Advising at ASIC Level 1
Superannuation & Retirement Planning
Resource 1
ASIC Superannuation Competency Units covered in this manual are:
FNSASICU503A
Provide advice in Superannuation
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CHAPTER 1 – INTRODUCTION..................................................................................................... 5
CHAPTER 2 – SUPERANNUATION .............................................................................................. 7
History of superannuation in Australia ............................................................................................................ 7
Types of funds ................................................................................................................................................. 9
Choice of fund................................................................................................................................................ 11
Default funds ................................................................................................................................................. 14
Life insurance................................................................................................................................................. 15
Contributing to superannuation .................................................................................................................... 17
Types of contributions...................................................................................................................................... 17
Non-Concessional Contributions (NCC) ............................................................................................................ 19
Concessional Contribution (CC) ........................................................................................................................ 21
Taxation of contributions ................................................................................................................................. 28
Breaching contribution caps ............................................................................................................................ 34
Accessing Superannuation ............................................................................................................................. 39
Conditions of release........................................................................................................................................ 39
Illegal early access ............................................................................................................................................ 47
Handling of superannuation complaints .......................................................................................................... 47
CHAPTER 3 - MORE ON SUPER .................................................................................................. 50
Portability of benefits .................................................................................................................................... 50
Preserved & Non-Preserved Superannuation Amounts ................................................................................. 50
Spouse super contribution tax offset ............................................................................................................. 51
Government Co-contribution ......................................................................................................................... 51
Low income super contribution ..................................................................................................................... 53
Death Benefits ............................................................................................................................................... 54
Tax on death benefits ....................................................................................................................................... 55
Anti-detriment payment .................................................................................................................................. 56
Self Managed Superannuation Funds (SMSF) ................................................................................................. 57
CHAPTER 4 - RETIREMENT PLANNING .................................................................................. 66
Types of income streams ............................................................................................................................... 67
Account based pension .................................................................................................................................... 67
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Annuities .......................................................................................................................................................... 72
Defined benefit pension ................................................................................................................................... 75
CHAPTER 6 – SOCIAL SECURITY ............................................................................................... 78
Overview ....................................................................................................................................................... 78
Age pension ................................................................................................................................................... 78
Determining entitlement ................................................................................................................................. 79
Work bonus ...................................................................................................................................................... 80
CHAPTER 7 - AGED CARE ............................................................................................................ 81
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This guide should be read in conjunction with the following additional reference materials:

Financial Planning in Australia (latest edition)

Australian Master Financial Planning Guide (latest edition by CCH)

