Introduction

Taxation of superannuation contributions

Regulation of superannuation contributions

Taxation of superannuation fund earnings
Taxation of superannuation benefits

Income tax rates

Social security treatment of superannuation

Proposed changes
Endnotes

List of acronyms

Introduction

Superannuation law is detailed and comprehensive, and individual circumstances can drastically alter its general application. This paper has been prepared as a briefing and reference tool only and is not intended for use in providing financial advice. This paper should not be used for determining the tax liability attached to superannuation in any particular case, especially in view of the limited number of considerations that are addressed in a summary document of this kind. Nor should it be used to determine any person’s social security entitlements, or any decision on the level of contributions to make to a superannuation fund or any decision on the choice of any superannuation fund. The author disclaims any liability in relation to any financial decision taken which may be influenced by the content of this paper.

Australia’s retirement income system is based on the so called three pillars:

This paper concentrates on the first two pillars, compulsory and voluntary superannuation contributions, and gives a brief commentary on the interaction of the social security regime with the first two pillars.

Recent changes

Superannuation is a tax-effective investment vehicle⁽¹⁾, but is known for its frequent legislative change, which in turn has lead to increased complexity, mainly due to efforts to ‘grandfather’ existing entitlements from each change. The complexity covers most areas of the superannuation system including prudential regulation, taxation and disclosure regulation. In the 2004–05 financial year various Acts, regulations and other legislative instruments relating to superannuation were passed into law, either introducing policy initiatives or amending existing Acts and regulations in the areas of:

Many of the changes occurring in the superannuation system during 2004–05 were substantial. For example, the co-contributions scheme was significantly expanded, the old work test related restrictions on the ability to make superannuation contributions for persons under 65 years of age have been removed and, from 1 July 2005, those over their preservation age may now receive their superannuation benefits in the form of a complying income stream without having to formally retire from the workforce.

Further, the indexation of financial thresholds each financial year results in numerous changes of these threshold levels.⁽³⁾

This paper, updated for the 2005–06 financial year is designed to provide readers with a ‘ready reckoner’ — a simple, easy to use summary of superannuation taxation and preservation rules, and covers the following topics:

All figures in bold type are thresholds indexed in accordance with legislation governing the amounts that apply in a financial year, and are only current for the 2005–06 financial year. This brief will continue to be updated at the beginning of every financial year.

This brief does not address the roles of the various government agencies that regulate the superannuation industry. However, it should be noted that taxation legislation and regulations, administered by the Australian Taxation Office (ATO), are directed at superannuation funds and their members to collect revenue for the Commonwealth of Australia. The ATO also administers the co-contributions, superannuation guarantee and choice regimes and regulates self managed superannuation funds (SMSFs). Prudential legislation and regulations, administered by the Australian Prudential Regulation Authority (APRA) (except in relation to SMSFs), are directed at safeguarding the assets of superannuation fund members and investors.  Disclosure legislation and regulations, administered by the Australian Securities and Investments Commission (ASIC), are directed at ensuring that fund trustees provide relevant information to superannuation fund members to help them make informed decisions.

Taxation of superannuation contributions

This section explains how superannuation contributions are taxed, the maximum amount of tax-deductible contributions that an employer can make and the tax offsets that apply to certain superannuation contributions.⁽⁴⁾ A superannuation contribution is a payment to a superannuation fund, which is generally concessionally taxed. A ‘tax offset’ is a reduction in tax liability that has the same value to all taxpayers independent of the taxpayer’s marginal tax rate.

Age-based deduction limits

Employer contributions made to a complying superannuation fund or retirement savings account are fully tax deductible to the employer up to the age-based deduction limits.⁽⁵⁾  

Self-employed persons (whose income from an employer is less than 10 per cent of their total income) get a full tax deduction on the first $5 000 of personal contributions plus 75 per cent of the remaining personal contributions up to the age-based deduction limits.⁽⁶⁾ The deduction limits are:

Source: Australian Taxation Office: TD 2005/21

Deductions are restricted for employees aged 70 and over. From 1 July 2002, an employer is entitled to a tax deduction only if contributions have been made within 28 days of the end of the month within which the employee turned 70.⁽⁷⁾

Taxation of contributions

Employer and tax-deductible personal contributions are included in the income of complying superannuation funds and retirement saving accounts and are taxed at a rate of 15 per cent. Generally the personal superannuation contributions an employee may make out of his or her after-tax income are not eligible for a tax deduction and are not included in the income of complying superannuation funds or retirement saving accounts.

Surcharge on contributions

With the passing of the Superannuation Laws Amendment (Abolition of Surcharge) Act 2005, the superannuation contributions surcharge ceased to apply on contributions made after 30 June 2005. However, surcharge will continue to be paid by two groups:

For the first group, surcharge is generally assessed and collected in the first half of the 2005–06 financial year. No further surcharge is payable by this group after the outstanding surcharge amounts have been paid.

