the following applies to superannuation for salaried employees in Australia but you should verify the details and discuss them with your financial planner or accountant before making any decisions as each person's circumstances and requirements differ, while the ATO tends to change the laws relating to superannuation more frequently than one would like.
this website takes NO responsibility for any decisions you make, it is merely to provide you with a broad initial understanding to get you started.
benefits of superannuation
eligible contributions are taxed at 15% instead of your marginal tax rate, thus allowing a much higher base for your investments to start
capital gains tax is at 10% instead of half your marginal tax rate (ie. CGT rate is 22.5% for most doctors outside of super)
benefits can be paid tax free after age 60 years instead of potentially attracting your marginal tax rate for investment income streams.
problems with superannuation
you can't usually access your money until a condition of release is met (see below)
you can't have much say in how it is invested unless you establish an expensive and onerous SMSF (see below)
the government has a nasty habit of changing the rules
you can't use any SMSF investments for personal or family use - see arms length rulings below
you can't offset any interest on borrowings or any other SMSF costs against your personal income
ridiculously low capping of eligible pre-tax voluntary concessional contributions if aged under 50 years limits its utility
superannuation contributions
all concessional contributions, including mandated contributions will be taxed within the super fund at 15% as they are contributed (but as of July 1 2012, only for those with incomes under $300,000, and as of 2016, those under $250,000 income, those over this are taxed at 30%)
by law your employer MUST contribute into your designated super fund - these mandated superannuation guarantee contributions are currently set at 9% of your gross salary.
you may also opt to make pre-tax voluntary concessional contributions into your super fund by way of salary packaging
unfortunately, the changes as of July 2009 limit your pretax voluntary contributions severely if you are aged under 50 years, it is now capped at a ridiculously low $25000 per year INCLUSIVE of employer mandatory contributions!
the cap is not much better for those over 50 years - $35,000 per annum BUT ONLY if your superannuation balance is less than $500,000
furthermore, as of July 1, 2012, those earning over $300,000 will have the tax on these contributions increased to 30% (ie. a tax concession of 15% instead of 30%), and in the 2016 budget, this was lowered to include those earning over $250,000pa
if you exceed these limits, the excess contributions will be taxed at the top marginal income tax rate (ie. ~46%) at the time of packaging.
you can elect to have your super contributions paid into any other eligible superannuation fund such as Asgard, etc.
self-managed superannuation fund (SMSF)
these are more sophisticated trust funds with relatively high establishment costs, moderately onerous auditing and management requirements, ongoing maintenance costs for auditing, but which can give you much more control over your superannuation investments albeit within very strict ATO guidelines - see ATO's SMSF guidelines (pdf)
in general, these would only be considered once there are sufficient funds to make them cost effective - eg. > $200,000.
for example, typical fees might be:
~$2000 for accountant's statement of advice including review of superannuation and insurance, assessment of fund's ability to repay interest on any loans, etc
~$3000 for creation of a SMSF trustee company, including trust deeds, TFN and ABN.
optionally ~$3000 for creation of a bare trust company if borrowings will be needed - the bare trust holds the property being purchased until the loan is repaid.
optionally ~$2000-$3000 for establishment of a bank loan - no you can't use or link to your existing personal loan packages
annual audit fee of ~$500
annual compliance cost fees of ~0.5-0.6% of value of the fund
all SMSFs need to lodge an SMSF annual tax return statement with the ATO each year AFTER the audit is completed, in order to:
report income tax
report super regulatory information
report member contributions
pay the supervisory levy (currently $150 each year)
key points of investments within a SMSF include:
any costs or interest payments related to property ownership or borrowings within the SMSF must be covered WITHIN the fund by rental or other income and super contributions.
ie. you cannot tax deduct loan interest against your personal income
fund and investments MUST be at arms length
fund must have a separate bank account from your personal bank account - you can't mix fund money with other money
fund assets must be in the name of the trustee company of the fund, or in the names of all the individual trustees as trustees of the fund
strict requirements for purchasing shares or property - must be at market value
trustees or family members of trustees cannot be tenants of any SMSF property or use any fund assets
if the fund buys collectibles such as art, wine or jewellery then they cannot be used privately - ie. cannot be worn, drank, etc.
