Superannuation in Australia

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Superannuation in Australia are the arrangements put in place by the Government of Australia to encourage people in Australia to accumulate funds to provide them with an income stream when they retire. Superannuation in Australia is partly compulsory, and is further encouraged by tax benefits. The government has set minimum standards for contributions by employees as well as for the management of superannuation funds. It is compulsory for employers to make superannuation contributions for their employees on top of the employees' wages and salaries. The employer contribution rate has been 9.5% since 1 July 2014, and as of 2015, was planned to increase gradually from 2021 to 12% in 2025. [1] People are also encouraged to supplement compulsory superannuation contributions with voluntary contributions, including diverting their wages or salary income into superannuation contributions under so-called salary sacrifice arrangements.

Government of Australia federal democratic administrative authority of Australia

The Government of Australia is the government of the Commonwealth of Australia, a federal parliamentary constitutional monarchy. It is also commonly referred to as the Australian Government, the Commonwealth Government, Her Majesty's Government, or the Federal Government.

Australia Country in Oceania

Australia, officially the Commonwealth of Australia, is a sovereign country comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands. It is the largest country in Oceania and the world's sixth-largest country by total area. The neighbouring countries are Papua New Guinea, Indonesia, and East Timor to the north; the Solomon Islands and Vanuatu to the north-east; and New Zealand to the south-east. The population of 26 million is highly urbanised and heavily concentrated on the eastern seaboard. Australia's capital is Canberra, and its largest city is Sydney. The country's other major metropolitan areas are Melbourne, Brisbane, Perth, and Adelaide.

Retirement point where a person ceases employment permanently

Retirement is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours.

Contents

An avoidable issue with Australia’s superannuation system is employees failing to consolidate multiple accounts, thus being charged multiple account fees. Of Australia’s 15 million superannuation fund members, 40% have multiple accounts, which collectively costs them $2.6 billion in additional fees each year. The federal budget estimates put the number of unnecessary duplicate accounts at 10 million. Plans are in place to facilitate consolidation of these accounts. [2] An individual can withdraw funds out of a superannuation fund when the person meets one of the conditions of release, such as retirement, terminal medical condition, or permanent incapacity, contained in Schedule 1 of the Superannuation Industry (Supervision) Regulations 1994. [3] As of July 1st, 2018, members have also been able to withdraw voluntary contributions made as part of the First Home Super Saver Scheme (FHSS). [4]

As of 30 June 2018, Australians have AU$2.7 trillion in superannuation assets, making Australia the 4th largest holder of pension fund assets in the world. [5]

Introduction

For many years until 1976, what superannuation arrangements were in place were set up under industrial awards negotiated by the union movement or individual unions.

In Australia, an industrial award is a ruling handed down by either the Fair Work Commission or by a state industrial relations commission which grants all wage earners in one industry or occupation the same minimum pay rates and conditions of employment such as leave entitlements, overtime and shift work, as well as other workplace related conditions. The national awards, with the National Employment Standards, provide a minimum safety net of terms and conditions of employment for all national system employees.

The Australian labour movement began in the early 19th century and since the late 19th century has included industrial and political wings. Trade unions in Australia may be organised on the basis of craft unionism, general unionism, or industrial unionism. Almost all unions in Australia are affiliated with the Australian Council of Trade Unions (ACTU), many of which have undergone a significant process of amalgamations, especially in the late 1980s and early 1990s. The leadership and membership of unions hold and have at other times held a wide range of political views, including communist, socialist and right-wing views.

A change to superannuation arrangements came about in 1983 through an agreement between the government and the trade unions. In the Prices and Incomes Accord, the trade unions agreed to forgo a national 3% pay increase which would be put into the new superannuation system for all employees in Australia. This was matched by employers' contributions[ when? ]. Employers' and employees' contributions were originally[ when? ] set at 3% of the employees' income, and has been gradually increased. [6] Though there is general widespread support for compulsory superannuation today,[ failed verification ] at the time of its introduction it was met with strong resistance by small business groups who were fearful of the burden associated with its implementation and its ongoing costs. [7]

The Prices and Incomes Accord was an agreement between the Australian Council of Trade Unions and the Australian Labor Party government of Prime Minister Bob Hawke and Treasurer Paul Keating in 1983. Employers were not party to the Accord. Unions agreed to restrict wage demands and the government pledged to minimise inflation. The government was also to act on the social wage. At its broadest this concept included increased spending on education as well as welfare.

