Why the need for superannuation?
Australians are living longer and the baby boomers who were born in the years after World War II are now reaching retirement age. That is, Australia’s population is getting older.
the three pillars (or tiers) policy of superannuation:
Tier 1 — a tax payer funded social security pension (a safety net) that is means tested
Tier 2 — compulsory employer contributions to superannuation for employees
Tier 3 — tax incentives for voluntary contributions to superannuation
To be a complying superannuation fund, the fund must:
- reside in Australia
- have made an irrevocable election to be regulated by the SIS Act
- meet the conditions for compliance as outlined in the SIS Act.
The cornerstone of this legislative framework is the
Superannuation Industry (Supervision) Act 1993 (SIS Act).
The SIS Act is based on a number of underlying principles which include the following.
- The trustees remain responsible for all decisions of the fund.
- Wherever possible, members of superannuation funds should participate in decision-making processes via elected membership on trustee boards.
- All investment decisions must be directed towards funding retirement. - Superannuation should not be simply a tax haven.
- Superannuation is a regulated and controlled investment environment; however, compliance with the Act does not guarantee the performance or financial viability of the fund.
Four bodies are primarily charged with the regulation and control of the superannuation industry.
- The Australian Prudential Regulation Authority (APRA) is the prudential regulator for deposit-taking institutions, insurance and superannuation. APRA is the prudential regulator for all superannuation funds other than self-managed superannuation funds. The term prudential generally means the monitoring of risk-taking behaviour
- The Australian Securities and Investments Commission (ASIC) regulates market conduct and disclosure. It is part of ASIC’s role to ensure consumers are protected and that markets, including the market for superannuation funds, are conducted in a fair, orderly and transparent manner.
- The Australian Taxation Office (ATO) performs a variety of roles, which include:
– regulator of self-managed superannuation funds
– collecting tax from superannuation funds and conducting audits
– administering the tax concessions available to individuals
– auditing employers to ensure that they meet their requirements under the Superannuation Guarantee (Administration) Act 1992 (SGAA)
– collaborating with the state collectors of unclaimed superannuation funds. - The Superannuation Complaints Tribunal (SCT) deals with complaints by members against the decisions of trustees.
There are some extreme circumstances where money can be released prior to reaching preservation age and satisfying a condition of release. These include:
permanent incapacity
permanent departure from Australia
severe financial hardship
compassionate grounds.
Spouse tax offset
The government provides a tax offset for an individual who makes a non-concessional contribution into the superannuation account of a low-income earning spouse.
The offset is equal to 18%. The maximum eligible non-concessional contribution is $3000. Therefore the maximum offset is equal to $540 ($3000 × 0.18).
The offset is payable on the lesser of:
$3000 reduced by every dollar the low-income spouse earns in excess of $37 000, or
the value of the spouse contributions.
Bankruptcy provisions
The High Court has affirmed that it is possible for all funds held in superannuation to be protected from creditors in the case of bankruptcy. However, the legislative response to the High Court’s decision has been to allow creditors access to the superannuation funds of a bankrupt provided it can be proven that the transfer of assets to a superannuation fund was done for the purpose of denying creditors their entitlements.
Relationship breakdown and the splitting of superannuation
Where spouses agree, they are able to enter into a superannuation agreement which, if ratified by the Family Court, outlines how their superannuation is to be divided. Where spouses are unable to agree the Family Court will need to make a determination as to how the superannuation should be divided. The Family Court may order an interest split or a payment split. An interest split is where the account is split immediately and one account becomes two — each party then independently manages their own separate superannuation account. A payment split is where the split occurs at the time of payment which is generally at retirement. In both interest splits and payment splits the components that make up the original superannuation balance are split proportionally.
accumulation account
A type of superannuation fund where the investment risk is borne by the member and in which contributions and positive earnings increase the accumulated amount and negative earnings reduce the accumulated amount.
actuarial calculations
To evaluate mathematically the likelihood of certain financial events and their associated costs; for example, what percentage of the total superannuation fund membership is likely to retire in the next 12 months and how much should be set aside to meet this likelihood.
complying superannuation fund
A superannuation fund which is resident in Australia, has made an irrevocable decision to be regulated by the SIS Act and meets the conditions for compliance as outlined in the SIS Act.
condition of release
Criteria that, if satisfied, enables an individual to withdraw their money from superannuation.
default fund
An employer-nominated superannuation fund where the member does not exercise their choice of fund.
default investment option
A trustee-nominated investment choice where the member does not exercise their investment choice.
defined benefit scheme
A type of superannuation account where the balance is determined by a formula which often includes salary and years worked; generally the investment risk is borne by the employer sponsor of the fund.
fiduciary responsibilities
To act in good faith and to put the interest of others (members) ahead of your own.
fully funded scheme
A superannuation fund where contributions and earnings have been set aside to meet the commitments to members as they fall due.
in-specie contributions
Contributions made in kind rather than in cash; for example, a self-employed person may contribute listed shares to their SMSF.
indirect cost ratio (ICR)
An aggregation of all management costs (MER) and other indirect costs which cannot be attributed to individual member accounts expressed as a percentage of funds under management.
management expense ratio (MER)
A ratio of fees charged to the value of the assets under management.
ordinary times earnings (OTE)
Prescribed in legislation as including some items, for example earnings for ordinary hours worked, and excluding other items, for example overtime pay.
preservation age
The minimum age at which funds can be withdrawn from superannuation.
