SUPERANNUATION SUPERANNUATION AN OVERVIEW Paper 026-001 CONTENTS Page 1. What Is Superannuation? ... 2
2. A History Of Superannuation In Australia ... 2
3. Why Implement The Superannuation Guarantee Scheme? ... 2
4. How Does Superannuation Work? ... 3
5. Withdrawals From Superannuation Fund ... 4
6. World Class ... 4
SUPERANNUATION
SUPERANNUATION AN OVERVIEW
Paper 026-001
1. What Is Superannuation?
In a nutshell, superannuation is a long term investment in a concessional taxed system designed to help provide for a person’s retirement.
The purpose of superannuation is to provide taxpayers with an income when they retire. It also reduces the burden upon the government via reduced age pension payments and health costs as the life expectancy of Australians is increasing, whilst the workforce participation rate is expected to decrease in line with Australia’s ageing population.
2. A History Of Superannuation In Australia
The name superannuation originated from the practice of governments in Europe who rewarded public servants with an annual allowance or gratuity for life which were know as an annuity and those who received an extra large annuity were said to be superannuated. Hence, a fund that assisted people to become superannuated became known as a superannuation fund.
In Australia, superannuation has been around since the beginning of the 1900’s but mainly to upper management in large corporations, employees in the finance sector, public servants and members of the defence force.
During the 1970’s union members became entitled to superannuation payments due to industrial relation changes and in 1985 more employees become entitled to superannuation payment via the National Wage Case claim under award-based superannuation.
In 1992 superannuation was further changed to ensure virtually all employees were covered under the Superannuation Guarantee Scheme.
3. Why Implement The Superannuation Guarantee Scheme?
Superannuation prior to this scheme was often only applicable, if required, under an award that included superannuation payments and excluded nearly one third of private sector employees. If superannuation was not paid by the employer it was difficult to recover this payment without using legal action via the Arbitration Commission which would prove to be uneconomic for an individual to pursue.
The new scheme essentially created a uniform system which was now enforceable through the Commonwealth government's taxation powers and resulted in all employees being covered by the Superannuation Guarantee Scheme.
Where employers did not voluntarily comply with superannuation payments on a regular basis, the Commonwealth is able to require compliance via a Superannuation Guarantee Charge to the employer on behalf of the employees of that employer who have not been paid their full superannuation entitlements.
This scheme also allowed for a phased-in increase of superannuation rate over a 10 year period from 3% to 9% with payments to be made quarterly in arrears (instead of annually in arrears) which allows employer contributions to be invested sooner and the likelihood of a reduction of unpaid employer contributions.
This scheme also leads to the ability of employees to have a choice, in the majority of situations, as to where their superannuation contributions are made to instead of the default fund nominated by the employer.
4. How Does Superannuation Work?
A superannuation fund is a trust which collects contributions on behalf of its members and then invests those funds to generate income for the benefit of its members in retirement.
A superannuation fund also can provide insurance coverage for its members and limited financial advice.
A superannuation fund can be either:
a defined benefit fund which provides members with a pre-determined benefit based on the member's final salary and the length of service with the employer; or
an accumulation fund where the member’s contributions are based as a percentage of their income. They then bear the burden of risk of the fund’s investment earnings or losses. Superannuation funds can be known as any of the following:
industry funds which are generally considered to be union funds;
retail funds which are run by financial institutions;
employer stand alone funds which are run by an employer for their employees; and
self managed superannuation funds which are directly self controlled by the members. A member of a superannuation fund will contribute money to their superannuation fund via
employer contributions and/or personal contributions. An employer has a compulsory obligation to contribute an amount to an employee's superannuation fund. The employee can also make
contributions to their superannuation fund either by pre-tax via salary sacrifice of income (subject to tax at 15%) or post-tax contributions after income tax has already been paid at their marginal rate. Contributions into a superannuation fund are limited to set amounts on the two types of
contributions:
Concessional contributions are contributions which either an employer or individual claims a tax deduction. These are generally subject to tax at 15%. The amount varies depending upon age and government imposed limits.
Non concessional contributions are contributions which neither the employer nor the individual claims a tax deduction. These are not subject to tax and the amount varies depending upon
If excess contributions are made above an individual’s annual concessional or non concessional contribution limit, then in the majority of situations, this amount will be taxed at 46.5%.
A superannuation fund will, in the majority of circumstances, pay 15% income tax on any income its investment generates. These rates are very generous in order to entice people to put additional funds into their superannuation and help ensure that a sufficient investment is generated over a long period to provide for a member's retirement. This makes superannuation a very attractive investment vehicle for higher income earners and those approaching retirement due to the tax arbitrage between their personal tax rate and those of a superannuation fund.
5. Withdrawals From Superannuation Fund
A withdrawal of funds from a superannuation fund is stipulated in the Superannuation Laws. In most cases you cannot withdraw your superannuation until you reach your "preservation" age, which is, at least, 55 years and can be up to the age of 60, depending on your date of birth.
For anyone born before 1st July 1960, the preservation age is 55 and steadily increases to 60 years of age for those born on or after 1st July 1064.
You might be able to access superannuation at another age if:
you have made a decision to start a "Transition to Retirement Pension" (TRIP)
you're experiencing severe financial hardship
you require the funds for compassionate reasons
you are a non resident and you are leaving Australia permanently
you have a permanent disability
you are temporarily incapacitated
death
You will need to make an application to the fund's trustees. The fund's trustees will probably require professional advice before any earlier withdrawal is approved.
6. World Class
The Australian Superannuation Scheme is considered one of the best in the world and better designed and developed with higher participation rates than those schemes throughout the rest of the world. It is a long term investment vehicle which is taxed at concessional rates in order to encourage Australians to invest and plan for their retirement as well as being an attempt to reduce the future burden of providing an age pension and health costs for the ageing Australian population.
7. Professional Advice
Superannuation is a complicated area and it is recommended that you obtain professional accounting advice.
AN IMPORTANT MESSAGE
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