In 1992, under the Keating Labor Government, the compulsory employer contribution scheme became a part of a wider reform package addressing Australia's retirement income dilemma. It had been demonstrated that Australia, along with many other Western nations, would experience a major demographic shift in the coming decades, of the aging of the population, and it was claimed that this would result in increased age pension payments that would place an unaffordable strain on the Australian economy. The proposed solution was a "three pillars" approach to retirement income: [8]

Keating Government Government of Australia, 1991-1996

The Keating Government was the federal executive government of Australia led by Prime Minister Paul Keating of the Australian Labor Party from 1991 to 1996. The Government followed on from the Hawke Government after Paul Keating replaced Bob Hawke as Labor leader in an internal party leadership challenge in 1991. Together, these two governments are often collectively described as the Hawke-Keating Government. The Keating Government was defeated in the 1996 federal election and was succeeded by the Howard Coalition government.

Population ageing is an increasing median age in the population of a region due to declining fertility rates and/or rising life expectancy. Most countries have rising life expectancy and an ageing population. This is the case for every country in the world except the 18 countries designated as "demographic outliers" by the UN. The aged population is currently at its highest level in human history. The UN predicts the rate of population ageing in the 21st century will exceed that of the previous century. The number of people aged 60 years and over has tripled since 1950, reaching 600 million in 2000 and surpassing 700 million in 2006. It is projected that the combined senior and geriatric population will reach 2.1 billion by 2050. Countries vary significantly in terms of the degree and pace of ageing, and the UN expects populations that began ageing later will have less time to adapt to its implications.

Economy of Australia National economy

The economy of Australia is a large mixed-market economy, with a GDP of A$1.69 trillion as of 2017. In 2018 Australia became the country with the largest median wealth per adult. Australia's total wealth was AUD$8.9 trillion as of June 2016. In 2017, Australia was the 13th-largest national economy by nominal GDP, 20th-largest by PPP-adjusted GDP, and was the 25th-largest goods exporter and 20th-largest goods importer. Australia took the record for the longest run of uninterrupted GDP growth in the developed world with the March 2017 financial quarter, the 103rd quarter and marked 26 years since the country had a technical recession.

The compulsory employer contributions were branded "Superannuation Guarantee" (SG) contributions. [9] [10]

The Keating Labor Government had also intended for there to be a compulsory employee contribution beginning in 1997-98, with employee contributions beginning at 1%, then rising to 2% in 1998-99 and reaching 3% in 1999-2000. [11] However this planned compulsory 3% employee contribution was cancelled by the Howard Liberal Government when it took office in 1996. [12] The employer SG contribution was allowed to continue to rise to 9%, which it did in 2002-03. The Howard Government also limited employer SG contributions from 1 July 2002 to an employee's ordinary time earnings, which includes wages and salaries, as well as bonuses, commissions, shift loading and casual loadings, but does not include overtime paid.

The SG rate was 9% from 2002-03 to 2013-14, when the Rudd-Gillard Labor Government passed legislation[ when? ] to increase SG contributions to 12% by 1 July 2019, as had originally been intended by the Keating Government in 1995. [12] However, the succeeding Abbott Liberal Government deferred[ when? ] the start of this planned increase to the SG by six years, from 1 July 2015 to 1 July 2021. [12] The SG rate has since 1 July 2014 been 9.5% of employee earnings, and after 30 June 2021 the rate is planned to increase by 0.5% each year until it reaches 12% by 2025. [13] [14]

Operation

Employer contributions

Superannuation guarantee contributions

1 JulyMinimum contribution
percentage [15] [16]
19923 / 4*
19933 / 5*
19944 / 5*
19955 / 6*
19966
19987
20008
20029
20139.25
20149.5
202110
202210.5
202311
202411.5
202512

Employers are required to pay superannuation contributions, called "superannuation guarantee" (SG) contributions, to an approved superannuation fund for their employees at 9.5% (as at 2018) of the employees’ “ordinary time earnings”—which generally consists of wages and salaries, commissions, allowances but not overtime. [17] Employers are not required to make employer contributions for employees earning less than $450 per month, nor for employees aged under 18. However, if an under 18 employee earns over $450 per month before tax or works more than 30 hours per week full-time, part-time or casual, the employer is also required to contribute superannuation. Additionally, if employees aged over 70 years work more than 40 hours in a 30-day period, the employer can also pay contributions. Employer contributions are required to be paid on at least a quarterly basis.

