Superannuation Course Snapshots

The following information is provided to prospective course members to gain an insight into the topics covered in the superannuation course. Only the first few paragraphs of each main topic area are provided here. Please refer to the Superannuation Table of Contents for a more comprehensive list of subject headings covered within each topic area. 

Chapter 1 – Introduction to Superannuation

People opting to set up a SMSF will be largely motivated by the fact that they will have a greater degree of control over their superannuation assets. As well, small funds enjoy some important exceptions in respect of their investments.

SMSFs are funds that have fewer than 5 members (i.e. a maximum of 4) and all members are trustees of the fund. SMSFs are also referred to as ‘Do-It-Yourself’ or ‘Mum and Dad’ funds as they are often operated by small companies or families.

SMSFs are regulated by the Australian Taxation Office (ATO) and represent the majority of funds in Australia. Since October 1999, the number of SMSFs has grown from 187,000 funds to approximately 388,000 funds holding over $358 billion in assets at the end of June 2008. This includes:

• approximately 746,000 members in SMSFs;
• $938,000 (on average) per fund, $489,000 (on average) per member;
• 59.4% of members with incomes between $20,000 and $100,000;
• 61.7% of members aged between 45 and 64 years of age;
• 54% male and 46% female membership; and
• 69.2% two-member funds.

SMSFs appeal to many people wanting to make contributions into superannuation because, in their capacity as both trustee and member, they have control over how their retirement savings are managed and invested.

However, SMSFs will frequently require assistance in areas such as fund administration, investment management, taxation or legal advice and will engage these services externally. For example, the trustees of a SMSF may manage their own investments with the help of a stockbroker or financial adviser, but pay an accounting firm to take care of the compliance and administration of their fund, such as the reporting, tax and accounting requirements.

Chapter 2 – Super Fund Regulators

Australian Taxation Office (ATO)

A significant part of the Tax Office’s work relates to administering the numerous provisions contained in income tax legislation which impact on superannuation and the administration of taxation laws. These include the tax treatment of superannuation contributions and benefits as well as the tax treatment of the income of superannuation entities.

The Tax Office is also responsible for administering a number of superannuation related functions, including the Superannuation Guarantee (SG), the Superannuation Holding Account special account, Super Co-contributions, and the Lost Members Register.

A further function of the Tax Office is its regulatory role in relation to SMSFs. This is a parallel role to the regulation of superannuation funds (other than SMSFs) conducted by APRA.

Chapter 3 – What is a Superannuation Fund?

A superannuation fund is essentially a trust structure which holds assets on behalf of its members for the primary purpose of providing retirement benefits. As nearly all superannuation funds are created under a trust structure, the general principles of trust law are relevant to the operations of those funds.

Funds which are not set up as trusts are public sector funds established under either a Federal or State Act of Parliament.

Most superannuation funds are regulated superannuation funds because they have elected to be regulated and have complied with the provisions of the:

• Superannuation Industry (Supervision) Act 1993 (SIS Act); and
• Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations). 

Being regulated under the SIS Act and in accordance with the SIS Regulations allows a superannuation fund to access concessional rates of tax on the assessable income of the super fund. Superannuation funds that are regulated are called ‘complying superannuation funds’.

Superannuation funds are administered by a trustee in accordance with the fund’s trust deed, which sets out the rules for the establishment and operation of the fund.

A regulated and complying superannuation fund is entitled to concessional tax treatment. Concessional tax treatment means that the investment earnings of the fund are taxed at 15%, instead of marginal tax rates.

A superannuation fund does not automatically get these tax concessions. To receive these tax concessions the fund must:

• be a resident fund at all times;
• elect to become regulated and have complied with the SIS Act and SIS Regulations;
• have not received a notice of non-compliance; and
• comply on an ongoing basis with the requirements set out in the legislation governing the operation of superannuation funds.

Chapter 4 – Fund & Benefit Design

The way that your superannuation benefits (both income streams and lump sums) are calculated depends on the way your superannuation fund is structured. There are two different types of superannuation funds used to calculate your benefits. They are:

1. Accumulated benefit funds; and
2. Defined benefit funds. 

Most superannuation funds in Australia fall into one or the other of these categories. Most funds established in recent years are accumulated benefit funds (accumulation funds). There remains, however, many defined benefit funds. There are also funds, sometimes known as "hybrid funds", which have characteristics of both.

Chapter 5 – Superannuation Contributions

The SIS Regulations prescribe the minimum contribution standards that must be met for a fund to accept a contribution on behalf of a member. The purpose of the contribution standards is to ensure that contributions are for retirement income purposes, and not for the purpose of accumulating capital in a tax advantaged environment.

From 1 July 2007 a cap or limit applies to the amount of contributions that can be made to a superannuation fund and receive concessional tax treatment. A higher rate of tax applies to contributions in excess of the limits. There are two caps that apply to contributions depending on the type of contribution being made.