www.ato.gov.au

www.humanservices.gov.au
IMPORTANT PLEASE READ
1. The following information within this document was updated in 2013. Due to changes that
have occurred within the superannuation environment on an ongoing basis you may need to
update this document.
2. You are expected to read your text book and the references provided within this document.
3. To complete this course you must have access to the internet and be able to download the
resources required.
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Chapter 1 – Introduction
This learner guide explores superannuation and retirement income options including the potential
for Australian’s to access the Aged Pension.
Overview of Superannuation
It is a commonly misconception that superannuation is risky and it is directly linked to the
sharemarket. A superannuation fund is held under a trust structure to help the member fund their
own retirement. The trustee of the fund must invest according to the terms of the trust deed and
the requirements of the Superannuation Industry (Supervision) Act 1993 (SIS Act). The member of
the fund usually has control over where their funds are invested (shares, property, alternative assets
or fixed interest/cash).
(A definition of) A superannuation fund (may be expressed as) is:
(a superannuation fund is) an indefinitely continuing fund set up solely to provide benefits to its
members on retirement or (death benefits) to members’ dependants on death of the member. A
superannuation fund is established by governing rules (a trust deed for the private sector) and an
Act of parliament or Ordinance for a public sector fund) and is managed by Trustees.1
In plain English the sole purpose of a superannuation fund is to provide for its member(s) in
retirement. Superannuation is a form of trust structure. What this means is superannuation is a
separate entity from you as an individual. As an individual you are the member of your fund
however you do not own your super fund. The trust does. The member is able to make decisions
regarding the super fund but does not have the ultimate control. This rests with the trustee of the
fund. Superannuation, as a consequence of compulsory employer contributions, is the most
common way individuals will save for their retirement.
The contributions within the specified legislated limits and investment earnings of a complying
superannuation fund are concessionally taxed at maximum 15%. Outside of super individuals can be
taxed up to 46.5%. The rationale for providing tax concession to superannuation funds is to
encourage individuals to contribute to a superannuation fund creating a “nest egg” that they can
draw on in retirement. The major downside to contributing to super is the funds are generally not
accessible until retirement. We will explore this is greater detail later in this guide.
Overview of Retirement Income
Before one retires superannuation is held in what is called accumulation phase. This simply means
money is periodically invested in the fund and the balance is expected to accumulate overtime
through these ongoing contributions and investment returns. When a personal reaches retirements
the super fund is usually transferred into a pension phase. A superannuation pension has further tax
1
Master Financial Planning Guide p. 276
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advantages whereby any earnings whilst in pension phase do not incur any tax (0% tax) and any
income drawn down by a member over the age of 60 is non-assessable income which means no tax
is paid on amounts drawn down to the members bank account.
Should an Australian have insufficient investments (inside or outside of super) to fund their own
retirement then they may be eligible to receive the Centrelink Age Pension. This is paid fortnightly
from the Australian Government to people of age pensioner age with assets and income under set
thresholds. The Centrelink Age Pension is completely different to a Superannuation Pension.
The following chapters provide you with greater detail and information on superannuation and
retirement income streams.
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Chapter 2 – Superannuation
History of superannuation in Australia
Large industrial companies began providing superannuation to senior employees in the 1940’s.
These funds in the main provided for lump sum benefits to be paid on retirement. Small and family
run companies generally did not offer superannuation to their employees and in many cases did not
have any for their managers and directors it was not until the 1980’s when industrial awards
required employers to contribute a minimum amount of superannuation for employees that
superannuation became universally provided.
In July 1983 the then Labour Government made substantial changes to superannuation changing the
tax regime for benefits accruing after that time.
At this time a new retirement vehicle was created called an Approved Deposit Fund (ADF). The role
of an ADF was to be a holding account for superannuation and other retirement benefits while a
member decided where to invest his or her superannuation. An ADF is a cash fund similar to an
ordinary bank account. There are still some Australian’s holding ADF funds today however they are
rather inferior products when compared to the more recent superannuation products available on
the market.
Until the late 1980’s superannuation was controlled by the commissioner of taxation when the
responsibility was transferred to the newly established Insurance and Superannuation Commission
(ISC). The ISC’s role was to supervise the operation of superannuation funds.
In 1988 the Labour Government in power decided that the income of superannuation funds would be
taxed at 15%.
Difficulties associated with enforcing award provisions in relation to superannuation and as not all
employees were covered by awards the superannuation guarantee charge was introduced in 1992
requiring that employers make a minimum contribution each quarter to employee’s superannuation.
Where an employer did not contribute at least the minimum amount it would be required to pay the
Super Guarantee Charge to the ATO and this would then be redistributed to a superannuation fund
nominated by the employee.
On the 1st July 1994 the Superannuation Industry Supervision Act (SIS Act 1994) introduced
operational standards for all superannuation funds and a number of changes were made to the
income tax legislation. The changes related to tax deductions for superannuation contributions and
limits to the amount of the benefit that could be received over a person’s lifetime from a
superannuation fund and taxed at concessional rates.
From July 1994 the tax law changed so that a tax deduction was allowed for contributions up to a set
amount, which depended on the person’s age.
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In 1997 the Australian Prudential Regulatory Authority (APRA) was formed as a result of the Wallis
inquiry to supervise banks, insurance companies and superannuation funds that had more than 5
members.
There has been a big change that was introduced to superannuation system during 2007
“Introduction of the Superannuation Simplification initiatives”. The key features of these changes
include:

Employer termination payments (new ETPs) now sit outside the super system

Forced payment of retirement benefits have been abolished

Lump sums to have two components only:

Tax exempt component - tax free

Taxable component – ability to withdraw from super if condition of
release is met up to threshold of $180,000 between ages 55-59

Benefits paid from a taxed source are tax free for those aged 60 and over

Employers can claim employee contribution deductions up to age 75

Self-employed can claim a full deduction for allowable contributions up to age 75

Cap to apply to post tax contributions of $150,000 -- with a three year average provision of
$450,000. In the 2014/15 year this is expected to increase to $180,000 – with three year of
$540,000.

New TFN (tax file number) provisions:
o
Taxable contributions will be taxed at the top marginal rate plus Medicare levy
where a TFN has not been supplied.
o
Post tax contributions can only be accepted with a TFN.