Initially, between 1993-1996, a higher contribution rate applied for employers whose annual national payroll for the base year exceeded $1 million, with the employer's minimum superannuation contribution percentage set out in the adjacent table with an asterisk. The contribution rate increased over time. The SG rate was 9.5% on 1 July 2014, and was supposed to increase to 10% on 1 July 2018; and then increase by 0.5% each year until it reached 12% on 1 July 2022. The 2014 federal budget deferred the proposed 2018 SG rate increases by 3 years, with the 9.5% rate remaining until 30 June 2021, and then the rate increasing by 0.5% each following year until the SG rate reaches 12%, on 1 July 2025. [18]

SG employer superannuation contributions are generally tax deductible to the employer and are not part of the taxable income of the employee. They are subject to a 15% tax in the super fund.

“Defined benefit" superannuation schemes

Special rules apply in relation to employers operating "defined benefit" superannuation schemes, which are less common traditional employer funds where benefits are determined by a formula usually based on an employee's final average salary and length of service. Essentially, instead of minimum contributions, employers need to make contributions to provide a minimum level of benefit.

Salary sacrifices contributions

An employee may request that their employer makes all or part of future payments of earnings into superannuation in lieu of making payment to the employee. Such an arrangement is known as "salary sacrifice", and for income tax purposes the payments are treated as employer superannuation contributions, which are generally tax deductible to the employer, and are not subject to the superannuation guarantee (SG) rules. The arrangement offers a benefit to the employee because the amount so sacrificed does not form part of the taxable income of the employee.

For some purposes, however, such contributions are called "reportable superannuation contributions", [19] and for those purposes they are counted back as a benefit of the employee, such as for calculation of "income for Medicare levy surcharge purposes".

To be valid, a salary sacrifice arrangement must be agreed between employer and employee before the work is performed. This agreement is usually documented in writing in pro forma form.

Personal contributions

People can make additional voluntary contributions to their superannuation and receive tax benefits for doing so, subject to limits. The concessional contribution cap for the 2017 2018 financial year is $25,000. For later financial years, the cap is worked out by indexing annually this amount. Amounts above those limits are called "excess concessional contributions".

Carry-forward concessional contributions Unused concessional contributions cap space can be carried forward from 1 July 2018, if the total superannuation balance is less than $500,000 at the end of 30 June in the previous year. Unused amounts are available for a maximum of five years.

Access to superannuation

Employer and personal superannuation contributions are income of the superannuation fund and are invested over the period of the employees' working life and the sum of compulsory and voluntary contributions, plus earnings, less taxes and fees are paid to the person when they retire.

As superannuation is money invested for a person's retirement, strict government rules prevent early access to preserved benefits except in very limited and restricted circumstances, including severe financial hardship or on compassionate grounds, such as for medical treatment not available through Medicare.

Generally, superannuation benefits fall into three categories:

Preserved benefits are benefits that must be retained in a superannuation fund until the employee's 'preservation age'. Currently, all workers must wait until they are at least 55 before they may access these funds. The actual preservation age varies depending on the date of birth of the employee. All contributions made after 1 July 1999 fall into this category.

Restricted non-preserved benefits although not preserved, cannot be accessed until an employee meets a condition of release, such as terminating their employment in an employer superannuation scheme.

Unrestricted non-preserved benefits do not require the fulfilment of a condition of release, and may be accessed upon the request of the worker. For example, where a worker has previously satisfied a condition of release and decided not to access the money in their superannuation fund.

Preservation age and conditions of release

Date of birthPreservation age
Before 1 July 196055
1 July 1960 – 30 June 196156
1 July 1961 – 30 June 196257
1 July 1962 – 30 June 196358
1 July 1963 – 30 June 196459
After 30 June 196460

Benefit payments may be a lump sum or an income stream (pension) or a combination of both, provided the payment is allowed under super law and the fund's trust deed. Withholding tax applies to payments to members who are under 60 or over 60 and the benefit is from an untaxed source. [20] In either case, eligibility for access to preserved benefits depends on a member's preservation age and meeting one of the conditions of release. [21] Until 1999, any Australian could access their preserved benefits once they reached 55 years of age. In 1997, the Howard Liberal Government changed the preservation rules to induce Australians to stay in the workforce for a longer period of time, delaying the effect of population ageing. The new rules progressively increased the preservation age based on a member's date of birth, and came into effect in 1999. The result is that by 2025 all Australian workers would need to be at least 60 years of age to access their superannuation.

