Superannuation and Retirement Planning in Australia

1. Financial Planning in Australia 2017 Essentials Edition Sharon Taylor

2. Superannuation and RetirementChapter 12

3. Introduction • 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.

4. Introduction • 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.

5. Introduction • 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.

6. Introduction • Stages to the retirement savings cycle: • 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.

7. Introduction • Advantages of superannuation for investing: • 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.

8. Introduction • 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.

9. Introduction • 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).

10. Superannuation Industry (Supervision) Act 1993 • 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;

11. Superannuation Industry (Supervision) Act 1993 • 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.

12. Requirement to be regulated • 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.

13. Superannuation funds covenants

14. Investment strategy • The SIS legislation requires trustees to make investments in line with an investment strategy which takes into account the objectives of the fund.

15. Investment strategy • 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.

16. Sole purpose test • 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.

17. Sole purpose test • It also covers benefits paid to a member’s dependants or legal personal representative on the member’s death.

18. Other requirements of funds • 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;

19. Other requirements of funds • when certain significant events occur; • on request by the member or an interested party; and • when a member leaves the fund.

20. Types of funds • 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).

21. Operation of superannuation funds - advantages

22. Operation of superannuation funds - advantages

23. Operation of superannuation funds - disadvantages

24. In-house investment • 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.

25. In-house investment • 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.

26. Acquiring assets from members and other ‘related’ parties • 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;

27. Acquiring assets from members and other ‘related’ parties • 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.

28. Limited Recourse Borrowing Arrangement (LRBA) • A superannuation fund is permitted to enter into a borrowing arrangement for purposes of a limited recourse borrowing arrangement (LRBA). • To meet the requirements of the SIS Act, the investment is required to be held in trust (as a bare trust; that is, a trust in which the trustee is passive as they have no duties to perform) until the loan has been repaid.

29. Limited Recourse Borrowing Arrangement (LRBA) • Once the loan has been repaid, the investment can remain in trust or be transferred to the superannuation fund.

30. Collectables and artwork • 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 from 1 July 2012 or the fund must dispose of them.

31. Collectables and artwork • 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.

32. Lump sum benefits • Examples of superannuation lump-sum benefits would include: • lump-sum payments made on the retirement or permanent invalidity of a member of the fund; • the conversion (commutation) of a superannuation pension to a lump sum; • lump sums paid by the superannuation fund because of the member’s severe financial hardship or release on compassionate grounds; and

33. Lump sum benefits • the payment of the residual capital value of a pension by the fund. A residual capital value is the • amount left over after some types of pension, such as fixed-term pensions, have ended.

34. Lump sum benefits • The rate of tax that applies depends on: • the age of the person receiving the payment; • the circumstances in which the payment was received; and • whether one or more of the components is a tax-free component, a taxable component or from a ‘taxed’ or ‘untaxed’ source.

35. Lump sum death benefits • Where the recipient of the death benefit is a non-dependant for tax purposes, such as a child over 25 years, then: • the tax-free component of the death benefit is tax-free; • the taxable component of the payment from a taxed source is taxed at a rate of 15% (plus Medicare levy); and • the taxable component of the payment from an untaxed source is taxed at 30% (plus Medicare levy).

36. Who is a dependant • The rules provide that a person’s spouse and child are also considered to be dependents in all cases. The spouse and child are included in the definition of a dependent, irrespective of whether they are financially dependent on the person for support.

37. Who is a dependant • An interdependency relationship exists where two persons: • have a close personal relationship; • live together; • provide financial support; or • provide domestic support or personal care.

38. Income stream • In Australia people have traditionally preferred to receive lump sum benefits to income streams, such as pensions and annuities. The main reason is that in the past the amount of money saved in the superannuation fund has been relatively small. • The money received at retirement could be used to pay off the house mortgage, buy a new car or go on an overseas trip.

39. Income stream • Another reason was that if the money was spent the retiree could always rely on social security to provide a modest income to live on.

40. Types of pensions under SIS legislation • Under the SIS legislation a superannuation fund is able to provide any type of pension with a range of features. • While many pension types persist from the past under grandfathering arrangements, most new pensions commencing are either: • account based pensions; or • transition to retirement pensions.

41. Types of pensions under SIS legislation • Account Based Pensions • payment of a minimum amount is required annually; • there is no maximum amount that can be drawn; • no residual amount on cessation of the pension; • on death the pension can only be transferred as a pension or lump sum to a dependant as defined for tax purposes or cashed as a lump sum to the pensioner’s estate;

42. Types of pensions under SIS legislation • if the account based pension commences on or after 1 June in any year there is no requirement to make the first pension payment until the next financial year; and • the pension cannot be used as security for borrowing.

43. Types of pensions under SIS legislation • Transition to retirement pensions: • an account based pension that can be commenced by a person prior to retirement before reaching age 65 and after reaching preservation age; • the main restriction on a transition to retirement pension is that it must be paid as an account based pension and there are restrictions placed on converting (commuting) it to a lump sum;

44. Types of pensions under SIS legislation • the calculation of the pension is made in the same way as an account based pension; and • once a condition of release is met, for example, permanent retirement, the transition to retirement pension can be commuted.

45. Taxation of pensions • Under the tax law, all pensions were included in assessable income until 30 June 2007 as they were regarded as income of the person. • However, that position changed from 1 July 2007 and all superannuation pensions, irrespective of their date of commencement, paid from taxed sources to persons who are 60 or older are tax free.

46. Taxation of pensions • Pensions paid from untaxed sources and those paid to people under age 60 continue to be subject to tax.

47. Taxation of pensions • If the pension is taxable, that part which represents the income or taxable component of the pension is included in assessable income for tax purposes. • All taxable pensions paid from taxed sources, paid to a person under age 60, are eligible for a tax offset equal to 15% of the taxed part of the pension.

48. Taxation of pensions • Taxable pensions paid from untaxed sources to a person older than 60 are eligible for an offset equal to 10% of the taxed part of the pension. • Where a person under age 60 receives a taxable pension from an untaxed source then it is fully taxable in a similar way to salary and wages.

49. Summary • particular stages of the accumulation and drawdown of superannuation benefits; • taxation concessions that are available;