Portability processes have been simplified with the introduction of a standard form, and a 30 day
completion period.

Pensions will not be able to revert to a non-dependant on death, - requiring the payment of a
lump sum (commutation).

Change of description for a resident, and no-resident superannuation fund:

o
Resident Superannuation Fund is a Australian superannuation fund, and
o
Non-resident superannuation is a 'Foreign Superannuation Fund'.
Changes to SMSF:
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o
Consolidation of regulatory returns.
o
Fringe benefits tax has been removed from in specie employer contributions
o
Supervisory levy increase click here
o
New trustees to sign a declaration acknowledging responsibilities.
Expanded income definition for superannuation co-contribution and other government benefits
From 1 July 2009, there is a broadening of the various definitions of income that are used when
determining eligibility for certain types of government support.
A. The definition of income for the superannuation co-contribution, income support payments
for people below Age Pension age, family assistance, child support, and financial and
retirement savings assistance delivered through the tax system will include certain 'salary
sacrificed' contributions to superannuation.
B. The adjusted taxable income definitions used for the purposes of family assistance
programs, some parental income tests, the Commonwealth Seniors Health Card, child
support and loan repayment obligations under the Higher Education Loan Program will be
expanded to include net financial investment losses and net rental property losses.
C. The definition of income used for the Senior Australians Tax Offset, Medicare levy surcharge
and dependency tax offsets will also be expanded to include net financial investment losses
and net rental property losses.
D. The income definitions used for the Senior Australians tax offset, pensioner tax offset, and
dependency tax offsets will be expanded to include reportable fringe benefits.
E. The Commonwealth Seniors Health Card income test will be expanded to include in the
income assessment the gross income from superannuation income streams from a taxed
source as well as income that is salary sacrificed to superannuation.
Types of funds
Superannuation funds are set up under a trust deed. Trustees run the fund and, by law, they must
act honestly and prudently, and make decisions in the best interests of all members. There are two
broad groups of superannuation funds. The first is an accumulation fund where each member
receives a contribution to their own account. The funds balance is expected to accumulate over time
from earnings, less taxes and the expenses of running the superannuation account. The balance
upon retirement (assuming a condition of release is met) is used to fund the member’s lifestyle.
The second type is a defined benefit fund. This is explored in greater detail below.
There are several different types of superannuation funds. The most popular three types of funds
are:
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1. Retail fund – generally owned and operated by financial institutions and/or insurance
companies. Retain funds are intended to generate revenue and profit for the provider. As
the name suggests they are open to the general public. Examples include BT (owned by
Westpac), AMP, Colonial First State (CFS) (owned by CBA), OnePath (owned by ANZ) and
MLC (owned by NAB).
2. Industry fund - industry funds were originally designed for people in a particular industry or
under a particular industrial award. Whilst many industry funds still target particular sectors
they are generally available to anyone. Industry funds up until recently would promote that
they do not pay any fees to financial advisers however this has changed in recent times as
they were missing out on an important offering to their members. Industry funds are not for
profit organisations where any profits accumulated are meant to be passed back to the
members. Example of industry fund include REST, HESTA and Australian Super.
Until recently industry funds use to promote they are a low cost alternative to retail funds
however these days retail funds have low cost investment options available which puts them
on par with industry funds (if not cheaper in many instances).
3. Self managed superannuation fund (SMSF) - Self managed superannuation funds are
designed for members who want full control and responsibility for their super. SMSF can
have up to four members in the one fund and are often used by families.
There are several other types of superannuation funds which include:
i.
ii.
iii.
iv.
v.
vi.
Master fund or master trust - corporate funds open to people working for a particular
employer or corporation (including public sector funds) for example the QANTAS
superannuation fund.
Small superannuation fund – also commonly referred to as an APRA (Australian Prudential
Regulatory Authority) fund. This is because they are overseen by APRA. Similar to SMSF they
can have four or less members. Where they differ is the members do not have the same
level or responsibility as a SMSF.
Defined benefit fund – these funds are becoming less and less common with large
companies due to the financial obligation of the fund. A defined benefit fund guarantees the
member either a one off lump sum amount or an ongoing pension payment in retirement. A
formula is used to calculate the benefit amount. The formula is based upon the length of
employment and the final salary before retirement or average salary during employment.
Defined benefit funds are also quite common with the public servant sector (government
employees such as politicians).
Public sector fund – is part of a scheme for the payment of superannuation, retirement or
death benefits which is established under a Commonwealth, state or territory law. E.g.
Public Super Scheme (PPS).
Eligible rollover fund - An eligible rollover fund (ERF) is a special super fund that looks after
benefits for ‘lost’ members. A lost member is one who can no longer be contacted. E.g. Mail
returned to sender.
Retirement savings account (RSA) - A Retirement Savings Account (RSA) is a superannuation
account that is similar to a savings account that banks and other financial organisations
offer. They are low cost and low risk savings products with a cash only investment option.
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vii.
Approved deposit fund (ADF) – similar to an RSA is a very basic fund which generally only
has cash as an investment option.
Refer to See page 4- 100 of the Australian Master Financial Planning Guide for further information on
types of superannuation unds
Choice of fund
The super choice legislation amends the Superannuation Guarantee (Administration) Act 1992 so
that employers who are required to make Superannuation Guarantee (SGC) Charge contributions on
behalf of their employees are required to offer choice of superannuation fund to all eligible
employees from 1 July 2005.
Choice of fund was extended on 1 July 2006 to include additional classes of employees that were
previously excluded from the choice of fund legislation. Whilst many more employees are now
eligible for choice, there are still some who are still excluded from choice of super.
Employees not covered by choice
Broadly, those excluded from choice of fund are mainly public sector employees (other than
Victoria), few employees remaining under state awards dealing with superannuation, and those
covered by commonwealth and state industrial agreements dealing with superannuation. Below is a
list of those employees exempt from choice:

Employees whose 'contributions' are made to unfunded public arrangements.

Commonwealth employees who are members of the CSS, PSS and employees receiving
superannuation benefits under the Superannuation (productivity benefit) Act 1988, until
such times as regulations are made giving them choice. Commonwealth employees who
qualify for the new commonwealth accumulation scheme have had choice from 1 July 2006.

Employees for whom contributions are being made in accordance with certain workplace
agreements or certified agreements under the Industrial Relations Act, or the Workplace
Relations Act. These can include notional agreements preserving state awards and preserved
state agreements.

Employees for whom contributions are being made in accordance with a state industrial
award or registered industrial agreement. Following proclamation of the work choices
legislation this principally involves employees not employed by a corporation subject to
commonwealth jurisdiction.

Employees who are defined benefit members and who would still get retrenchment benefits
if their employer paid future contributions to another fund and certain other members of
defined benefit funds.

If an employee does not fall into one of the above categories then the employer must give
the employee the opportunity to choose their own superannuation fund in accordance with
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the legislation.
Source ' ASFA fact Sheet 2 ' Who has Choice
Offering Choice- employer obligations
For all new eligible employees, the standard choice form must be provided to them within 28 days
from commencement of employment. An employer must also provide a standard choice form to an
employee within 28 days for any of the following reasons:

where an employee requests in writing unless received in the last 12 months

if the employer became aware that there ceased to be a chosen fund for the employee due
to the fact that the employer is unable to contribute to the chosen fund, or the fund ceases
to be an eligible choice fund,

if the employer is contributing to the employee default fund in accordance with the choice
requirements, and the employer changes the fund to which they are making contributions
for the benefit of the employee.
Along with the standard choice form, employers are also required to make available to employees
where a product disclosure statement (PDS) of the default fund if it can be obtained. This will allow
employees to compare funds and make an informed decision.
Offered Choice - employee obligations
Employees offered choice that wish to choose a fund must provide the employer with written notice
of their chosen fund. The notice must contain the following information:

contact details of the fund

employee's superannuation account name and membership number

full name of the fund and the fund's Australian Business Number (ABN)

notice from the trustee of the fund stating that the fund is a complying super fund

information concerning the method of contribution (e.g. EFT, cheque) and details necessary
to make the payment

a superannuation product identifier number (SPIN), if the fund uses one

if the fund is a self managed superannuation fund, a written notice from the ATO stating
that the fund is a regulated superannuation fund, and