To access their super, a member must also meet one of the following "conditions of release". [22] Before age 60, workers must be retired — i.e., cease employment — and sign off that they intend never to work again (not work more than 40 hours in a 30-day period). Those aged 60 to 65 can access super if they cease employment regardless of their future employment intentions, so long as they are not working at the time. Members over 65 years of age can access their super regardless of employment status. Employed individuals who have reached preservation but are under age 65 may access up to 10% of their super under the Transition to Retirement (TRIS) pension rules. [22]

An Australian worker who has transferred funds from their New Zealand KiwiSaver scheme into their Australian superannuation scheme, cannot access the ex-New Zealand portion of their superannuation until they reach the age of 65, regardless of their preservation age. This rule also applies to New Zealand citizens who have transferred funds from their New Zealand Kiwisaver scheme into an Australian superannuation fund.

Reasonable benefit limits

Reasonable benefit limits (RBL) were applied to limit the amount of retirement and termination of employment benefits that individuals may receive over their lifetime at concessional tax rates. [23] There were two types of RBLs - a lump sum RBL and a higher pension RBL. For the financial year ending 30 June 2005, the lump sum RBL was $619,223 and the pension RBL was $1,238,440. [24] RBLs were indexed each year in line with movements in Average Weekly Ordinary Time Earnings published by the Australian Bureau of Statistics. The lump sum RBL applied to most people. Generally, the higher pension RBL applied to people who took 50% or more of their benefits in the form of pensions or annuities that met certain conditions (for example, restrictions on the ability to convert the pension back into a lump sum). [24] RBLs were abolished from 1 July 2007. [25]

Superannuation taxes

Contributions

Contributions made to superannuation, either by an individual or on behalf of an individual, are taxed differently depending on whether that contribution was made from 'pre-tax' or 'post-tax' money. "Pre-tax" contributions are contributions on which no income tax has been paid at time of contribution, and are also known as "before-tax" contributions or as "concessional" contributions. They comprise mainly compulsory employer SG ("Superannuation Guarantee", see above) contributions and additional salary sacrifice contributions. These contributions are taxed by the superannuation fund at a "contributions tax" rate of 15%, which is regarded as "concessional" rate. For individuals who earn more than $250,000, the contributions tax is levied at 30%. [26]

"Post-tax" contributions are also referred to as "after-tax" contributions, "non-concessional" contributions or as "undeducted" contributions. These contributions are made from money on which income tax or contributions tax has already been paid, and typically no further tax is required to be withheld from that contribution when it is made to a fund.

Both contribution types are subject to annual caps. Where the annual cap is exceeded, additional tax is payable, either at the marginal tax rate for concessional contributions, or an additional 31.5% for non-concessional contributions, which is in addition to the standard tax rate of 15% payable on contributions, making a total of 46.5%.

Investments in the fund

Investment earnings of the superannuation fund (i.e. dividends, rental income etc.) are taxed at a flat rate of 15% by the superannuation fund. In addition, where an investment is sold, capital gains tax is payable by the superannuation fund at 15%.

Much like the discount available to individuals and other trusts, a superannuation fund can claim a capital gains tax discount where the investment has been owned for at least 12 months. The discount applicable to superannuation fund is 33%, reducing the effective capital gains tax from 15% to 10%. [27]

These taxes contribute over $6 billion in annual government revenue. [28] Superannuation is a tax-advantaged method of saving as the 15% tax rate on contributions is lower than the rate an employee would have paid if they received the money as income. The federal government announced in its 2006/07 budget that from 1 July 2007, Australians over the age of 60 will face no taxes on withdrawing monies out of their superannuation fund if it is from a taxed source.

Discontinued superannuation surcharge

In 1996, the federal government imposed a "superannuation surcharge" on higher income earners as a temporary revenue measure. During the 2001 election campaign, the Howard Government proposed to reduce the surcharge from 15% to 10.5% over three years. The superannuation surcharge was abolished by the Howard Government from 1 July 2005.

