1. Financial Planning in Australia: Advice and Wealth Management 6TH EDITION Sharon Taylor Roger Juchau Financial Planning in Australia: Advice and Wealth Management 6TH EDITION Sharon Taylor Roger Juchau

2. © Reed International Books Australia Pty Limited trading as LexisNexis Chapter Twelve Investing in Superannuation

3. © Reed International Books Australia Pty Limited trading as LexisNexis In Australia, superannuation encourages a person to save for retirement or for other similar events in an environment that provides significant tax benefits. The tax advantages of superannuation allow people to accumulate a greater amount than if they had made the same investments in their own name. If you ‘invest’ in superannuation, contributions are made on your behalf to a superannuation fund. Those contributions are invested by the fund to earn income so that, by the time retirement takes place, a person will have a greater amount to live on after they have ceased working. Investing in Superannuation Introduction

4. © Reed International Books Australia Pty Limited trading as LexisNexis Proportion of income earned immediately before retirement and calculate its equivalent value based on the time that the person is expected to be retired. Estimate the amount required to satisfy a person’s lifestyle needs during retirement and discount those costs to an estimated retirement date. Investing in Superannuation Methods to estimate retirement needs

5. © Reed International Books Australia Pty Limited trading as LexisNexis The contributions stage — payment of amounts to the fund for a member; The accumulation stage — investment of contributions on which income is earned; The benefit stage — withdrawal of lump sums and pensions for a member during their life or by their dependants in the event of the member’s death. Investing in Superannuation Stages to the retirement savings cycle

6. © Reed International Books Australia Pty Limited trading as LexisNexis By using the tax concessions available for superannuation, a financial planner can ensure the amount accumulated for retirement is greater than if the same investments had been made in other ways. For example, tax-deductible contributions to superannuation are taxed in the fund at the rate of 15%. If the amount were paid to an employee as salary and wages, tax may be payable at personal tax rates of up to 47%, including Medicare. Investing in Superannuation Advantages of Superannuation for investing

7. © Reed International Books Australia Pty Limited trading as LexisNexis The principal legislation that applies to superannuation and financial planning are: – Income Tax Assessment Act 1997(Cth) (ITAA 97); – Corporations Act 2001 (Cth) (Corporations Act); and – Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). Investing in Superannuation Superannuation Legislation

8. © Reed International Books Australia Pty Limited trading as LexisNexis Under the SIS Act, it is necessary for a superannuation fund to have a trustee and for the fund to elect to be a regulated fund. Not everyone can be a trustee or a director of a company that is the trustee of the superannuation fund. It is not possible for anyone who: – is under 18; – lacks the ability to manage their own affairs; – has been found guilty of dishonesty; – is bankrupt; – has been penalised under the SIS Act and related regulations, to act as a trustee; or – director of the trustee company of any superannuation fund. Investing in Superannuation Requirement to have a Trustee

9. © Reed International Books Australia Pty Limited trading as LexisNexis One of the first requirements for a fund to become regulated under the SIS legislation is for the trustee to make an election that the fund is to be a regulated superannuation fund and lodge it with APRA. In the case of a self-managed superannuation fund the trustee’s election is to be lodged with the ATO. The election is irrevocable and binds the trustee to comply with the provisions of the SIS Act at all times. Investing in Superannuation Requirement to be regulated

10. © Reed International Books Australia Pty Limited trading as LexisNexis Investing in Superannuation Superannuation Fund Covenants

11. © Reed International Books Australia Pty Limited trading as LexisNexis The SIS legislation requires trustees to make investments in line with an investment strategy which takes into account the objectives of the fund. An investment strategy for the fund consists of the following three elements: – that the investment objectives and strategy are recorded in the minutes of the trustee meetings; – that the trustee carries out the investment strategy and invests the money of the superannuation fund money; and – that the trustee outlines the details of the final investment strategy and objectives to members in the regular fund report. Investing in Superannuation Investment Strategy

12. © Reed International Books Australia Pty Limited trading as LexisNexis A superannuation fund is required to be established and maintained solely for superannuation purposes (the sole purpose test). The term ‘superannuation purposes’ covers the provision of benefits to a member before or after retirement from gainful employment or attaining a particular age (age 65), whichever occurs earlier. It also covers benefits paid to a member’s dependants or legal personal representative on the member’s death. Investing in Superannuation Sole Purpose Test

13. © Reed International Books Australia Pty Limited trading as LexisNexis Funds are required to have adequate records and systems Disclosure provisions require that trustees report to members: – before a person joins a fund in the case of funds that are offered to the public; – when a person joins a fund that is not offered to the public; – regularly; – when certain significant events occur; – on request by the member or an interested party; and – when a member leaves the fund. Investing in Superannuation Other Requirements of Funds