if an employer uses a number or unique identifier to refer to the employee - the number or
identifier that relates to the employee.
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At the point in time that the employer receives all the required information, the fund is considered
to be the employee's chosen fund. The employer has two months to prepare to contribute to the
chosen fund from the date of receiving the notice.
To view an example of a super choice letter click here.
The standard choice form will be an approved form under section 388-50 of the Taxation
Administration Act 1953. To see the standard ATO super choice template click here.
Employer may refuse to accept chosen fund
An employer may refuse to accept the fund chosen by an employee if the employee does not
provide a written statement, together with the notice, setting out any of the required information
under the standard choice form of the chosen fund.
There are other circumstances where an employer is not required to offer choice to their employees.
Under the choice of fund regime, employers are only obliged to action an employee's request once
in any 12 month period. The start date for the 12 month period is the date on which the employee
first gave all the relevant information to the employer.
Example
An employee has provided all required information to choose a fund on 15 July 2014. Therefore, the
employee may not be entitled to change their superannuation fund again for employer contributions
before 15 July 2015. Once the 12 months has elapsed and the employee wishes to choose a new
superannuation fund, the employee is still required to provide the employer with a written notice
and the prescribed information, as noted above.
Employers can accept a change of fund request within the 12 month period if they wish, however
they are not obliged to do so.
Employees are not subject to set timeframe's to choose their own superannuation fund. Once an
employer offers choice, employees can take up that option any time in the future.
Excluded contributions
Because the choice rules fall under the Superannuation Guarantee (Administration) Act 1992 (SGAA)
the regime only covers superannuation guarantee (SG) contributions. Any contributions above the
mandated 9.25% are not covered by the new rules. If an employer is making additional (voluntary)
contributions above 9.25%, then those contributions are not required to be remitted to an
employee's chosen fund. This rule also applies to salary sacrifice contributions; the employer can
direct where salary sacrifice contributions are paid.
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Default funds
Employers who are not exempt are required to nominate a default fund. The default fund is the fund
chosen by the employer where an employee that is eligible for choice fails to nominate their own
fund.
An employer's default fund must have the following minimum requirements to be considered an
eligible default fund:

offer minimum levels of insurance in respect of death (exemptions apply)

complying superannuation fund status, and

able to accept employer SGC.
For employees covered under a federal award or agreement, the default fund is the fund specified in
the employee's award or agreement. If the award or agreement nominates a number of funds, the
employer is required to choose one of the listed funds as the default fund.
Non-compliance
There are significant penalties for employers who fail to comply with the new choice rules. The ATO
penalties apply if an employer:

makes SG contributions, but not to the fund chosen by the employee

does not offer choice to its employees

if they fail to provide the standard choice form

contributes to a non-complying fund.
The penalty for non-compliance is calculated as approximately 25% of all non-complying
contributions paid, capped at $500 per employee for every quarter or per notice period as
determined by the Taxation Commissioner.
Released on 16 September 2005 employers who failed to comply with the choice of fund
requirements were exempt from paying the choice shortfall penalty until 30 June 2006.
These guidelines were revoked on 15 June 2006 and new ones registered extending the exemption
period from 30 June 2006 to 30 June 2007. This means that an employer will now be exempt from
paying the choice shortfall penalty if they fail to comply with the choice of fund requirements up to
30 June 2007. The exemption period has been extended as choice is now available to more
employees from 1 July 2006 and in light of the fact that some funds are closing due to the
introduction of APRA's trustee licensing rules.
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Life insurance
From 1 July 2008, your employer-nominated fund (also known as your default fund) must offer
minimum life insurance death cover to members.
The insurance cover must comply with one of the following requirements:

a premium of at least $0.50 per week for those under 56 years old

the level of insurance cover must equal or exceed that shown in the table below

if the contributions are made to a defined benefit fund on behalf of a defined benefit
member, the cover must equal or exceed that detailed in the table below.
Age range
Minimum level of insurance cover
0-19
Nil
20-34
$50,000
35-39
$35,000
40-44
$20,000
45-49
$14,000
50-55
$7,000
56 or older
Nil
There are some instances where employer-nominated super funds do not need to meet life
insurance requirements - for example, if you:

are making contributions under a federal award or into a retirement savings account or
capital guaranteed fund on behalf of an employee

arrange insurance cover for your employees outside the super system that includes death
cover that is at least equivalent to the minimum insurance requirements