Concessional contributions cap

Concessional contributions are generally contributions which have been included in the assessable income of the fund. That is, employer contributions, including those made under a salary sacrifice arrangement, and personal contributions which the person has claimed as a tax deduction (eg. contributions by self-employed persons).

A $50,000 per annum per individual cap (indexed annually) applies to concessional contributions (i.e. employer contributions and personal contributions claimed as a tax deduction). The purpose of the cap is to limit the amount of contributions that can be taxed concessionally in superannuation funds in an income year (the rate of tax for a superannuation fund is 15%).

A person who is 50 years of age or over during the period 1 July 2007 and 30 June 2012, will be eligible for a transitional concessional contribution cap of $100,000. This amount will not be indexed.

Proposed budget changes to concessional contribution caps

From 1 July 2009, the concessional contribution caps will be halved from their present levels of $50,000 and $100,000.

Individuals under 50 years of age will only be able to contribute up to $25,000, and those over 50 years of age will only be able to contribute up to $50,000 during the transitional period.

In a major blow to the over 50’s, the government also proposes that once the transitional period ends at 30 June 2012, individuals over 50 years of age will see their contributions cap of $50,000 reduced to $25,000.

Non-concessional contributions cap

Non-concessional contributions are often referred to as ‘after-tax contributions’ because they are usually made from after tax funds. They are generally personal contributions that have not been claimed as a tax deduction. They also include contributions made on behalf of a spouse.

The cap applying to non-concessional contributions is three times the concessional contributions cap (i.e. $150,000 for the 2007-2008 income year). It is always three times the concessional contributions cap.

People under the age of 65 in an income year are able to bring forward two years’ worth of cap on non-concessional contributions (and potentially have a $450,000 non-concessional cap apply for the 2007-2008 income year).

Proposed budget changes to non-concessional contribution cap

The non-concessional contribution cap multiple from 1 July 2009 will now become six times the concessional contribution cap (i.e. 6 times $25,000 = $150,000). This means that it will effectively remain at the same level.

Existing non-concessional contributions cap features remain unchanged.

Chapter 6 – Payment of Superannuation Benefits

A trustee must pay benefits to members in accordance with the rules contained in the SIS Act and the SIS Regulations and only under certain circumstances.

Contributions made into a superannuation fund are required to remain in the superannuation system until certain conditions of release are met. This is referred to as preservation.

The preservation rules are contained in the SIS Act are designed to ensure superannuation savings are kept until retirement. Once a person has reached their preservation age and officially retired, they may cash in their retirement savings by requesting that their super fund pay their retirement benefits as a lump sum amount or in the form of an income stream.

The payment of a member's benefits is referred to as the 'cashing of benefits'.

Chapter 7 – Taxation of Super Funds & Member Benefits

Super funds

Most income received by a complying superannuation fund is assessable and is taxable at the rate of 15%. Assessable income of the fund includes concessional contributions (eg, employer contributions and self-employed contributions for which a tax deduction has been claimed).

The 15% rate of tax applying to these contributions is commonly referred to as the contributions tax. While the tax is payable by the fund as part of lodging their annual tax return, in practice the tax is withheld from contributions made before they are allocated to the member’s account.

Also included in a superannuation fund’s assessable income are earnings from investments and capital gains. An exception to this would be assets used to fund any pension liabilities of the fund, such as an allocated pension. Earnings from these assets and any capital gains from the sale of such assets are exempt.

Benefits

Under the new superannuation simplification measures most superannuation benefits received by retirees will be received free of tax. Superannuation benefits may be paid from superannuation funds, ADFs, RSAs and life insurance companies. Before the superannuation provider can make a payment, a condition of release must be met. Generally the retiree will be aged 65, or a person who has reached preservation age and retired.

Superannuation benefits may be paid as lump sums or income streams only.

Chapter 8 – Introduction to SMSFs

A superannuation fund is a SMSF if it meets the following conditions:

• has a trust deed that meets the requirements of the Superannuation Industry (Supervision) Act 1993 (SIS Act);
• has fewer than 5 members (i.e. has four or less);
• each individual trustee of the fund is a fund member;
• each member of the fund is a trustee;
• no member of the fund is an employee of another member of the fund, unless those members are related;
• no trustee of the fund receives any remuneration for his or her services as a trustee.

A SMSF can also have a company as its trustee (known as a corporate trustee) if it meets the following conditions:

• has a trust deed that meets the requirements of the Superannuation Industry (Supervision) Act 1993 (SIS Act);
• the fund has fewer than 5 members (i.e. has four or less);
• each director of the company is a member of the fund;
• each member of the fund is a director of the company;
• no member is an employee of another member (unless those members are related);
• the corporate trustee does not receive remuneration for their services as a trustee; and
• no director of the corporate trustee receives any remuneration for their services as a director.

The requirement that all members be trustees ensures that each member is fully involved and has the opportunity to participate in the decision-making processes of the fund.