Superannuation co-contribution scheme

From 1 July 2003, the Howard Liberal Government made available incentives of a Government co-contribution with a maximum value of $1,000. [29] From the 2012-2013 financial year to the 2016-2017 financial year, superannuation contributions are available for individuals with income not in excess of $37,000. [30] The Government offsets a maximum of $500 and a minimum of $20, calculated at 15% of a low income earners total superannuation contributions. [31]

As at 1 July 2017, The Low Income Superannuation Contribution (LISC) scheme will be replaced with the renamed Low Income Superannuation Tax Offset (LISTO). [32] Under this new scheme, the minimum amount of Government contributions for low income earners with income not in excess of $37,000 is lowered to $10 but the $500 maximum remains. [33]

Effect on income tax

One of the reasons that people contribute to superannuation is to reduce their income tax liability, and possibly to be able to receive an age pension while still receiving supplementary income.

The following is a general summary of the tax rules relating to superannuation. The full details are extremely complex.

Employer superannuation contributions

Employer superannuation contributions are generally tax deductible if paid to a "complying superannuation fund". This includes compulsory employer contributions as well as "salary sacrifice" contributions. Employees may choose to make additional contributions at the same rate as a "salary sacrifice", but only if their employer agrees to do so.

Taxation of superannuation fund

Employer contributions received by a superannuation fund and income earned in the fund are taxed at the concessional rate of 15%, or more for higher income earners. Additional contributions made without the cooperation of an employer or paid to a non-complying superannuation fund are taxed at the top marginal tax rates and are subject to different rules.

Benefits paid

Income retrieved from the fund by a member after preservation age is generally tax free.

Exceeding the concessional contributions cap

The concessional contribution cap for the 2017-2018 financial year is $25,000. For later financial years, the cap is worked out by indexing annually this amount. Excess concessional contribution (ECC) is included in the assessable income for corresponding income year, and the taxpayer is entitled to a tax offset for that income year equal to 15% of the excess concessional contributions (S 291-15 of the Income Tax Assessment Act 1997). This offset cannot be refunded, transferred, or carried forward.

Excess concessional contribution charge

ECC charge is applied to the additional income tax liability arising due to excess concessional contributions included in the income tax return- Division 95 in Schedule 1 to the Taxation Administration Act 1953. The ECC charge period is calculated from the start of the income year in which the excess concessional contributions were made and ends the day before the tax is due to be paid under the first income tax assessment for that year. The compounding interest formula is applied against the base amount (the additional income tax liability) for each day of the ECC charge period. The ECC charge rates are updated quarterly and for January - March 2019 it is 4.94% per annum.

Concessional contributions and taxable income, exceeding the threshold - Division 293 tax

Division 293 tax (additional tax on concessional contributions) is payable if income for surcharge purposes (other than reportable super contributions), plus concessionally taxed super contributions (also known as low tax contributions) are greater than $250,000. Division 293 tax levies 15% tax on the excess contributions above this threshold.

Non-concessional contributions

Non-concessional contributions include excess concessional contributions for the financial year. They do not include super co-contributions, structured settlements and orders for personal injury or capital gains tax (CGT) related payments that the member has validly elected to exclude from their non-concessional contributions. Non-concessional contributions are made into the super fund from after-tax income. These contributions are not taxed in the super fund. The non-concessional contributions cap is $100,000 for members 65 or over but under 75. Members under 65 years of age will have the option of contributing up to $300,000 over a three-year period depending on their total superannuation balance. If a member’s non-concessional contributions exceed the cap, they are taxed at the top marginal tax rate. [34]

Effect on pensions

Australian resident citizens over 67 years of age are entitled to an age pension if their income and assets are below specified levels. The full pension, as at 2014, was $766 every two weeks for singles and $577.40 each for couples. This reduced by 50% of any income over $160 every two weeks for singles or $284 for couples. The pension may also be reduced for 0.15% of assets other than the home over $202,000 or $286,500 for single or couples. The pension is reduced by the maximum of the income and assets test. Assets may also be deemed to earn between 2% and 3% which is counted towards the income test.[ citation needed ]

Income received from a superannuation fund is considered to be income for pension purposes, and reduces the pension by 50% of the income received that is over the limit. However, if this is received as a "super pension" then the effect on the age pension is discounted by the "cost" of the "super pension". This "cost" is calculated by dividing the total super balance by the life expectancy of the receiver at the time the super pension began. This means that if one withdraws ones super evenly over one's expected life expectancy there is essentially no income test on it. [35]

Assets in a pension fund are deemed to earn income. The assets supporting a "super pension" are also deemed to earn income.[ citation needed ] (It is difficult to find reliable information on this complex subject, and the above should only be taken as a guide and not relied upon.)

