What to Know About Superannuation

The Government encourages saving for retirement in a variety of ways, mainly by giving superannuation tax concessions.

There are three times at which tax is important: when money goes into the fund, while it is there, and when it comes out.

Money contributed to superannuation can be taxed at 15%, but it can also gain the contributor a tax benefit. Money in a superannuation fund can make income and capital gains that are taxed at concessional rates while the fund has not yet started to pay a benefit, but are not taxed after the fund has started to pay a benefit. Money that comes out of the fund is not taxed, unless the money comes out before the beneficiary has turned 60 years of age, in which case a benefit for which a tax deduction has been claimed is taxed but with a 15% offset.

What is a superannuation trust?

Virtually all private sector superannuation schemes in Australia are organised through the legal device of a trust. A trust is a form of ownership of property in which one person (the trustee) is the legal owner of the property but is under a legal obligation to use the property exclusively for the benefit of another person (the beneficiary). In the case of a superannuation trust, the rights and obligations of the trustee and beneficiaries (often called “members”) are set out in a document called a “trust deed”.

The trustee of a superannuation fund may be a company or one or more individual people. Some commercial organisations (usually associated with insurance companies) act as trustees for a large number of employers under a single trust deed.

Some public sector superannuation schemes are not set up as trusts. The rights of members of these schemes depend on the legislation governing them.

The legal principles governing the law of trusts were developed in cases concerning trustees who administered, without payment, sums of money made available to the beneficiaries through gifts and wills. As will be apparent from this chapter, these principles are, arguably, inappropriate to determine the rights of members of modern superannuation schemes, where the benefits are provided in a commercial context, frequently in substitution for wages under awards and contracts of employment.

Contributions

Superannuation Guarantee

The Superannuation Guarantee (Administration) Act 1992 (Cth) has the practical effect that an employer must contribute 9% of “ordinary time earnings” as superannuation for its employees into a superannuation fund unless the employee is paid less than $450 a month; is aged 70 or over; is not a resident of Australia and the work is done outside Australia; or is under 18 and working 30 hours a week or less (ss27 & 28).

Contributions are made to “complying” superannuation funds or retirement savings accounts and should be made within 28 days of the end of the relevant quarter.

Different rules apply to “defined benefit” superannuation schemes (see: “Types of benefits” under “Choice of Superannuation Funds“, for an explanation of defined benefit superannuation schemes).

Salary Sacrifice

If the employer and the fund agree, an employee may make further contributions, within strict limits, under “salary sacrifice” and other arrangements. This can mean that instead of paying tax at the individual’s marginal tax rate on the amount “sacrificed”, tax is paid at a concessional rate of 15%. This will still usually be a lower tax rate than the marginal rate that would otherwise apply. Tax on concessional contributions for persons with pre-tax earnings of $300,000 or more is 30%.

Personal Contributions

No tax benefit is obtained by a simple voluntary contribution by an employee, although the income and capital gain later obtained on that contribution is taxed at concessional rates.

Self-employed persons (those who earn 90% or more of their income from self-employment) may obtain tax deductions up to the age-based limits referred to in “Salary sacrifice”, above.

There is no tax on voluntary contributions that did not attract a tax deduction (called “non-concessional contributions”). However, for a person aged under 65 years, only $150,000 per year, or $450,000 over three years, may be contributed on a non-concessional basis.

Co-Contribution

Employees and certain self-employed people with annual assessable income and reportable fringe benefits up to $61,920 will get a government “co-contribution” of up to $1,000 for an eligible personal contribution of $1,000 to a complying superannuation fund or retirement savings account. The maximum amount is paid if the person’s “total income” is $31,920 or less, reducing gradually to nil for incomes of $61,920 and above.

Low Earning Spouse

Taxpayers can claim an 18% tax rebate on superannuation contributions of up to $3,000 made on behalf of their low income or non-working spouse.

Small Accounts

If an account has $1,000 or less in it, it cannot be reduced by fees that are greater than the interest earned by the account.

Superannuation Surcharge

The superannuation surcharge was abolished from 1 July 2005.

Reasonable Benefit Limit

Reasonable benefit limits (RBLs) were abolished from 1 July 2007.

Age Restrictions

Before age 65, a person can make further tax deductible contributions even if they are not working. Between ages 65 and 75, a person can make further tax deductible contributions so long as they work for at least 40 hours in a period of 30 consecutive days.

There is no longer any obligation to draw down monies from a superannuation fund at any age. However, not taking a pension when one is available means the loss of the benefit being that a fund paying a pension is not taxed on its investment returns.

Eligible Termination Payments

Most eligible termination payments (now known as “employment termination payments”) cannot now be rolled over into superannuation. (For further information about eligible termination payments and employment termination payments see the Taxation chapter.)

Lost Superannuation

When a worker goes from one job to another, they may be required to join a different fund. It is important that the money in the previous fund is not forgotten. The money can be moved or “rolled over” to the new fund. The ATO keeps a register of “lost” money. Contact the ATO or visit the website if you think that you have lost track of superannuation money (see: “Superannuation Contacts“, at the end of this chapter).

An alternative for people who have many small jobs is to start a “retirement savings account” with a financial institution, into which all employers can pay small amounts of superannuation.

Superannuation guarantee levy

If employers do not contribute 9% as described above, a “superannuation guarantee charge” has to be paid to the ATO, which then contributes the net amount to superannuation to benefit the employee. This is calculated against an employee’s “salary or wages”, which may be more than the employee’s ordinary time earnings.

The levy is only payable in respect of employees, not contractors. Difficult questions arise about whether a person is a contractor. The High Court has found, for example, that a bicycle courier employed as a contractor was an employee, but a motor vehicle courier was a contractor. The ATO website at www.ato.gov.au has a “Guide to contractors” tool to help work out if a person is an employee or a contractor.

From 1 July 2003, the employer should pay superannuation guarantee contributions at least once each quarter, on 28 October, 28 January, 28 April and 28 July in each year. The employee should be notified on a pay slip, letter or email. If these amounts are not paid, then the employee could be disadvantaged if the company becomes insolvent. If notification is not received at the appropriate time, contact the superannuation fund or the ATO. In United Super Pty Ltd v Built Environs Pty Ltd [2001] SASR 339 (not accessible online), it was held that a super fund was in breach of trust and breach of contract where it did not inform a member that payments by the employer had ceased.

However, the ATO is not active in enforcing payment; the charge is paid only if the employer is still solvent and the employee misses out on benefits like insurance.