Members of defined benefit funds, who are liable to pay surcharge, do not pay it in the year in which the liability arises. Rather, the notional liability is calculated and kept as a charge against their superannuation benefits, when they are eventually paid.

Government co-contribution for low income earners

The Government co-contribution for low income earners fulfils one of the Government’s 2001 election commitments and replaces the Low Income Superannuation Rebate.

From 1 July 2003, a person who is treated as an employee for superannuation guarantee purposes may be entitled to a Government co-contribution. In the 2005–06 year of income, an employee with total income less than $28 000 who makes personal superannuation contributions is eligible for a $1.50 contribution from the Government for every dollar of eligible personal contributions made to a complying superannuation fund.⁽⁸⁾ The maximum amount of eligible personal contributions that the Government will match is $1 000. That is, the Government will contribute $1 500 if an employee with income less than $28 000 makes $1 000 in personal superannuation contributions.

For an employee with a total income between $28 000 and $58 000, the maximum amount of the Government co-contribution is reduced by five cents for every dollar above $28 000. There is no entitlement to the co-contribution once an employee’s total income is $58 000 or more. From the 2007–08 year of income, these thresholds will be indexed in line with full-time adult average weekly ordinary time earnings. The following table sets out the levels of government co-contributions an employee may be paid, by total income and personal contributions made.

Source: Australian Taxation Office Fact Sheet⁽⁹⁾

The lowest amount of co-contribution payable is $20 per financial year. That is, if an employee contributes as little as $1 in personal contributions he or she will receive a co-contribution payment into their superannuation fund of at least $20 for the financial year.⁽¹⁰⁾

The contributions are treated as an un-deducted contribution. This means they are not subject to contributions tax. However, the earnings of the fund on co-contributions amounts are subject to tax (see below).

A significant number of employees have taken advantage of the co-contributions scheme. Already 571 000 low and middle income earners have received the co-contribution during 2004–05 (i.e. in relation to the 2003-04 year) and the latest available figure for the total the amount paid out is about $309m.⁽¹¹⁾

Tax offset for superannuation contributions made for a low income spouse

A contributing spouse is entitled to receive an 18 per cent rebate for contributions made to the superannuation fund or retirement savings account of a spouse (up to a maximum of $3 000 contributions per annum), provided the spouse has an assessable income plus reportable fringe benefits of $10 800 or less per annum. The maximum rebate of $540 phases out on a dollar-for-dollar basis, and is not available when the low income spouse’s assessable income plus reportable fringe benefits is $13 800 or more per annum.

Non-deductible contributions

As part of its 2001 election commitment, the Government promised to introduce reforms to the superannuation system to allow contributions to superannuation accounts for children under the age of 18 and to allow recipients of the first child tax offset (Baby Bonus) to contribute to their superannuation funds. The legislation that introduced these initiatives treats them as undeducted contributions, meaning that the contributor will not be able to claim a tax deduction for the contributions and they will not be entitled to any tax offset. The contributions will not be eligible for the Government co-contribution.⁽¹²⁾

From 1 July 2004, the rules regarding who can make contributions to a superannuation fund were amended so that anyone under 65 years of age can now contribute to a superannuation fund (refer to the section below entitled ‘Removing the work test’). A consequence of this change is that, from 1 July 2004, the provisions for contributions for children and contributions by recipients of the Baby Bonus are no longer necessary. However, specific work tests have to be met before someone can claim a tax deduction for contributions made by or on behalf of a person less than 18 years of age.

Contributions for children

From 1 July 2002 to 30 June 2004, family and friends of a child under the age of 18 were allowed to make undeducted contributions to a superannuation fund on behalf of the child. The maximum amount that could have been contributed for a child over a three year period was $3000 (this limit no longer applies). These contributions do not attract the co-contribution payment.⁽¹³⁾

Regulation of superannuation contributions

The level of superannuation support that an employer is required to provide to employees is prescribed under federal and state industrial awards and the Commonwealth’s superannuation guarantee scheme.

Under award superannuation, the parties (generally unions and employers) are bound by an industrial agreement (or award) to make superannuation contributions to a superannuation fund nominated in the agreement. The level of support is normally not greater than 3 per cent of ordinary time earnings or some other notional earnings base defined in the award and permitted by the Superannuation Guarantee (Administration) Act 1992 (SGA Act).

The superannuation guarantee scheme requires all employers to provide a minimum of 9 per cent superannuation support in each financial year for employees (with limited exceptions). The superannuation guarantee scheme operates in conjunction with award superannuation so that contributions made by an employer in conjunction with an industrial award may be counted towards the employer’s superannuation guarantee obligations using the notional earnings base in the award or ordinary time earnings.

However, from 1 July 2008, employers will not be able to use a notional earnings base to calculate the superannuation guarantee contributions. While they may still use the notional earnings base to satisfy award contributions, all superannuation guarantee contributions will have to be calculated on an employee’s ordinary time earnings.