are unable to obtain insurance from the fund normally used for a particular employee due to
your employee's health, occupation or hours worked
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
contribute to a fund whose governing rules were in place on 11 March 2005 and determined
that an amount not less than $50,000 will be payable for the death of an employee.
The regulations provide for circumstances where an employer does not have to make a contribution
to a fund which offers the required level of death cover. To read more click here.
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Contributing to superannuation
Anyone up to the age of 65 can contribute funds to superannuation. From the age of 65 a work test
must be satisfied for a trustee to accept a contribution to a superannuation fund. From 1st July 2013
the prohibition of contributing to super after the age of 75 was removed meaning that anyone can
now receive employer contributions as long as they meet the work test. Previously it was voluntary
for employers to make SGC contributions once an employee turned 70 and was not allowed once
they turned 75.
Prior to 1997, only a person who was in gainful employment and aged less than 65 years was eligible
to contribute to a superannuation fund that is you had to satisfy a work test. The work test at that
time was to be in gainful employment for at least 10 hours in the week you made the contribution.
This type of work test was open to “abuse” and many people who needed to were able to find work
for the required 10 hours in the week of contribution.
In 1997 this changed slightly as contributions were allowed to be made on behalf of a child or a
spouse. Interestingly, this created an anomaly in the superannuation system, if you were not
working you could not contribute to your own superannuation account, however, you could
contribute to your non-working spouses superannuation account.
In 2002 this changed again with the “opening up” of age limits for personal after tax contributions
known as Undeducted Contributions (where no tax deduction is claimed) also known as nonconcessional contributions. From 2002 any person under age 65 was able to contribute to
superannuation without having to satisfy the work test.
Types of contributions
The two major categories of contributions are:
1. Mandated employer contributions
These are contributions made by an employer under a law or an industrial agreement for the benefit
of a fund member. They can include any of the following:
-
super guarantee contributions
-
super guarantee shortfall components
-
award-related contributions
-
some payments from the superannuation holding accounts (SHA) special account.
You can accept mandated employer contributions for members at any time. This means you may
accept mandated employer contributions for a person regardless of the age of the person or the
number of hours they are working at that time.
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2. Non-mandated contributions
These include voluntary super contributions such as the following:
-
contributions made by employers over and above their Superannuation Guarantee
(Administration) Act 1992 or award obligations (these are known as employer voluntary
contributions):
-
personal contributions made by employees
-
personal contributions made by self-employed people
-
spouse contributions.
You can only accept non-mandated contributions in the following circumstances:
For members under 65 years of age, super funds can accept all types of contributions (within certain
limits covered shortly). However, you can only accept member contributions if the member’s tax file
number (TFN) has been quoted and the member is less than 65 years of age.
For members aged 65, you may accept non-mandated contributions where
-
the member is gainfully employed and worked for a minimum of 40 hours within a
consecutive 30 day period. (E.g. After turning 65 an employee works 10 hours a week over 4
weeks).
-
the member has quoted their TFN.
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The above grouping is based on compulsory and non –compulsory contributions. These two types of
groups are split into two important sub categories depending on the tax treatment of the
contributions .
Non-Concessional Contributions (NCC)
NCC are also commonly referred to as non-deducted contributions. These are contributions made to
a superannuation fund by a member after 30 June 1983, for which a tax deduction has not been
claimed. NCC includes those contributions made by:

An employee who makes a contribution using after tax dollars (E.g. from their bank account)

A spouse contribution, or

A self-employed person who does not claim a tax deduction for the contribution (or that
part for which no deduction is claimed).
Why make Non concessional contributions?
There are many advantages in making non-concessional contributions:

Non-concessional contributions are not subject to the 15 per cent contributions tax that
applies to concessional (tax deductible) contributions. Earnings on these contributions are
taxed at a maximum rate of 15 per cent. Depending on your individual tax rate, this may be
significantly lower than the tax rate that would apply to earnings if your savings were
invested outside super.

When a lump sum benefit is paid to you, non-concessional contributions included in the
benefit are tax-free.

If you transfer your super account to pension phase before the age of 60 and it includes nonconcessional contributions, you will receive a portion of the pension income – known as ‘the
tax free amount’ – tax-free.
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Caps on NCC
Non-concessional contributions are currently capped at $150,000 annually. The caps are meant to
be indexed annually however this has not been the case for several years now. You can’t accept any
fund-capped contributions in a financial year that exceed the following:
For members aged 64 or less on 1 July of the financial year, the bring forward provision is allowed
which allows a member to use the current financial year cap and bring the next two financial year
caps forward allowing a non-concessional contributions of $450,000 for the 2013-14 financial year to
be made in a single financial year as along as the bring forward provision has not been triggered in
the previous two financial years.
The government has announced in the 2014/15 financial year the NCC cap will be increased to
$180,000 (5 times the concessional contribution cap) which means the bring forward provision
entitlement will increase to $540,000 (3 x $180,000).
For members aged 65 or more but less than 75 on 1 July 2013 of the financial year, the nonconcessional contributions cap for members who meet the work test, is $150,000.
NCCs are member contributions, other than any of the following:

