1. Financial Planning in Australia
2017 Essentials Edition
Sharon Taylor

2. Investing in Superannuation Chapter 9

3. Superannuation is a very important tool of financial planning.
Overview
Many rules apply to the taxation and operation of superannuation funds.
Superannuation is a very important tool of financial planning.
A well constructed financial plan is the basis of a well-financed retirement.
Financial planners must be able to apply the rules of superannuation to a variety of client circumstances.

4. The need to save for retirement
There are a number of ways people can save for their retirement: for example, a person may invest in shares or property or use the proceeds from the sale of a business, or save for retirement through superannuation.
Superannuation is a long-term savings method designed to provide money to live on in retirement.

5. History
Superannuation in Australia can probably be traced back to the mid-1800s. At that time, superannuation was provided to senior employees of banks and insurance companies.
The large industrial companies began providing superannuation to senior employees in the 1940s.

6. History
It was not until the 1980s that industrial awards required that an employer contribute a minimum amount of superannuation for employees.
Because of the difficulties with enforcing awards and because not all employees were covered by an award, the government introduced the superannuation guarantee system in 1992.

7. Three stages of superannuation
Contributions - the contributions stage usually involves cash being paid into the superannuation fund for its members. Contributions may be made:
by an employer for employees;
by employees;
by people who do not receive superannuation support, for example, self-employed people and those who receive income solely from investments;
for a person’s spouse;

8. by anyone under age 65 (or up to 75 if certain work tests are met); or
Three stages of superannuation
for children under 18;
by anyone under age 65 (or up to 75 if certain work tests are met); or
by the government as a co-contribution.

9. Three stages of superannuation
Accumulation - during the accumulation stage, contributions are invested by the fund trustees for the benefit of members. The trustees of a superannuation fund who have the responsibility for its operation are required to invest the money in the fund. Investments may be in shares, fixed interest investments or property. A financial planner can play an important role to assist the client if the fund allows a choice of investments.

10. Three stages of superannuation
Benefits - the benefits stage occurs when contributions and the income earned by the fund are paid to the member or, if the member has died, to the member’s dependants. The type of benefit which may be paid from the fund depends on the fund rules and the preference of the member or his or her dependants.

11. Benefits may be paid as a lump sum, pension, or a combination of both.
Three stages of superannuation
Benefits may be paid as a lump sum, pension, or a combination of both.
Benefits cannot be paid unless a ‘condition of release’ is met.

12. Superannuation Complaints Tribunal (SCT)
Regulator and Regulations
APRA
ASIC
ATO
Superannuation Complaints Tribunal (SCT)
Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act)

13. the tax deductibility of the contribution;
Superannuation contributions
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.

14. Other types of contributions to superannuation
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

15. Other types of contributions to superannuation
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.

16. Other types of contributions to superannuation
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.

17. Other types of contributions to superannuation
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.

18. Salary sacrifice contributions
It is useful for most people to salary sacrifice up to the concessional contributions cap 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.

19. The superannuation guarantee system
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.

20. Who is an employer?
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

21. Also considered employers for superannuation guarantee purposes are:
Who is an employer?
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.

22. Who is an employer?
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.

23. Employees outside the superannuation guarantee scheme
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;

24. members of the Defence Reserve Forces;
Employees outside the superannuation guarantee scheme
members of the Defence Reserve Forces;
Australian residents who are employed overseas; and
non-resident executives who work in Australia for short periods.

25. This may include over-award payments, shift-loadings and commissions.
Ordinary Time Earnings (OTE)
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.

26. Ordinary Time Earnings (OTE)
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.

27. Timing of payments
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.

28. 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.

29. As a general rule, the balance in the account is capital guaranteed.
Retirement savings account
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.

30. Choice of fund
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;

31. Choice of fund
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.

32. Personal contributions
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;

33. the election has been acknowledged by the fund’s trustee.
Personal contributions
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.

34. The 10% rule
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.

35. The 10% rule
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.

36. Government co-contributions
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.

37. To be eligible for the co-contribution, a person must:
Government co-contributions
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;

38. not hold a temporary resident’s visa; and
Government co-contributions
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.

39. To be eligible for the LISC a person:
Low-income superannuation contribution
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;

40. To be eligible for the LISC a person:
Low-income superannuation contribution
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.

41. The full offset is available for a spouse who earns less than $10,800.
Low-income spouse tax offset
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.

42. CGT gap
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).

43. Excess concessional and non-concessional contributions
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%.

44. Splitting concessional contributions
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.

45. Divorce and superannuation
The splitting of assets and liabilities, including superannuation, on the break-up of a marriage has always been problematic.
However, where superannuation was involved, the law had a number of additional difficulties because superannuation did not form part of the ‘property’ of the marriage.

46. Divorce and superannuation
The reason was that the parties did not own the superannuation because it was under the control of the trustee until the benefits became payable to a member on retirement or invalidity, or to dependants on the member’s death.

47. Divorce and superannuation
The courts have used a number of methods to divide superannuation benefits where either party was a member of a superannuation fund. In some cases superannuation was notionally included in the property to be divided and a calculation made so that an equitable distribution took place.

48. Divorce and superannuation
From late 2002 legislation was introduced so that superannuation forms part of the property of a marriage and can be split between the parties to the marriage.
Under the legislation, couples can split superannuation entitlements by agreement and, if no agreement can be reached, a court order will be made indicating how the property will be split.

49. Divorce and superannuation
The amount split to either partner will depend on the circumstances and the basis of the agreement made.
For example, the agreement may be that one party may decide to take the house and the other the superannuation and other assets.

50. Bankruptcy and superannuation
Superannuation funds enjoy considerable protection from bankruptcy, but transfers made to super with the intent of defeating creditors can be unwound.

51. Superannuation is a very important tool of financial planning.
Summary
Many rules apply to the taxation and operation of superannuation funds.
Superannuation is a very important tool of financial planning.
A well-constructed financial plan is the basis of a well-financed retirement.
Financial planners must be able to apply the rules of superannuation to a variety of client circumstances.