14. © Reed International Books Australia Pty Limited trading as LexisNexis Under the SIS legislation there are five basic classifications: – industry funds; – standard employer-sponsored funds; – public sector funds; – retail funds; and – small superannuation funds (small APRA funds and self- managed superannuation funds). Investing in Superannuation Types of Funds

15. © Reed International Books Australia Pty Limited trading as LexisNexis Investing in Superannuation Advantages of using an SMSF

16. © Reed International Books Australia Pty Limited trading as LexisNexis Investing in Superannuation Disadvantages of using an SMSF

17. © Reed International Books Australia Pty Limited trading as LexisNexis A superannuation fund is prohibited from making more than a modest level of investment with ‘related parties’. These investments are called ‘in-house assets’. The rule ensures that most of the fund’s investments are made on commercial terms. Investing in Superannuation In-house asset rules

18. © Reed International Books Australia Pty Limited trading as LexisNexis The maximum value of a fund’s in-house assets is not permitted to exceed 5% of the market value of the fund’s total assets. Where a superannuation fund breaches the in-house asset 5% rule, the trustees must take action to correct the position, otherwise they will expose themselves to penalties under the SIS Act. Investing in Superannuation In-house asset rules

19. © Reed International Books Australia Pty Limited trading as LexisNexis There are limited exceptions to this rule for funds with less than five members. The exception permits the trustees of a fund to acquire an asset from a related party if the asset is: – any real estate which is used wholly and exclusively in a business — the fund can; – acquire property equal to 100% of the value of its assets; – providing the fund a listed security — for example, a share in a company listed on a stock exchange; – a unit in a widely-held unit trust; – certain insurance policies; and – an in-house asset providing the fund will not breach the in-house asset ratio after its acquisition. Investing in Superannuation Exemptions

20. © Reed International Books Australia Pty Limited trading as LexisNexis The rules apply from 1 July 2011 to all new collectables, artwork and personal use assets acquired by an SMSF. All existing collectables, artwork and personal use assets must comply with the requirements of the new rules by 1 July 2012 or the fund must dispose of them. Investing in Superannuation Collectables and Artwork

21. © Reed International Books Australia Pty Limited trading as LexisNexis The restrictions specify that the investments cannot: – be leased to, or be part of a lease arrangement with, a related party such as a fund; – member, relative of a member or a related company, trust or partnership; – be used by a related party; and – be stored in a private residence of a related party. Investing in Superannuation Collectables and Artwork

22. © Reed International Books Australia Pty Limited trading as LexisNexis A contribution to a superannuation fund or RSA is usually an amount of cash which is paid to the fund and credited to an account held in the name of the member. Investing in Superannuation Contributions

23. © Reed International Books Australia Pty Limited trading as LexisNexis The most important considerations of a financial planner in advising a client about superannuation contributions are: – what is meant by ‘contributions’ to a superannuation fund; – whether the contribution can be accepted by the fund; Investing in Superannuation Contributions

24. © Reed International Books Australia Pty Limited trading as LexisNexis – the tax deductibility of the contribution; – the advantages of salary sacrificing to superannuation; – the ability to split contributions to the client’s spouse; – the impact of any excess contributions taxes on the client; and – availability of the co-contribution or tax off sets for the relevant contribution. Investing in Superannuation Contributions

25. © Reed International Books Australia Pty Limited trading as LexisNexis Spouse contributions - where a partner contributes to superannuation for their spouse they may be entitled to a tax offset for the contribution Child contributions - where a contributions is made for a child under 18 it will not be a taxable contribution in the superannuation fund Concessional contributions - a concessional contribution is a tax deductible contribution made by an employer or a contribution made by an individual for themselves or, in some circumstances, for another person. Investing in Superannuation Contributions

26. © Reed International Books Australia Pty Limited trading as LexisNexis Non-concessional contributions - are generally amounts contributed to the superannuation fund which are not tax deductible. They include personal after tax contributions, contributions made for a child under 18 or for someone’s spouse. Employer contributions - an employer is permitted a tax deduction for superannuation contributions made for employees or, in certain circumstances, previous employees. Salary sacrifice contributions - many employees make agreements with their employer to have part of their salary paid for various purposes before tax has been deducted. Investing in Superannuation Contributions

27. © Reed International Books Australia Pty Limited trading as LexisNexis It is useful for most people to salary sacrifice up to the concessional contributions cap of $30,000 because it can provide the most effective tax benefit. While it is possible to salary sacrifice to superannuation amounts greater than the contributions cap, it is not as tax effective. While salary sacrifice has the benefit of resulting in a lower income tax liability for an employee, it may impact on a person qualifying for other benefits and concessions. Investing in Superannuation Salary Sacrifice

28. © Reed International Books Australia Pty Limited trading as LexisNexis The superannuation guarantee system is regarded as the backbone of Australia’s retirement income system. It was introduced in 1992 to extend superannuation coverage to those not covered by industrial awards and agreements. There is a maximum amount that is required to be contributed for superannuation guarantee purposes. No superannuation guarantee is payable on an employee’s earnings over and above a quarterly amount of $49,430 for the 2014/15 financial year. Investing in Superannuation Superannuation Guarantee

29. © Reed International Books Australia Pty Limited trading as LexisNexis An employer is a person or entity that employs workers under a contract for employment and may include: – a sole trade; – partnership; – company; – corporation; – trust; – public authority; – a government; or – or an individual Investing in Superannuation Who is an Employer?