Quarterly superannuation guarantee

From 1 July 2003, employers have been required to make superannuation guarantee contributions on a quarterly basis.

Maximum contribution base

Employers who do not make superannuation guarantee contributions are liable for the superannuation guarantee charge. The superannuation guarantee charge is made up of the employer’s superannuation guarantee shortfall (the amount that the employee should have received in superannuation guarantee contributions), an interest (or penalty) component and an administration component (to recover costs incurred by the ATO). When calculating an individual employee’s superannuation guarantee shortfall, the amount of an employee’s salary or wages used to calculate their ‘ordinary time earnings’ in a contribution period is limited to the maximum contribution base, which is $33 720, indexed every March for each quarterly period⁽¹⁴⁾.

Choice of superannuation fund

From 1 July 2005, employees must choose the complying superannuation into which they want to have their superannuation guarantee contributions paid. Where an employee does not choose a superannuation fund, the employer may choose the complying superannuation fund, provided it is an ‘eligible choice fund’. An ‘eligible choice fund’ for an employer is:

However, the Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004 excludes various groups of employees from the coverage of the choice of superannuation fund legislation including:

Choice of superannuation fund will provide more competition for approximately half the people in the workforce who have superannuation.⁽¹⁵⁾ However, partly due to the survey conducted jointly by the ASIC and the Australian Consumers’ Association into the financial planning industry in 2003 showed there are still concerns that there are insufficient controls in place to protect superannuation fund members who are permitted to choose a superannuation fund for their superannuation guarantee contributions from unethical practices similar to those seen in the United Kingdom in the 1990s.⁽¹⁶⁾ ASIC has undertaken a campaign to ensure that financial advisers and other intermediaries are giving correct and relevant information about choosing a superannuation fund.⁽¹⁷⁾ The government has also undertaken an education campaign, established a web site and set up a call centre to ensure that both employers and employees understand what are their obligations and rights under the choice regime.⁽¹⁸⁾

Changes to the Choice Regime

Amongst other things, the Government has announced that it will amend legislation to ensure that employees operating under State Industrial Awards must be offered the choice of superannuation fund from 1 July 2006.⁽¹⁹⁾ Under the provisions of the Superannuation Act 2005 all those joining the Commonwealth Public Service on or after 1 July 2005 will be able to participate in the Choice regime by 1 July 2006 at the latest.⁽²⁰⁾

With the passing of the Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2005 employers will be able to use the ‘Superannuation Holding Account Special Account’ (SHASA) as an eligible choice fund, up to 30 June 2006 (SHASA is closed to new contributions after that date).

Portability

Significant changes have occurred to the Portability regime. Briefly, Portability allows a superannuation fund member to transfer some, or all, of their superannuation fund balances to another superannuation account in their own name. The Government has removed the requirement for a superannuation fund to not have received an employer contribution for the previous 6 months before it can be subject to the portability regulations. Further, defined benefit funds that have an ‘allocated surplus’ in respect of a particular member are also now subject to the Portability regime.⁽²¹⁾ These changes will make it easer to consolidate a person’s multiple superannuation accounts and expand the range of superannuation funds that are subject to the Portability regime.

Removing the work test

Prior to 1 July 2004, a superannuation fund could only accept voluntary contributions for a member if at least one conditions were met.⁽²²⁾ These were:

The first three dot points above were commonly referred to as the ‘work test provisions’.

On 25 February 2004, the Treasurer released A more flexible and adaptable retirement income system⁽²⁴⁾ as part of the ‘Australia’s Demographic Challenges’ announcement.⁽²⁵⁾ Included in the policy announcement was the proposal to remove the work test for anyone under the age of 65. The policy announcement also included the introduction of a work test where a person wants to claim a tax deduction for the contributions made on behalf of a person less than 18 years of age.

Amendments made to the Superannuation Industry (Supervision) Regulations 1994, with effect from 1 July 2004, now allow anyone under 65 years of age to make contributions to a superannuation fund without needing to meet any work test requirements.

Between 65 and 75

A superannuation fund may accept contributions from a person in the following age groups:

For the purposes of these particular rules, being ‘gainfully employed on a part time basis’ during a financial year requires the person to have worked at least 40 hours in a period of not more that 30 consecutive days in that financial year. For example, a person who works 40 hours in a fortnight can make superannuation contributions, within the above age based limits, for the rest of the financial year.⁽²⁷⁾

If a person aged between 65 and 75 continues to work, but does not meet the ‘gainfully employed on a part time basis’ test their superannuation fund may still receive mandated employer contributions made on their behalf (i.e. the SG contributions made by an employer). The consequence of not meeting this test within this age range is that the person themselves cannot make their own contributions to a superannuation fund.