investments must be consistent with the core purpose of the fund:
core purposes generally are provision of benefits for each member of the fund, on or after the:
member’s retirement from gainful employment
members reaching the prescribed age
member’s death, if the death occurred before they retired from gainful employment or before they attained a prescribed age, where the benefits are provided to their dependants or legal personal representative.
common breaches include:
investments that offer a pre-retirement benefit to a member or associate
providing financial help or a pre-retirement benefit to someone at a financial detriment to your fund.
investments must be diversified:
it is unlikely that a SMSF with 100% of its assets invested in a property would meet this requirement
conditions of release
conditions of release are the events your member needs to satisfy to withdraw benefits from their super fund.
the conditions of release are also subject to the rules of your SMSF (as set out in the trust deed). It is possible that a benefit may be payable under the super laws, but can’t be paid under the rules of your SMSF.
preserved benefits and restricted non-preserved benefits may be paid out for the following reasons:
retirement:
actual retirement depends on a person’s age and, for those less than 60 years of age, their future employment intentions. A retired member can’t access their preserved benefits before they reach their preservation age (see below).
if aged < 60yrs, intention to work less than 10 hours per week
if aged > 60yrs, employment ceased after age 60yrs or intention to no longer work full time or “part time”
note that if one commences new employment after “retirement”, super contributions made during this period will not be accessible until a further condition of release is met.
attaining age 65 years or more:
there are no cashing restrictions once age 65yrs is met
terminating employment
if the employer-sponsored preserved benefits are less than $200
if the employer-sponsored preserved benefits are greater than $200 than it may be possible to paid as a non-commutable lifetime pension or annuity.
permanent incapacity
if the member is unlikely, because of ill health, to engage in gainful employment that they are reasonably qualified for by education, training or experience.
temporary incapacity
in general, temporary incapacity benefits may be paid only from the insured benefits or voluntary employer funded benefits.
severe financial hardship
different conditions for release and cashing restrictions apply depending on the age of the member.
compassionate grounds
requires approval in writing from APRA
temporary residents departing Australia
People who have entered Australia on an eligible temporary resident’s visa and who permanently depart Australia can be paid any super they have accumulated subject to a special with-holding tax payment.
attainment of preservation age
can elect to access their preserved benefits and restricted non-preserved benefits as paid as a non-commutable lifetime pension or annuity to assist with transition to retirement.
terminal illness or injury
lump sum benefit may be payable if condition is likely to lead to death within 12 months
rollovers and transfers
generally rollovers of monies into another super fund does not require a condition of release to be met.
preservation age
preservation age is the age at which you can start to draw down on the super fund and pay yourself annual benefits
it is dependent upon your date of birth:
date of birth
preservation age
before 1 Jul 1960
55
1 Jul 1960 to 1 Jul 1961
56
1 Jul 1961 to 1 Jul 1962
57
1 Jul 1962 to 1 Jul 1963
58
1 Jul 1963 to 1 Jul 1964
59
after 30 Jun 1964
60
types of pension benefits
new rules as of 20th Sept 2007.
benefits paid out are tax free if aged over 60yrs unless the benefit is paid from an untaxed source such as a life insurance payout for which the policy claimed a tax deduction in which case tax is at 31.5%.
HOWEVER as of 2016 budget, the tax free income applies only to 1st $1.5m in super assets, thereafter it is 15%
account based income stream
they require a minimal annual payment to be made (based on age - eg. 4% at under age 65yrs, rising to 6% by age 75yrs) with no maximum annual amount stipulated BUT cannot exceed 10% of the account balance
they can only be commuted in particular circumstances
they can’t have a residual capital value
they can’t be paid to a non-dependant beneficiary
non-account based income stream
they may be paid for life or for a fixed term or years
they can only be commuted in particular circumstances
certain non account-based income streams may have a residual capital value
they can’t be paid to a non-dependant beneficiary
lump sum payments
subject to a with-holding tax of 21.5% if under preservation age
subject to a with-holding tax of 16.5% if over preservation age but under age 60yrs AND exceeds “Low rate cap amount” of $150,000 (cap as at 2010)