30. © Reed International Books Australia Pty Limited trading as LexisNexis Also considered employers for superannuation guarantee purposes are: – the Commonwealth, state and territory governments; – non-resident employers who employ staff in Australia; and – non-profit organisations that are exempt from tax. Investing in Superannuation Who is an Employer?

31. © Reed International Books Australia Pty Limited trading as LexisNexis An employee is taken to be a person who works for an employer in the traditional sense in a master– servant relationship. However, the meaning of employee is extended to include: – contractors who are engaged principally for their labour; – directors of companies; – members of parliament; and – artists and sportspersons. Investing in Superannuation Who is an Employee?

32. © Reed International Books Australia Pty Limited trading as LexisNexis Employers are not obliged to provide superannuation for particular employees. These include: – an employee who earns less than $450 in a calendar month; – employees who are under 18 and work no more than 30 hours each week; – employees who are older than 70; – part-time domestic workers who work less than 30 hours each week; – members of the Defence Reserve Forces; – Australian residents who are employed overseas; and – non-resident executives who work in Australia for short periods. Investing in Superannuation Employees outside the Superannuation Guarantee Scheme

33. © Reed International Books Australia Pty Limited trading as LexisNexis Under the legislation, the amount of contributions to be made to a fund is the contribution percentage multiplied by the person’s ordinary time earnings. Ordinary time earnings are the total earnings paid to an employee for ordinary hours of work. This may include over-award payments, shift- loadings and commissions. It does not include overtime and payments in lieu of leave as these payments are not made for the ordinary hours that are worked by the employee. Investing in Superannuation Ordinary Time Earnings (OTE)

34. © Reed International Books Australia Pty Limited trading as LexisNexis All contributions which are to count for superannuation guarantee purposes must be made 28 days after the end of each quarter (i.e. 28 October, 28 January, 28 April and 28 July). If contributions are not made within these deadlines the employer is liable to pay the Superannuation Guarantee Charge. Investing in Superannuation Timing of Superannuation Guarantee Payments

35. © Reed International Books Australia Pty Limited trading as LexisNexis The superannuation guarantee charge has three components: – the total amount of the superannuation guarantee shortfall for each employee if it has not been paid prior to the time the ATO is required to be notified; – an interest charge equal to 10% per annum of the superannuation guarantee shortfall component from the beginning of the contribution period until the time the payment is made to the ATO; and – an administration fee of $20 per employee per quarter. Investing in Superannuation Superannuation Guarantee Charge

36. © Reed International Books Australia Pty Limited trading as LexisNexis An RSA is an account held by a bank and other approved organisations in the name of an individual which pays benefits on the retirement, invalidity or death of the account holder or in other approved circumstances. As a general rule, the balance in the account is capital guaranteed. Investing in Superannuation Retirement Savings Account

37. © Reed International Books Australia Pty Limited trading as LexisNexis An employer is required to provide a written offer to all new employees within 28 days of commencing employment. The written information provided by the employer must include: – advice that the employee has the opportunity to choose a suitable fund; – the date of the advice and the date by which the employer must be notified of the employee’s choice of fund; Investing in Superannuation Choice of Fund

38. © Reed International Books Australia Pty Limited trading as LexisNexis – the name of the employer’s default fund to which contributions will be made if the employee doesn’t choose a fund and contact information about the default fund (e.g. the default fund’s insured death benefit); and – if the employee’s fund is a defined benefits fund, information must be provided about the effect of the employee choosing another fund. Investing in Superannuation Choice of Fund

39. © Reed International Books Australia Pty Limited trading as LexisNexis A tax deduction is available for individuals who are able to contribute to superannuation and meet certain additional conditions. Those conditions are: – the contribution must be made to a complying superannuation fund; – that the 10% rule is satisfied; – if the contributor is under age 18 at the end of the year of income, that they must have earned income from carrying on a business or from being employed — for example, self- employed; Investing in Superannuation Personal Contributions

40. © Reed International Books Australia Pty Limited trading as LexisNexis – the contribution has been made before the 28th day in the month after the person has reached age 75; – a written notice has been given to the trustee of the fund that the individual intends to claim a deduction and the amount of the contribution to be claimed; and – the election has been acknowledged by the fund’s trustee. Investing in Superannuation Cont.