Age 75 and over

If a person is aged 75 or more only mandated employer contributions (e.g. award contributions) can be accepted on behalf of the person by a fund. ⁽²⁸⁾

Taxation of superannuation fund earnings

The assessable income of a complying superannuation fund or retirement savings account, comprising of both the investment earnings and the contributions received, are taxed at a rate of 15 per cent. The capital gains tax discount for superannuation funds is one third of the capital gains included in a superannuation fund’s assessable income. The tax that a superannuation fund pays on its assessable income can be reduced through the use of imputation credits and other deductions such as those related to property investment.⁽²⁹⁾

Funds which are made non-complying are taxed at a rate of 47 per cent on their assessable income, including realised capital gains and taxable contributions. Superannuation funds can be non-complying either through choice or through failing to meet the necessary standards and conditions required under prudential legislation to qualify for tax concessions.

Taxation of superannuation benefits

This section describes the taxation arrangements that apply to superannuation benefits. A superannuation benefit is the amount of money in the superannuation fund or retirement savings account to which the fund member or retirement savings account holder is entitled. Most benefits are payable on termination of employment and will often be subject to preservation (see ‘Preservation rules’ below).

The taxation of superannuation benefits is complex due to changes made on 1 July 1983 and 1 July 1988 aimed at avoiding retrospectivity by applying new taxation treatment to only those portions of benefits attributed to service after 1 July 1983 and 1 July 1988.⁽³⁰⁾

Eligible termination payments

Eligible termination payments are lump sums usually paid on retirement or resignation from a job and include ‘golden handshakes’ as well as lump sum payments from superannuation funds, approved deposit funds, and retirement savings accounts. Eligible termination payments are taxed differently from other income.

Eligible termination payments can be made up of several components (although not all eligible termination payments have every component). Each component of an eligible termination payment is taxed in a different manner and may be subject to various rebates.

The various components of an eligible termination payment and their respective taxation treatment are provided in the following table:

Sources: Chapter 18 CCH Master Superannuation Guide 2004–05 and ATO Taxation Determination TD 2005/21

Reasonable benefit limits

The amount of concessionally taxed superannuation benefits a person is allowed to receive over his or her lifetime is limited by reasonable benefit limits. The table below shows the lump sum and pension reasonable benefit limits. The pension reasonable benefit limit is available provided that at least 50 per cent of the total benefit received by a person is taken in the form of a pension or annuity that satisfies the pension and annuity standards.

Source: Australian Taxation Office: TD 2005/21

Bona fide redundancy payments

From 1 July 1994, a limit was set on redundancy and early retirement payments. Amounts within the limit are exempt from tax. For the 2005–06 year of income the limit is $6 491 plus $3 246 for each year of completed service (source: Australian Taxation Office TD 2005/21).

Death benefits

All death benefits paid on or after 1 July 1994 are subject to pension reasonable benefit limits. Death benefit payments made directly to the dependants of a deceased member are exempt from tax up to the deceased person’s pension reasonable benefit limit. When paid to a person other than a dependant, death benefit payments become eligible termination payments. The post-June 1983 death benefit eligible termination payment is taxed at 15 per cent if paid from a taxed source and 30 per cent if paid from an untaxed source up to the deceased person’s pension reasonable benefit limit. Any amount above the deceased person’s pension reasonable benefit limit is treated as an excessive component and is taxed at 38 per cent or 47 per cent depending on the source of the payment.

From 30 June 2004, the definition of ‘dependant’ was widened to include people living in an interdependent relationship.⁽³²⁾ An ‘interdependent relationship’ exists where the two people involved:

Pension and annuity tax offset

Where a person receives an eligible termination payment and uses it to purchase an annuity or pension from a taxed superannuation fund and the person is 55 or more years of age, the person is entitled to a tax offset, at 15 per cent, on the assessable part of the annuity or pension payment that is not in excess of the person’s reasonable benefit limit.

Departing Australia superannuation payments

From 1 July 2002, temporary residents who permanently depart Australia can gain access to their accumulated superannuation. To be eligible for a payment:

The payment of superannuation benefits that qualify as departing Australia superannuation payments are subject to special withholding tax rates to claw back the tax concessions the contributions received when originally paid into the superannuation. These are set out in the Income Tax (Superannuation Payments Withholding Tax) Act 2002 and are as follows:

Income tax rates

Individual income tax rates are relevant to calculating an individual’s superannuation entitlement. For example, a fund member who receives an eligible termination payment that contains a non-qualifying component has taxation levied on that component at the member’s marginal income tax rate. In addition, if a fund member has an eligible termination payment that contains a concessional component, 5 per cent of that component is taxed at the member’s marginal income tax rate. The marginal income tax rates for the 2005–06 year of income are in the following table:

Source: Budget Paper No. 1, 2005–06, Statement 5, Table B1: Personal Income Tax Rates

The marginal income tax rates set out above apply to Australian residents and do not include the Medicare levy, which is generally 1.5 per cent. These standard tax rates can be offset by a range of concessional arrangements, including:

Not all of the tax offsets will apply to every taxpayer.

