funds, superannuation fund trustees, contributors, employers and employees. The main legislation is:- Superannuation Industry (Supervision)Act 1993(Cth) (SIS Act) Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regulations) Income Tax Assessment Acts 1936 and 1997 (Cth) Corporations Act 2001(Cth)

Regulation of Superannuation The government agencies responsible for ensuring compliance with and enforcement of the above legislation are the:- Australian Prudential Regulation Authority (APRA) Australian Taxation Office (ATO) Australian Securities and Investment Commission (ASIC).

Types of Superannuation fund There are eight types of superannuation funds: - Accumulation fund Defined Benefit Fund Retail funds Industry Superannuation Fund Public sector funds Corporate Funds Eligible rollover fund Self managed superannuation fund (SMSF)

Types of Superannuation fund Accumulation Fund This is the most common form of fund in Australia. A member’s investment grows or accumulates over time but the value of the final superannuation benefits available depends upon:- the amount of contributions made by the employer the amount of contributions made by the member the earning rate of the fund the amount of fees charged the investment options chosen by the member

Types of Superannuation fund Defined Benefit Fund Defined benefit funds are no longer very common, and those that still exist are frequently closed to new members. Most defined benefit funds are corporate or public sector funds and essentially the employer or the fund takes on the investment risk. A member’s retirement benefits are determined by the fund rules and are usually determined by factors such as:- Age when you retire Final salary at retirement How many years of service the member has provided

Types of Superannuation fund Retail funds Retail funds are usually run by banks or investment companies such as BankersTrust, Colonial Mutual, AMP, National Australia Bank, Commonwealth Bank etc.

Types of Superannuation fund Industry Superannuation Fund Some large industry funds are open for anyone to join but others may be restricted to workers in a particular industry. As the name suggests, industry superannuation funds concentrate on providing not- for- profit, usually low fee superannuation products to workers in particular industries. mainly only benefits members of particular types of industries managed by a trusted group of individuals who are representatives of an industry group or group of industries who direct the members’ monetary contributions to earn through investments the fund is non -profit as there is no shareholders in the group of beneficiaries – industry members only benefit from returns in investments made usually only 5-15 investment options which will meet most member’s needs READ EXAMPLE

Types of Superannuation fund Public sector funds Public sector funds were created for the employees of Federal and State government departments and most are only open to government employees. Key elements include the following:- some employers contribute more than the 9% minimum there will usually be a limited range of investment choices to meet the members’ needs many long-term members have defined benefits, but new members are usually in an accumulation fund generally operate with very low fees profits are placed back into the fund for the benefit of all members

Types of Superannuation fund Corporate Funds A corporate fund is arranged by an employer for its employees. This type of corporate fund will have the narrowest range of investment options for members. Key elements include the following; where the corporate fund is operated by the employer or by an industry fund, all of the profits will be returned to the members where the corporate fund is operated by a retail fund, it will retain some of the profits. the funds are generally low to mid cost for large employers but may be high cost for small employers. most will be accumulation funds.

Types of Superannuation fund Eligible rollover fund An eligible rollover fund (ERF) is a holding account for lost members or inactive members with low account balances. These funds often have low investment returns and high fees so from a member’s perspective it is better to consolidate monies in an ERF with their active superannuation fund.

Types of Superannuation fund Self managed superannuation fund (SMSF) A self managed fund is another way of saving for retirement with the difference being that the members of a SMSF are its trustees and run it for their own benefit. A trustee of the fund is responsible for managing the SMSF according to its trust deed and the laws which apply to it, the pivotal principle being that the SMSF is run for the sole purpose of providing retirement. As with other funds there are significant reporting and record keeping obligations and accessing superannuation benefits is only allowed when ‘preservation age’ is reached and they retire, with some limited exceptions. To contrive a scheme to access superannuation funds early is illegal and fraudulent, and such breach may incur heavy tax and other penalties. The ATO is responsible for regulation and enforcement of compliance for self managed superannuation funds. READ ARTICLE - Being a super fund trustee is no job for amateurs

Regulatory framework of superannuation funds A registrable superannuation entity (RSE) is a regulated superannuation fund or approved deposit fund or a pooled superannuation trust, but does not include a self managed superannuation fund. The superannuation fund is operated by a trustee but to operate a RSE a trustee must hold a registrable superannuation entity licence (RSE licence) under s29C of the SIS Act. A trustee or trustees granted a RSE license may be a constitutional corporation, a body corporate that is not a constitutional corporation or a group of individual trustees.

Regulatory framework of superannuation funds Under s34C of the SIS Act APRA is given the power to set up, monitor, enforce and review a system of ‘prudential standards’ in relation to ‘prudential matters’ concerning RSE activities. A prudential matter is a matter relating to the conduct by an RSE licensee, a RSE or related entity in such as way as to:- protect the interests of the beneficiaries of the RSE meet the reasonable expectations of the beneficiaries of the RSE keep itself in a sound financial position not to cause or promote instability in the Australian financial system the conduct of any of its affairs that are relevant to the RSE with integrity, prudence and professional skill; or the appointment of auditors and actuaries or the carrying out of audits and actuarial investigations.

Trustees Trustee - bears responsibility for the prudent and legal operation of the superannuation fund. The trustee is bound by law to act, honestly, prudently, and make decisions solely for the benefit of members and in the best interests of all members. Trustees must demonstrate to APRA that they have fit and proper people to do this.

The Cooper Review or Super System Review In May 2009 the Federal Government set up the Cooper Review to review the governance, efficiency, structure and operation of Australia’s superannuation system and to provide it with recommendations on how to provide a simpler, safer and more efficient system of superannuation. The final report was released to the public on 5 July 2010.

The Cooper Review or Super System Review Crucial points of the final report included the following:- The superannuation system should still work to provide optimal outcomes for members who do not wish to be engaged. That a new form of default superannuation called ‘MySuper’ should be made available as a ‘simple, well designed product suitable for the majority of workers.

The Cooper Review or Super System Review Response of the federal government A raft of proposed reforms referred to as the ‘Stronger Super Reforms’ centred on adoption of MySuper, SuperStream and enhanced fund governance. Some legislation to bring these reforms into law has been successfully passed, but some reforms are still proposals. Updates are available on both the ATO and APRA websites.

MySuper Default superannuation funds are those funds to which employers make compulsory superannuation contributions for employees who do not choose a fund to receive those contributions. For those employees a default fund is selected by their employer, or nominated through an industrial award or enterprise agreement. Of almost 12 million Australians who currently hold a superannuation account, approximately 80 % have their compulsory superannuation contributions paid into a default superannuation fund.

MySuper Trustees of MySuper products will face higher performance requirements which will be enforced by APRA including a specific duty to deliver value for money as measured by long term net results. If trustees fail to meet these duties, APRA will have the power to revoke their licence. Standardised reporting requirements written in plain English. Ban on entry fees charged to new members.

SuperStream The Cooper report identified significant costs imposed by the lack of efficiency of existing administrative processes. These included:- excessive costs complexity arising from manual processing of money transfers and data the lack of standardised formats and poor and incomplete data SuperStream is the federal government’s response by providing a package of measures designed to improve the productivity of the superannuation system and make it easier to use.