Superannuation funds

Trustee structure

Superannuation funds operate as trusts with trustees being responsible for the prudential operation of their funds and in formulating and implementing an investment strategy. Some specific duties and obligations are codified in the Superannuation Industry (Supervision) Act 1993 - other obligations are the subject of general trust law. Trustees are liable under law for breaches of obligations. Superannuation trustees have, inter alia, an obligation to ensure that superannuation monies are invested prudently with consideration given to diversification and liquidity.[ citation needed ]

Investments

Other than a few very specific provisions in the Superannuation Industry (Supervision) Act 1993 (largely related to investments in assets related to the employer) funds are not subject to any asset requirements or investment exposure flaws. There are no minimum rate of return requirements, nor a government guarantee of benefits. There are some minor restrictions on borrowing and the use of derivatives and investments in the shares and property of employer sponsors of funds.

As a result, superannuation funds tend to invest in a wide variety of assets with a mix of duration and risk/return characteristics. The recent investment performance of superannuation funds compares favourably with alternative assets such as ten year bonds.[ citation needed ]

Types of superannuation funds

Share of superannuation industry fund assets. Aus super funds share.png
Share of superannuation industry fund assets.

There are about 500 superannuation funds operating in Australia. Of those, 362 have assets totalling greater than $50 million. Superannuation assets totalled $2.7 trillion at the end of the June 2018 quarter, a new record according to the Association of Superannuation Funds of Australia. [36]

There are seven main types of superannuation funds:

Recent changes to the SIS act has allowed SMSFs to borrow under limited recourse borrowing rules. Banks have now developed SMSF loans catering purely for this change to the ACT and to enable SMSF's to borrow for residential property, commercial property and industrial property, however funds cannot acquire vacant land. There are restrictions placed upon the fund that the trustees of the fund cannot gain a personal advantage from asset acquired by the fund, or purchase from what's known as a 'related party'. For example, you would not be able to live in the home that is owned by your SMSF. SMSF loans are generally available to 70% to 80% of the purchase price and attract a slight margin to the interest rate in comparison to standard loans.

Retail and Wholesale Master Trusts are the largest sector of the Australian Superannuation Market.[ citation needed ]

Choice of superannuation funds

From 1 July 2005, many Australian employees have been able to choose the fund their employer's future superannuation guarantee contributions are paid into. Employees may change a superannuation fund. They may choose to change funds, for example, because: [40]

Where an employee has not elected to choose their own fund, employers must since 1 January 2014 make "default contributions" only into an authorised MySuper product, which is designed to be a simple, low-cost superannuation fund with few, standardised fees and a single balanced investment option.

Superannuation industry

Employment (thousands of persons) in the superannuation industry since 1984 ABS-6291.0.55.003-LabourForceAustraliaDetailedQuarterly-EmployedPersonsByIndustrySubdivisionSex-EmployedTotal-InsuranceSuperannuationFunds-Persons-A2545700F.svg
Employment (thousands of persons) in the superannuation industry since 1984

Legislation

Superannuation funds are principally regulated under the Superannuation Industry (Supervision) Act 1993 and the Financial Services Reform Act 2002. Compulsory employer contributions are regulated via the Superannuation Guarantee (Administration) Act 1992

Superannuation Industry (Supervision) Act 1993 (SIS)

The Superannuation Industry (Supervision) Act sets all the rules that a complying superannuation fund must obey (adherence to these rules is called compliance). The rules cover general areas relating to the trustee, investments, management, fund accounts and administration, enquiries and complaints.

SIS also:[ citation needed ]

  • regulates the operation of superannuation funds; and
  • sets penalties for trustees when the rules of operation are not met.