Preservation rules

‘Preservation’ refers to the prudential regulatory requirement that certain superannuation benefits be maintained either in a superannuation or rollover fund or retirement savings account until permanent retirement or after the member reaches preservation age.⁽³³⁾ Benefits may be paid on a member’s death or invalidity prior to preservation age.

New preservation rules from 1 July 1999

New preservation rules, administered by APRA and the ATO, took effect from 1 July 1999. These provided that all superannuation contributions (including member contributions) and superannuation fund investment earnings, from that date forward, would be preserved until the member’s preservation age. Pre-1 July 1999, non-preserved components of a member’s superannuation entitlement generally retain their non-preserved status.

Prior to 1 July 1999, some monies held in a member’s superannuation fund account were unpreserved benefits and could be accessed, subject to some restrictions, without having to wait until the member had reached the preservation age and retired from the workforce. An example is member contributions made from after-tax income prior to 1 July 1999 where the member is no longer working for the employer with whom they were employed when he or she made the member contributions.

From 1 July 2004, any employer eligible termination payment rolled over into a superannuation fund or approved deposit fund must be preserved until the member satisfies a condition of release that allows them access to their preserved benefits, such as retiring from the workforce once he or she have reached their preservation age.

Preservation age

‘Preservation age’ is the age at which a fund member can gain access to benefits that have accumulated in a superannuation fund or retirement savings account, provided that the member has permanently retired from the workforce.

The Government announced in the 1997 Budget that the preservation age would be increased from 55 to 60 years on a phased-in basis. By 2025, the preservation age will be 60 years for anyone born after June 1964, with the preservation age being reduced by one year for each year that the person’s birthday is before 1 July 1964. This means that persons born before 1 July 1960 will continue to have a preservation age of 55. The following table summarises the phase-in schedule:

Source: Reg 6.01(2) Superannuation Industry (Supervision) Regulations 1994

Under the new preservation rules, a person will continue to be allowed to have early access to preserved benefits where the benefits are taken in the form of a lifetime pension or lifetime annuity that cannot be turned into a lump sum (i.e. non-commutable) on termination of gainful employment, subject to the governing rules of the fund or retirement savings account. Preserved superannuation benefits can be accessed on compassionate grounds and severe financial hardship.

Accessing superannuation before retirement

From 1 July 2005 a person, who has reached their preservation age, may access their superannuation benefits in the form of a non-commutable income stream without having to retire or leave their current employment. Further, an allocated pension taken under these provisions can be stopped at any time and restarted at a later date.⁽³⁴⁾ These measures were designed to cater for more flexible working arrangements towards the end of a person’s working life.

Compulsory payout of superannuation benefits

From 1 July 2004 a member’s benefits in a superannuation fund must be paid out to that member when:

For the purposes of these particular regulations a member is ‘gainfully employed to a part time equivalent level’ if the member was gainfully employed for at least 240 hours during the previous financial year.⁽³⁶⁾

GST and superannuation

This section summarises how the GST is applied to superannuation funds.⁽³⁷⁾

The GST is a broad–based, value–added tax of 10 per cent on most goods and services supplied in Australia. It has been fully effective from 1 July 2000. (Some contracts entered into before 1 July 2000 are also affected by the GST). The GST is payable on transactions where goods and/or services are supplied for consideration (payment). No business is GST-free; only certain transactions may be classified as such.

In all countries that have a GST–type tax, financial services are given special treatment. This is because of the difficulty in valuing the service provided when there are sums of capital and interest and other earnings in most financial transactions. It is just too hard and uncertain to unscramble the omelette when a fee for service and an interest charge may both be involved in a transaction. Accordingly, financial services are ‘input-taxed’.

Superannuation funds are ‘financial supplies’, meaning that the provision, acquisition, or disposal of an interest in or under a superannuation fund, scheme, approved deposit fund or retirement savings account or in or under an annuity or allocated pension, is a financial supply.⁽³⁸⁾ Accordingly, no GST is payable by superannuation funds in respect of contributed capital and related fees paid by members or employer sponsors as the consideration for the rights or interests of the members in the fund or scheme.

Most of the services provided by superannuation funds are free of GST; that is, they are ‘input taxed financial supplies’. This means that superannuation funds pay GST on many of their purchases (such as computers), do not levy GST on the supplies they make to their ultimate customers (that is, on benefits paid to fund members), and are input–taxed (that is, they are not able to obtain input credit for the GST levied on the goods or services they purchased).