Chapter 9 – Setting up a SMSF

There are a number of steps that you must go through as a trustee of a SMSF to set up a SMSF. These include:

• Obtaining the trust deed;
• Appointing trustees;
• Signing the trustee declaration;
• Electing to be regulated;
• Obtain a Tax File Number (TFN); and
• Obtain an Australian Business Number (ABN).

There is also the option of registering for Goods & Services Tax (GST), but this will depend on the level of contributions that count towards the GST turnover threshold of $75,000.

Chapter 10 – SMSF Trustee Obligations

As a trustee of your own SMSF you are responsible for running the fund in a prudent manner. You can contract other people to act on your behalf or provide professional services, (eg, an accountant, fund administrator, financial planner or tax agent) however you must retain control over the fund and are ultimately responsible for all the actions of the fund.

As a trustee of a SMSF you are obliged to ensure that your fund is managed in accordance with:

• the fund’s trust deed (governing rules);
• the provisions of the SIS Act and SIS Regulations;
• the Corporations Act; and
• other general rules, such as those imposed by taxation legislation or trust law.

These rules exist to ensure fund assets are protected until they are needed at retirement. Where the SIS Act conflicts with the trust deed, the SIS Act overrides the trust deed.

Chapter 11 – SMSF Investment Restrictions

Although superannuation law is silent on what a fund can or can not invest in, it does restrict some investment practices of funds.

The investment restrictions aim to protect member’s benefits by ensuring fund assets are not overly exposed to undue investment risks, and aim to ensure that investment decisions are made with the core purposes of the ‘sole purpose test’ in mind.

Under the SIS Act, a trustee of a regulated superannuation fund must not intentionally acquire an asset from a related party of the fund.

As a trustee of a regulated superannuation fund you must not borrow money or maintain an existing borrowing of money. This restriction ensures that members’ benefits are not directly exposed to risks associated with geared investments and to prevent lenders acquiring a claim over an asset of the fund ahead of the members.

Geared investments involve some form of borrowing to finance their purchase or a charge over the assets purchased.

Chapter 12 – SMSF Contributions

As a trustee of a SMSF you need to be aware of the minimum standards for accepting contributions from or on behalf of members under the SIS Regulations to ensure that contributions are made for core retirement purposes.

You are also required to allocate to member accounts any contributions received within 28 days after the end of the month in which the contributions were made.

There are two main categories or types of contributions, mandated employer contributions and non-mandated contributions:

Mandated

The SIS Regulations allow funds to accept mandated employer contributions at any time. Mandated employer contributions are contributions made by, or on behalf of an employer that are:

• superannuation guarantee contributions;
• superannuation guarantee shortfall contributions;
• contributions made to satisfy an obligation under an industrial award or agreement; and
• payments from the Superannuation Holding Account special account.

Where employees have an effective arrangement in place with their employer to salary sacrifice to superannuation, all superannuation contributions are considered to be made by the employer. However, only those contributions to the superannuation guarantee level (9% from 1 July 2002) or the industrial award or agreement level (if higher than the superannuation guarantee level) will be classed as mandated employer contributions.

Non-mandated

Non-mandated contributions are voluntary superannuation contributions on behalf of a member. These include:

• contributions made by employers over and above their superannuation guarantee or industrial award obligations;
• personal contributions made by employees;
• personal contributions made by self-employed people;
• spouse contributions;
• contributions from the Super Co-contributions scheme; and
• contributions made for children under the age of 18 years

Non-mandated contributions can only be accepted in certain circumstances.

Chapter 13 – Paying SMSF Member Benefits

As a trustee of a SMSF you must pay benefits to members in accordance with the rules contained in the SIS Act and the SIS Regulations and only where a member has met one of the conditions of release.

Conditions of release are the specific events that you must satisfy in order to withdraw your preserved benefits and restricted non-preserved benefits from a superannuation fund. Conditions of release are also subject to the rules as set out in your SMSF’s trust deed.

Your preserved benefits and restricted non-preserved benefits are usually paid out in retirement related situations, but may be paid out as a result of other circumstances.

Chapter 14 – SMSF Administrative Duties

Various laws impose a range of administrative duties on you as a trustee of a SMSF. Failure to meet these obligations could result in you being fined and the fund losing its eligibility for income tax concessions. The SIS Act also has provisions which allow for the disqualification of trustees.

Trustees of SMSFs are required to lodge annual income tax and regulatory information concerning their fund with the Tax Office each year. Trustees must also lodge information regarding member contributions where the fund receives a contribution/s on behalf of a member, including information on those members with nil contributions for the income year.

For the 2007-2008 financial year onwards, trustees of SMSFs will be required to lodge a single annual return called the ‘SMSF Annual Return’. The single annual return will combine information previously collected in the funds:

• income tax return;
• regulatory return; and
• Member Contributions Statement (MCS).