That old saying about death and taxes should have superannuation added to it. In Australia at least, you just cannot get away from it.
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Make millions in Super
That old saying about death and taxes should have superannuation added to it. In Australia at least, you just cannot get away from it.
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Make millions in Super ... continued from above
Nevertheless, when you are about 60, you will not want to. Superannuation is
literally a lifetime of cash savings put away for you during your working life
by your employer for when you decide to throw in the working world and gaze at
your retiring navel.
It is also a massive industry. At present in Australia, there is something
like $700 billion in accumulated super funds. Who said Australia could not save?
The "three pillars" approach to retirement income:
- A safety net consisting of a means-tested Government age pension system
- Private savings generated through compulsory contributions to
superannuation
- Voluntary savings through superannuation and other investments
Since its introduction, employers have been required to make compulsory
contributions to superannuation on behalf of most of their employees. This
contribution was originally set at 3% of the employees' income, and has been
incrementally increased by the Australian government. Since 1 July 2002, the
minimum contribution has been set at 9% of an employee's ordinary time earnings.
The 9% is thus not payable on overtime rates but is payable on remuneration
items such as bonuses, commissions, shift loading and casual loadings.
Though there is general widespread support for compulsory superannuation
today, it was met with strong resistance by small business groups at the time of
its introduction who were fearful of the burden associated with its
implementation and its ongoing costs.
The Howard government has been criticised for its reluctance to increase the
compulsory rate of superannuation. Had the compulsory rate been 15% since 1996,
rather than the current 9%, total superannuation assets in Australia would be
approaching $2 trillion - almost double the current level.
After over a decade of compulsory contributions, Australian workers have over
$913 billion[3] in superannuation assets. Australians now have more money
invested in managed funds per capita than any other economy.
Compulsory superannuation in combination with buoyant economic growth has turned
Australia into a 'shareholder society', where most workers are now indirect
investors in the stock market. Consequently, a lively personal investment
marketplace has developed, and many Australians take an interest in investment
topics.
How it works:
Employer contributions
Employers must make superannuation contributions to the employees' designated
superannuation fund at least every three months. The superannuation
contributions are invested over the period of the employees' working life and
the sum of compulsory and voluntary contributions, plus earnings, less taxes and
fees is paid to the person when they choose to retire. The sum most people
receive is predominantly made up of compulsory employer contributions.
Special rules apply in relation to employers providing defined benefit
arrangements. There are less common traditional employer funds where benefits
are determined by a formula usually based on final average salary and length of
service. Essentially, instead of minimum contributions, employers need to
provide a minimum level of benefit.
Superannuation Guarantee law applies to all working Australians, except those
earning less than $450 per month, or aged under 18 or over 70. Individuals can
choose to make extra voluntary contributions to their superannuation and receive
tax benefits for doing so.
Access to superannuation
As superannuation is money invested for one'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;
- restricted non-preserved benefits; and
- unrestricted non-preserved benefits.
Eligibility for access to preserved benefits depends on a worker's
preservation age. The Howard government announced changes in 1997 to the
superannuation system designed to induce Australians to stay in the workforce
for a longer period of time, delaying the effect of population ageing.
Previously, any Australian could access their preserved benefits once they
reached 55 years of age. However, after legislation was passed in 1999, an
employee's preservation age depends on their date of birth.
Hence, by 2025, all Australian workers wishing to access their superannuation
would be at least 60 years old.
Reasonable benefit limits
Superannuation taxes:
Superannuation earnings are taxed at 15%, high income earners may incur
superannuation surcharge*
Employees can reduce their taxable income through salary sacrifice. By
contributing pre-tax salary into superannuation, your effective tax rate on the
contributed funds is 15% (before superannuation surcharge*, if applicable)
rather than your marginal personal tax rate.
Realised Capital Gains are taxed at a reduced rate of 15% (before
superannuation surcharge*, if applicable) and discounted by one third if held
for more than one year.
Superannuation members and individuals are able to contribute on behalf of a
non-working spouse up to age 65; if aged 65-69, the spouse must be gainfully
employed before a contribution can be made. The contributing spouse may be
eligible for an income tax rebate of up to 18%.
Self-employed individuals can claim a tax deduction for contributions made to
superannuation up to certain age based limits.
Individuals can also make deductible contributions to their fund. Here the
personal contribution is taxed upon entry to your super fund and the
contribution amount is tax deductible within age-based limits (at your marginal
tax rate).
If you are eligible and make a personal contribution to super, the Government
will match your contribution with a Superannuation co-contribution up to certain
limits.
Not only is contributing tax-effective, drawing an income from your super can
be tax effective too! Many pensions drawn from superannuation funds are entitled
to a tax rebate of up to 15% per annum.
For most Australians, superannuation has become an important issue in our
working lives.
Over the past 10 years, employers have been required to contribute to
superannuation on your behalf and as of July 2002, this amounts to 9% of your
annual salary.
Although this may seem like a lot, many financial planners believe it will
still not be enough to allow you to live comfortably in retirement.
Boosting your super savings is probably one of the most important steps you
will take in planning your retirement.
There are a range of strategies that you can assist you in maximizing and
growing your superannuation.
There are six main types of superannuation funds:
- Industry Funds are multiemployer funds run by employer associations and
unions.
- Wholesale Master Trusts are multiemployer funds run by financial
institutions for groups of employees. These are also classified as Retail
funds by APRA.
- Retail Master Trusts/Wrap platforms are funds run by financial
institutions for individuals.
- Employer Stand-alone Funds are funds established by employers for their
employees. Each fund has its own trust structure that is not necessarily not
shared by other employers.
- Do-It-Yourself Funds (or Self Managed Superannuation Funds) are funds
established for a small number of individuals (usually fewer than 5).
- Public Sector Employees Funds are funds established by governments for
their employees.
The vast majority of the funds are self-managed funds. Retail and Wholesale
Master Trusts are the largest sector of the Australian Superannuation Market
Choice of superannuation funds
From 1 July 2005, changes to the law mean that many Australian employees are
be able to choose which fund their employer's future superannuation guarantee
contributions are paid into.
Choice of superannuation funds allows workers to:
- change funds when their current fund is not available with a new
employer;
- consolidate superannuation accounts to cut costs and paperwork;
- change to a lower-fee and/or better service superannuation fund;
- change to a better performing superannuation fund.
The New Rules
All super benefits will be tax-free from July 1, 2007, for people over the
age of 60.
Reasonable benefit limit rules, which impose tax penalties if you save too
much in super, will be scrapped from July 1.
Undeducted, or personal, after-tax super contributions will be capped at
$150,000 a year from July 1. As a transitional measure, $1 million can be
contributed before July next year. Deductible contributions will be
limited to $50,000 from July 1.
Better incentives for the self-employed.
Need some superannuation advice? Just visit our
superannuation advice page for some professional, personally prepared
advice. It's free!
Disclaimer:
The information contained above has been provided as a general
service. Any references to specific financial, legal, accounting, or
taxation issues are done so in the context of general information
and should not be relied upon as fact or construed as advice by the
us in any of these areas. You should consult a relevant financial,
legal, tax or accounting professional to assist in your particular
circumstance. |