Nonetheless, in some circumstances superannuation funds are eligible for reduced input tax credits. For example, superannuation funds are eligible for reduced refunds of the GST they paid for administration and legal services. In addition, superannuation funds also have to levy GST on their non-‘input tax financial supplies’. For example, superannuation funds are required to levy GST on the supply of premises to commercial property tenants. If a superannuation fund’s turnover (which excludes input-taxed supplies) exceeds $50 000per year, it must register with the ATO for GST purposes. The Government is also encouraging people who manage their own superannuation funds to apply for an ABN to assist with the administration of their fund. Possession of an ABN does not necessarily mean that a superannuation fund is registered for the GST.⁽³⁹⁾

Self managed superannuation funds

This section summarises the main features of a self managed superannuation fund (SMSF).

General rules

A self managed superannuation fund is a fund that:

Because all the members of a self managed superannuation fund are trustees, the fund is not subject to the full range of prudential regulation and supervision. However, trustees of self managed superannuation funds still have to meet a number of obligations:

Some of the key restrictions under the SIS Act applying to SMSFs include:

Self managed superannuation funds are regulated by the ATO.

Growth, assets and numbers

In the March quarter 2005, small superannuation funds (the overwhelming majority of which are self managed superannuation funds) held an estimated $162.8 billion or some 22 per cent of total superannuation assets of $710 billion.⁽⁴⁰⁾

In June 2005 there are over 300,000 active self managed funds in Australia. This equates to approximately 600,000 trustee/members. Approximately 2,000 new funds are established each month, and on average, 200 wound up each month perhaps reflecting the increased understanding of the responsibilities of maintaining such funds.⁽⁴¹⁾

Self managed superannuation funds have the largest proportion of their assets invested in listed shares, but only a small proportion invested directly in international shares. Currently these funds have a much greater proportion of their assets invested in cash than do other superannuation funds. In the 2002 financial year collective SMSF assets were invested as follows:

Source: Australian Taxation Office⁽⁴²⁾

Payment of pensions

A self managed superannuation fund may pay an allocated pension or a term allocated pension (sometimes called a ‘market linked’ pension) to its members.

However, there are restrictions on the ability of a self managed superannuation fund to pay a defined benefit pension:

Social security treatment of superannuation

If a person is eligible to receive a social security pension or benefit, how much they are paid is determined by the application of the income test and assets test. Briefly, a person is assessed under both the income and assets test. The test that produces the lower rate is then applied to determine the rate at which that person is paid.

Assets test

If a person is applying for a benefit or pension, such as Unemployment Benefit or Sole Parent Pension, and they are under Age Pension age (65 years male, 60–65 years for a female depending on date of birth), superannuation in the accumulation stage is exempt from the assets test. Once a claimant reaches Age Pension age, superannuation is included in a person’s asset test assessment.

If the superannuation benefits are taken as an income stream, the particular income stream product purchased with those benefits may be subject to the assets test–depending on the type of product and the date on which was purchased. The following table gives a summary of the asset test treatment of various income stream products, either purchased with superannuation benefits, or arising from superannuation entitlements in public sector superannuation schemes.

Source: Department of Family and Community Services – Guide to Social Security Law⁽⁴⁶⁾

Income test

When a person claims Unemployment Benefit or other working age payment their superannuation in the accumulation stage is exempt from the income test. When a person becomes eligible for the Age Pension their superannuation balances are included in his or her financial assets for social security purposes. These financial assets are assessed as producing income using the relevant social security deeming interest rates.

The income produced by various income streams is assessed under the income test for social security purposes. Briefly, that portion of the income stream that is assessed as the return of a person’s capital, over their average life expectancy, is not assessed as income for social security purposes.⁽⁴⁷⁾

Proposed changes

During the 2001 election campaign, the Government proposed a number of reforms to superannuation.⁽⁴⁸⁾ The last major commitment to be legislated is the splitting of superannuation contributions between spouses. Legislation for this commitment was introduced into Parliament on 11 September 2003 and was awaiting debate in the Senate when the federal election was called in August 2004.

The Government reconfirmed its intention to reintroduce this legislation in the 2005–06 Budget. A significant departure from the previous Bill is that the ability to split contributions with a spouse will be voluntary for superannuation funds. Under the proposal in the Budget papers, a superannuation fund trustee may refuse a member’s request to split superannuation contributions with his or her spouse.⁽⁴⁹⁾ In the now lapsed Bill, a fund trustee had to split a member’s contributions with his or her spouse if the member so required it.

Other announced, but not yet legislated, changes in the superannuation area include:

Endnotes

1. The value of the superannuation tax concessions to low income earners, that is, those subject to a marginal tax rate of either 17 (now 15) per cent or 30 per cent, has been questioned by some experts. Refer to: David Knox, ‘Is superannuation really taxed concessionally?’ Journal of the Securities Institute of Australia (JASSA), Spring 2003, pp. 28–30. When looking at the whole taxation impact on superannuation contributions and periods of low or negative earnings compared to other forms of investment, there is evidence that this proposition has some merit. However, these studies are often limited by the models used to generate the results and may not address all the possibilities or benefits available to taxpayers. In the 2005–06 year estimated superannuation related tax expenditures will be about $14.05 billion See Treasury, 2004 Tax Expenditures Statement, Appendix B: Concessional taxation of Funded Superannuation, January 2005, p. 165.