In June 2004 the SIS Act and Regulations were amended to require all superannuation trustees to apply to become a Registrable Superannuation Entity Licensee (RSE Licensee) in addition each of the superannuation funds the trustee operates is also required to be registered. The transition period is intended to end 30 June 2006. The new licensing regime requires trustees of superannuation funds to demonstrate to APRA that they have adequate resources (human, technology and financial), risk management systems and appropriate skills and expertise to manage the superannuation fund. The licensing regime has lifted the bar for superannuation trustees with a significant number of small to medium size superannuation funds exiting the industry due to the increasing risk and compliance demands.

MySuper

MySuper is part of the Stronger Super [41] reforms announced in 2011 by the Julia Gillard Government for the Australian superannuation industry. From 1 January 2014, employers must only pay default superannuation contributions to an authorised MySuper product. Superannuation funds have until July 2017 to transfer accrued default balances to MySuper.

A MySuper default is one which complies to a regulated set of features, including:

  • a single investment option (although lifecycle strategies are permitted),
  • a minimum level of insurance cover,
  • an easily comparable fee structure, with a short prescribed list of allowable fee types,
  • restrictions on how advice is provided and paid for, and
  • rules governing fund governance and transparency. [42]

The Financial Services Reform Act 2002 (FSR)

The Financial Services Reform Act covers a very broad area of finance and is designed to provide standardisation within the financial services industry. Under the FSR, to operate a superannuation fund, the trustee must have a licence to run a fund and the individuals within the funds require a licence to perform their job.

With regard to superannuation, FSR:

  • provides licensing of 'dealers' (providers of financial products and services);
  • oversees the training of agents representing dealers;
  • sets out the requirements regarding what information must be provided on any financial product to members and prospective members; and
  • sets out the requirements that determine good-conduct and misconduct rules for superannuation funds.

Regulatory bodies

Four main regulatory bodies keep watch over superannuation funds to ensure they comply with the legislation:

Similar schemes in other countries

Criticism

The interaction between superannuation, tax and pension eligibility is too complex for most Australians to understand. It is very difficult to make considered decisions such as whether to invest excess funds in super or reducing a mortgage. [48] [49]

The Australian superannuation industry is under fire for re-investing funds into questionable investments, to benefit related parties ahead of the investor. Thus, a conflict of interest exists with the parent entity re-investing funds into funds related to the parent entity. Thus the best rate of return is never sought out, and the bank or entity investing the money is not seeking the highest rate of return. [50]

Most non-self managed funds only provide very minimal information to the account holders about how their money has been invested. Usually only vague categories are provided, such as "Australian Shares", with no indication of which shares were purchased. This makes the fund's management largely unaccountable to their members.

Losses to the superannuation funds from the global financial crisis have also been a cause for concern, said to be around $75 billion. [51]

Initial financial discussions determined that the Australian economy would be at risk if citizens were allowed to immediately access and withdraw Superannuation, further confirming the belief that mandatory Superannuation may not be a viable long term fiscal management tool. This was compounded by a lack of proper industry regulation, allegations of fraud and financial misconduct and a host of other issues currently plaguing the industry as a whole - "Thousands of superannuation fund members defrauded in Trio Capital scandal" [52]

See also

Related Research Articles

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A pension is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments. A pension may be a "defined benefit plan", where a fixed sum is paid regularly to a person, or a "defined contribution plan", under which a fixed sum is invested that then becomes available at retirement age. Pensions should not be confused with severance pay; the former is usually paid in regular installments for life after retirement, while the latter is typically paid as a fixed amount after involuntary termination of employment prior to retirement.

Pension fund plan, fund, or scheme which provides retirement income

A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income.

A pay-as-you-earn tax (PAYE) or pay-as-you-go is a withholding tax on income payments to employees. Amounts withheld are treated as advance payments of income tax due. They are refundable to the extent they exceed tax as determined on tax returns. PAYE may include withholding the employee portion of insurance contributions or similar social benefit taxes. In most countries, they are determined by employers but subject to government review. PAYE is deducted from each paycheck by the employer and must be remitted promptly to the government. Most countries refer to income tax withholding by other terms, including pay-as-you-go tax.

A Registered Retirement Savings Plan (RRSP), or Retirement Savings Plan (RSP), is a type of Canadian account for holding savings and investment assets. RRSPs have various tax advantages compared to investing outside of tax-preferred accounts. They were introduced in 1957 to promote savings for retirement by employees and self-employed people.