41. © Reed International Books Australia Pty Limited trading as LexisNexis The rule determines the amount of a person’s income that has been earned from employment sources. If contributions from employment sources is less than 10% of the person’s total adjusted income from all sources, the 10% rule will be satisfied. If the amount earned from employment sources is at least 10% of total adjusted income the person will not qualify for a tax deductible personal superannuation contribution. Investing in Superannuation 10% Rule

42. © Reed International Books Australia Pty Limited trading as LexisNexis If a person contributes to superannuation from their after-tax income or their personal savings, they may be eligible for the government’s co-contribution. To be eligible for the co-contribution, a person must: – earn less than $49,488 (which is the person’s net assessable income plus reportable fringe benefits plus reportable employer superannuation contributions); – be under 71; and – make a superannuation contribution to a complying fund; Investing in Superannuation Government Co-contributions

43. © Reed International Books Australia Pty Limited trading as LexisNexis – lodge an income tax return for the income tax year in which the co-contribution is being claimed; – not hold a temporary resident’s visa; and – earn at least 10% of their net assessable income plus reportable fringe benefits from employment as an employee and/or from self-employment. Investing in Superannuation Cont.

44. © Reed International Books Australia Pty Limited trading as LexisNexis To be eligible for the LISC a person: – must have made personal deductible superannuation contributions or their employer must have contributed for them to a complying superannuation fund; – must have earned an actual or adjusted taxable income of no more than $37,000 in a financial year; – must have provided their TFN to the superannuation fund otherwise the fund is unable to accept the LISC; Investing in Superannuation Low Income Superannuation Contribution

45. © Reed International Books Australia Pty Limited trading as LexisNexis To be eligible for the LISC a person: – was not the holder of temporary resident visa at any time during the financial year. The exception to this is that New Zealand citizens are eligible for the LISC; and – has 10% or more of their total income from business and/or employment if they lodge an income tax return or, if they do not lodge an income tax return, then 10% or more of their income comes from employment. Investing in Superannuation Low Income Superannuation Contribution

46. © Reed International Books Australia Pty Limited trading as LexisNexis The maximum tax offset is equal to 18% of the contribution made for the spouse up to a maximum offset of $540 (this equates to a contribution of $3,000). The full offset is available for a spouse who earns less than $10,800. A reduced tax offset applies to incomes of between $10,800 and $13,800. No tax offset is available where the partner earns more than $13,800. Investing in Superannuation Low Income Spouse Tax Offset

47. © Reed International Books Australia Pty Limited trading as LexisNexis Recognises the fact that some small business owners consider the proceeds from the sale of assets in their business as a resource to provide for their retirement. The amount from the small business CGT concession that can be transferred to superannuation for the 2014/15 financial year is $1.355 million (indexed). Investing in Superannuation CGT Cap

48. © Reed International Books Australia Pty Limited trading as LexisNexis If a person’s concessional, and non-concessional, contributions are in excess of the relevant caps, then a penalty tax at the persons marginal rate could be applied to the excess concessional contribution and 47% plus an interest component could be payable on excess non-concessional contributions. The tax payable on the excess is in addition to the tax payable on concessional contributions of 15%. Investing in Superannuation Excess Concessional and Non-Concessional Contributions

49. © Reed International Books Australia Pty Limited trading as LexisNexis It is possible for a member of a superannuation fund or RSA to split concessional contributions to superannuation that have been made on their behalf with their spouse. The maximum amount of concessional contributions that can be split is 85% of the contribution up to the relevant concessional contributions cap for the member. Investing in Superannuation Splitting

50. © Reed International Books Australia Pty Limited trading as LexisNexis The main financial planning strategies that are useful for superannuation contributions splitting include: – splitting concessional contributions from a spouse who is of Age Pension age to a person who is younger than Age Pension age. This strategy may enable the older person to qualify for or receive increased Centrelink benefits. The amount accumulating in superannuation is counted as an assessable asset once a person reaches Age Pension age; and – splitting concessional contributions to an older spouse. This allows the older spouse who has not retired and is under age 65 to accumulate a greater amount in superannuation that may be drawn down tax free after he or she reaches age 60 and meets a condition of release. Investing in Superannuation Splitting

51. © Reed International Books Australia Pty Limited trading as LexisNexis In this chapter, we have: – examined the role of superannuation in Australia from the point; – awards, industrial agreement, employer superannuation, and contributions made by the individuals; – compliance with the legislation; – types of superannuation funds that are available; – particular stages of the accumulation and drawdown of superannuation benefits; – taxation concessions that are available; – salary sacrifice to superannuation; and – co-contributions and splitting. Investing in Superannuation Summary