2. Including the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS) and from 1 July 2005 the Public Sector Superannuation Scheme Accumulation Plan,.

3. In the tax, superannuation and welfare systems, ‘financial thresholds’ are the levels of income at which benefits provided under those systems are phased out (reduced) or cease to be available to potential beneficiaries.

4. ‘Tax offsets’ is the generic term used by the Australian Taxation Office to refer to tax offsets, tax rebates and tax credits.

5. A complying superannuation fund qualifies for concessional tax rates. It is regulated under the Superannuation Industry (Supervision) Act 1993. Retirement savings accounts are simple low-cost, low-risk superannuation products offered by life insurance companies, banks, building societies and credit unions. They are regulated under the Retirement Savings Account Act 1997 and have the same tax treatment as superannuation.

6. Income for the purpose of determining age-based deduction limits includes reportable fringe benefits. The limits for self-employed persons was increased from $3 000 to $5 000 as part of amendments to the Income Tax Assessment Act 1936 by the Taxation Laws Amendment (Superannuation) Act (No. 2) 2002, with effect from 1 July 2002. For self-employed people in the 2005–06 year of income, the contributions required to be able to claim as a deduction the full age-based limit are:
   age under 35—$17 80
   age 35 to 49—$52 341
   age 50 and over—$132 449.

7. Section 26–80(2)(b) Income Tax Assessment Act 1997

8. ‘Total income of a year of income’ is defined in section 8 of the Superannuation (Government Co-Contribution for Low Income Earners) Act 2003 as being the person’s assessable income for the year of income and his or her reportable fringe benefits for the year of income.

9. ATO Fact Sheet: Super Co-Contribution–How to give your super a helping hand – how does it work? See http://www.ato.gov.au/super/content.asp?doc=/content/42616.htm&page=4&H4 (accessed 7 February 2005).

10. Section 11, Superannuation (Government Co-contributions for Low Income Earners) Act 2003.

11. The Hon. Mal Brough, Minister for Revenue and Assistant Treasurer, Press Release, $309 Million Win for Low to Middle Income Earners, No 75 of 2005, Tuesday 6 September 2005.

12. Section 6, Superannuation (Government Co-contribution for Low Income Earners) Act 2003. Generally, contributions made on behalf of children would not qualify that child’s superannuation account to receive a Government co-contribution payment because the child does not make their own personal superannuation contribution or does not have employer supported superannuation or does not put in a tax return .

13. ibid.

14. Australian Taxation Office SGD 2005/1

15. Barrie Dunstan,‘A super fraud masquerading as choice’, Australian Financial Review, 26 June 2004, p. 21.

16. In the 1990s UK authorities opened up the UK private pension in effect introducing its own form of choice of retirement income provider. The result was significant churning of members (moving members from one provider to another to gain commission fees for advisers even if the new provider provided a poor performing and inferior product). The industry faced a compensation bill of almost £12 billion. See Australian Securities and Investments Commission and the Australian Consumers’ Association, ‘Survey on the quality of financial planning advice’, ASIC Research Report, February 2003.Graeme Selleck, ‘Choice of Superannuation Fund, are the Financial Planners Ready?’, Research Note, no. 1, Department of the Parliamentary Library, Canberra, 2003–04.

17. ASIC Press Release, ASIC to go shadow shopping, 05-79, 1 April 2005, at http://www.asic.gov.au/asic/ASIC_PUB.NSF/byid/B8EC0DF7366A8D19CA256FD600181827?opendocument accessed 15 June 2005.

18. The Hon. Mal Brough, Minister for Revenue and Assistant Treasurer, Press Release, Full Steam Ahead to Super Choice on 1 July, no. 016, 14 March 2005.

19. ibid.

20. All post 1 July 2005 Commonwealth public servants will be members of the Public Sector Superannuation Scheme Accumulation Plan (PSSAP). Pre 1 July 2005 Commonwealth public servants may remain in the current Commonwealth defined benefit superannuation funds, but they will not be able to participate in the Choice regime.

21. Superannuation Industry Amendment Regulations 2005 (No. 3). These amendments remove subregulaitons 6.30(3) and (4) from the Superannuation Industry (Supervision) Regulations 1994.

22. ‘Mandated contributions’ are contributions paid to a superannuation fund to meet an employer’s obligation under an award or their superannuation guarantee obligation. 'Un-mandated contributions' are all other contributions made by a member or on behalf of a member to a superannuation fund.

23. To be gainfully employed on a part-time basis, a person had to be employed for at least 10 hours in a week.

24. This document can also be accessed from the Department of the Treasury website at: http://demographics.treasury.gov.au/content/_download/flexible_retirement_income_system/flexible_retirement_income_system.pdf.