A retirement plan is a financial arrangement designed to replace employment income upon retirement. These plans may be set up by employers, insurance companies, trade unions, the government, or other institutions. Congress has expressed a desire to encourage responsible retirement planning by granting favorable tax treatment to a wide variety of plans. Federal tax aspects of retirement plans in the United States are based on provisions of the Internal Revenue Code and the plans are regulated by the Department of Labor under the provisions of the Employee Retirement Income Security Act (ERISA).

Income tax in Australia is imposed by the federal government on the taxable income of individuals and corporations. State governments have not imposed income taxes since World War II. On individuals, income tax is levied at progressive rates, and at one of two rates for corporations. The income of partnerships and trusts is not taxed directly, but is taxed on its distribution to the partners or beneficiaries. Income tax is the most important source of revenue for government within the Australian taxation system. Income tax is collected on behalf of the federal government by the Australian Taxation Office.

A defined contribution (DC) plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis. Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts plus any investment earnings on the money in the account. In defined contribution plans, future benefits fluctuate on the basis of investment earnings. The most common type of defined contribution plan is a savings and thrift plan. Under this type of plan, the employee contributes a predetermined portion of his or her earnings to an individual account, all or part of which is matched by the employer.

A private pension is a plan into which individuals contribute from their earnings, which then will pay them a private pension after retirement. It is an alternative to the state pension. Usually individuals invest funds into saving schemes or mutual funds, run by insurance companies. Often private pensions are also run by the employer and are called occupational pensions. The contributions into private pension schemes are usually tax-deductible. This is similar to the regular pension.

Cherry picking tax avoidance was a form of tax avoidance used in Australia in the 1970s and early 1980s. Company contributions to a superannuation fund were claimed as tax deductions, but the money immediately went back to the company.

Taxation in Australia

Income taxes are the most significant form of taxation in Australia, and collected by the federal government through the Australian Taxation Office. Australian GST revenue is collected by the Federal government, and then paid to the states under a distribution formula determined by the Commonwealth Grants Commission.

Superannuation in Australia is taxed by the Australian taxation system at three points: on contributions received by a superannuation fund, on investment income earned by the fund, and on benefits paid by the fund.

KiwiSaver

The KiwiSaver scheme, a New Zealand savings scheme, came into operation from Monday, 2 July 2007. Participants can normally access their KiwiSaver funds only after the age of 65, but can also use them as a deposit for a first home.

In Australia, an industry superannuation fund is a superannuation fund originally established to provide for the retirement of workers from a specific industry. Industry super funds are not-for-profit super funds. They are mutual funds, are membership-based and do not have shareholders. Many industry super funds are trade union-based. The main difference between industry super funds and retail super funds, which are public offer funds managed by financial institutions, is what happens with the profits. Retail funds distribute profits to shareholders or investors, ie., the trustee of the fund, while industrial funds return profits to members.

A Personal Retirement Savings Account (PRSA) is a type of savings account introduced to the Irish market in 2003. In an attempt to increase pension coverage, the Pensions Board introduces a retirement savings account that would entice the lower paid and self-employed to start making some pension provision. The intention was for PRSAs to supplement any State Retirement Benefits that would be payable in years to come.

The National Pension System (NPS) is a voluntary defined contribution pension system in India. National Pension System, like PPF and EPF is an EEE (Exempt-Exempt-Exempt) instrument in India where entire corpus escapes tax at maturity and entire pension withdrawal amount is tax-free.

Daryl Albert Dixon is an Australian economic and investment writer and consultant. Presently the Executive Chairman of Dixon Advisory and Superannuation Services, he writes regular columns on personal investing, economic commentary and self managed superannuation in The Canberra Times, Australian Financial Review, The Australian and the former Smart Investor magazine.

Taxation in Estonia consists of state and local taxes. A relatively high proportion of government revenue comes from consumption taxes whilst revenue from capital taxes is one of the lowest in the European Union.

The Swiss pension system rests on three pillars:

FairVine is an Australian Superannuation company, specifically focused on addressing the issue of gender disparity in superannuation, where women retire with 47% less superannuation than men. Despite its core focus on women, the fund accepts all members regardless of gender. However, certain features and bonuses may be seen as skewed towards women, who are mandated a longer period of paid leave by the Australian Government.

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