25. The press release for A more flexible and adaptable retirement income system can also be accessed at: http://parlinfoweb.aph.gov.au/piweb/repository1/media/pressrel/6mrb61.pdf. The press release and policy document can be accessed at: Australia’s Demographic Challenges — Home.

26. Reg 7.04 Superannuation Industry (Supervision) Regulations 1994.

27. Reg 7.01(3) Superannuation Industry (Supervision) Regulations 1994.

28. Reg 7.04 Superannuation Industry (Supervision) Regulations 1994.

29. Imputation credits form part of the dividend imputation system. The Australian Financial Review: Dictionary of Investment Terms describes ‘Imputation Credit’ as Taxation credits which are passed onto shareholders who have received franked dividends in relation to their shareholdings.

30. For more information on the evolution of the taxation of superannuation, refer to Michael Reid, ‘Supercalifragilisticexpiannuation—A Plain English Guide to Australian Superannuation Arrangements’, Background Paper, no. 23, Department of the Parliamentary Library, Canberra, 1994.

31. The low rate eligible termination payment threshold ($129 751 for the 2005–06 year of income) is a lifetime threshold for determining the maximum rate of tax applicable to the post-June 1983 component (regardless of whether the benefit is derived from a taxed or untaxed source) of all eligible termination payments received by a taxpayer at age 55 years or over.

32. This includes people in a same-sex relationship where they meet the definition of interdependent relationship.

33. These prudential regulatory requirements are set out in the Superannuation Industry (Supervision) Act 1993 and Regulations 6.18 and 6.19 and Part 1 of Schedule 1 of the Superannuation Industry (Supervision) Regulations 1994.

34. Superannuation Industry (Supervision) Amendment Regulations 2005 (No. 2) and Retirement Savings Accounts Amendment Regulations 2005 (No. 1). Any type of income stream can be taken under these provisions, including allocated pensions or market linked pensions. However, they are non-commutable until the person has reached 65 and retired.

35. Reg 6.21(1) Superannuation Industry (Supervision) Regulations 1994.

36. Reg 6.21(6) Superannuation Industry (Supervision) Regulations 1994.

37. For more details, see the Association of Superannuation Funds of Australia and the GST Start–Up Office, The Goods and Services Tax and the Superannuation Industry Workbook, January 1999, website at: http://www.superannuation.asn.au/gst/rpm.cfm?page=workbk.

38. s is set out in regulation 40–13 of A New Tax System (Goods and Services Tax) Regulations 1999.

39. See The New Tax System Advisory Board media release, Self Managed Super Funds Should Apply for an ABN Now, 28 May 2000.

40. APRA, Statistics, Quarterly Superannuation Performance, March 2005, 14 July 2005, p. 7.

41. Mark Jackson, Deputy Commissioner for Superannuation, Australian Taxation Office, Speech to the Public Accountants Convention 2005, CPA Australia, Geelong,17 June 2005.

42. Australian Tax Office, Fact Sheet, DIY super – Its your money - but not yet: self managed superannuation funds in context, 8 September 2005.

43. Reg 9.041 Superannuation Industry (Supervision) Regulations 1994. and ATO Fact Sheet, Self Managed Superannuation Funds and Pensions, 31 May 2005.

44. The Hon Mal Brough, Minister for Revenue and Assistant Treasurer, Press Release, Extension of Transitional Arrangements for Small Funds, No. 049, 6 June 2005 and Reg 9.041 Superannuation Industry (Supervision) Regulations 1994 and Superannuation Industry (Supervision) Amendment Regulations 2005 (No. 4), which amends Reg 9.041(3) to allow a SMSF to commence to pay a defined benefit pension in certain circumstances before 1 July 2006.

45. ATO Superannuation Determination, SD 2004/1, Superannuation: can a self managed superannuation fund provide a defined benefit pension?, at http://law.ato.gov.au/pdf/sd04-001.pdf, accessed 16 June 2005.

46. Department of Family & Community Services: ‘Guide to Social Security Law, Part 4.9.2’, at http://www.facs.gov.au/guide/ssguide/492.htm (accessed 7 February 2005).

47. See Family and Community Services: Guide to Social Security Law – Part 4.9.2.30 – Income Test Assessment of Asset Test Exempt Income Streams, at http://www.facs.gov.au/guide/ssguide/49230.htm (accessed on 7 February 2005) and FaCS – Guide to Social Security Law – Part 4.9.3.30 – Income Test Assessment of Asset Tested Income Streams at http://www.facs.gov.au/guide/ssguide/49330.htm (accessed 7 February 2005).

48. Liberal Party of Australia, A Better Superannuation System, November 2001.

49. Budget Paper No. 2 2005–06, p. 32.

50. See Budget Paper No. 2 2005–06, pp.32–35.