a contribution that your member advises they intend to claim an income tax deduction for a
contribution from a structured settlement or personal injury payment. The member, or a
legal personal representative should have notified you before indicating they would make
such a contribution a contribution that is covered by a choice to treat it as a contribution for
a capital gains tax (CGT) small business concession. The member should have notified you of
their choice before making the contribution

an employer SGC contribution or Superannuation Holding Account (SHA) special account
payment from the ATO

a superannuation government co-contribution payment
Member contributions are contributions made by, or on behalf of, a member, but don’t
include employer contributions made for the member.
Eligible spouse contributions
You can accept eligible spouse contributions for a member that is made by their spouse at any time
if that member is under the age of 65.
If your member is aged between 65 and 70, eligible spouse contributions made for the member can
be accepted only if that member is at least gainfully employed on a part-time basis. If your member
is 70 or over, the super fund can’t accept eligible spouse contributions for them.
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There is no age limit or employment test for the person making the contribution.
Click here to read the definition of a spouse.
Superannuation Government Co-contributions
The ATO works out your members’ eligibility for the super co-contribution based on information
included in the individual’s tax returns and the details reported to the ATO from your super fund.
Lower income earners may be entitled to receive up to $500 into their super fund from the
Government for making a NCC.
Self employed - From 1 July 2007 the government co-contribution was extended to allow self
employed individuals to qualify for the co-contribution (previously this was limited to people who
derived at least 10% of their assessable income and reportable fringe benefits as employees).
To find out more about the Superannuation Government Co-contribution scheme click here.
Residency Test (for Self Managed Super Funds only)
SMSF trustees/members need to meet the definition of an ‘Australian super fund’. Part of that
definition requires your SMSF to be a resident super fund. Familiarise yourself by clicking here.
In specie contributions
In specie contributions are contributions to a super fund in the form of an asset transfer of
ownership rather than a cash contribution.
Generally, you can’t intentionally acquire assets (including in specie contributions) from related
parties of your fund. However, there are some exceptions to this rule, such as listed securities and
business real property acquired at market value. To read more about in specie transfers click here.
Tax Deduction for Self Employed / Sole Trader
Individuals who carry on a business as a sole trader and meet the requirements are entitled to claim
a tax deduction on any personal contributions made into superannuation (up to the concessional
contribution cap). This is designed to ensure that self-employed individuals are able to tax effectively
contribute to super. This is explored in greater detail under concessional contributions.
Concessional Contribution (CC)
There are three ways a concessional contribution can be made into superannuation:
1) Compulsory (SGC) or voluntary employer contribution – when a member receives SGC from
their employer (9.25% of ordinary times earnings) this is classified as a concessional
contribution. If an employer pays staff a higher contribution amount, say 12%, then 9.25% is
classified as SGC and 2.75% as voluntary employer contribution.
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2) Salary sacrifice – this is where an employee asks their employer to make a payment into
their super funds using their pre-taxed income. The employer:

increases the amount contributed to the employee's superannuation fund, and

at the same time reduces the employee's wages by the amount contributed to
superannuation.
It is important to note that employers are not obliged to pay compulsory SGC to an
employee on the pre-salary sacrifice wage. E.g. An employee earning $80,000 per
annum decides to salary sacrifice $10,000 using pre-tax dollars into their super. The
employee by law can now pay SGC based on $80,000 - $10,000 = $70,000. In fact, the
legislation actually states that since in this example the salary sacrifice amount of
$10,000 is actually greater than SGC amount of $70,000 x 9.25% = $6,475; the employer
doesn’t have an SGC obligation at all as the salary sacrifice is considered an employer
contribution. The reality is most employers continue to pay SGC on the pre-salary
sacrifice wage as it doesn’t negatively impact them whether the employee takes their
full wage in their pay or chooses to salary sacrifices part of their wage. Using the
example above in most instances the employer would do the right thing and pay SGC
based on $80,000 x 9.25% = $7,400 and also salary sacrifice $10,000 into the employees
super fund. Remember, it doesn’t make any difference to the position of the business if
an employee chooses to salary sacrifice some of their salary.
3) Self employed / sole trader – when a sole trader makes a personal contribution to super
they are entitled to claim a tax deduction on this contribution. To do this they must first
notify their super fund of their intention to claim a deduction by completing a notice of
intent to claim a tax deduction form. Once the member’s super fund acknowledged and
accepts the form the member is able to claim a tax deduction on personal contributions
made into their super fund. Click here to read more about the eligibility criteria (also read
the ‘find out more’ under the example in the link provided).
Please also note that people less than 65 years of age who have retired or are unemployed
and meet the <10% of income from employment work test may be eligible to contribute to
super and claim a deduction on their contribution through filing a notice of intent to reduce
their assessable income from the sale of assets or income earned through investments.
Salary sacrifice into superannuation - employees of age pension age
For employees of age pension age, an amount of salary voluntarily sacrificed into superannuation is
income for social security purposes. Other superannuation contributions an employer is required to
make under the Superannuation Guarantee, award, collective workplace agreement or
superannuation fund rules are NOT assessed as income.
This law is in place so that people cannot maximise their Centrelink entitlemts by salary sacrificing or
‘hiding’ money in super.
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For self-employed people, an amount of salary voluntarily sacrificed into superannuation is income.
The amount of salary sacrificed into superannuation is treated as if it were business profits or a wage
paid directly to them.
Superannuation Guarantee Charge (SGC)
The SGC is central to the retirement savings of most Australians. It was introduced in 1992 in an
effort to ensure employers were making contributions for their employees. If not, a superannuation
charge was imposed on the employer. The compulsory employer contribution is currently 9.25% of
ordinary time earnings.
Where an employer does not meet the minimum level of support required by the due date, they will
be liable to pay a non-deductible charge. The charge is greater than what would have been paid into
the fund had the employer made the contribution.
To work out the minimum superannuation contributions you need to pay for each of these
employees, you multiply their earnings base for the quarter by 9.25% and pay this amount to a
complying superannuation fund.
If an employee’s earnings base changes from quarter to quarter, remember to recalculate their
minimum quarterly superannuation contributions in line with their earnings base changes.)
Employers must contribute to superannuation for their employees. An employer for SGC purposes is
an employer under the common law meaning. Any of the following can be employers:

Individuals

Companies

Trusts

Partnerships

Government and public authorities.
It is important to note that small family businesses that employ family members are included for SGC
purposes and as such must meet their SGC obligations as employers.
The question of whether an entity is an employer is an issue that can be discussed at length but
three basic factors need to be considered:

Is there control over the persons performing the work?

Is there a responsibility to pay salary and wages?

Is there the power to hire /dismiss employees?
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An employer is not required make superannuation contributions for the following – those that
Exemptions:

Employees paid less than $450 in a month.

Part-time employees under 18 years of age (working 30 hours, or less, each week).

Resident employees paid by non-resident employers for work done outside Australia.

Non-resident employees paid solely for work undertaken outside Australia.

Foreign executives who hold certain visas or entry permits, as prescribed by
the Regulations.

Employees paid for work of a domestic/private nature for not more than 30 hours each
week, eg part-time nanny or housekeeper.

Employees who opted out of receiving SG contributions under old section 19(4) of the
Superannuation Guarantee Administration Act 1992 (SGAA), prior to 1 July 2007, because
their accumulated super entitlements or actual payments received exceeded their
pension RBL. These elections were and remain irrevocable. Such elections cannot be
made on or after 1 July 2007 with the abolition of RBLs and the repeal of section 19(4)
from that date.

Employees employed under the Community Development Employment Program.

Employees in their capacity as members of the Defence Force Reserves.

Contractors are generally classified as employees for SG purposes if the contract is wholly
or principally for labour. Cases where the SG may not apply include if the person who the
contract with is free to hire other people to perform the work, even if the person ends up
performing the work himself or herself.
For further guidance on the treatment of contractors see the ATO website. In recent years the
obligation of companies to pay contractors SGC has increased.
You can also use the SGC Guarantee Eligibility Tool on the ATO website for practical application.
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Past minimum level of SGC required:
Financial
Year
1996/97 1997/98 1998/99 1999/00 2001/01 2001/02 2002/03 –
2012/13
2013/14
Charge
6%
9.25%
6%
7%
7%
8%
8%
9%
The employer’s contribution is calculated by reference to what is known as the “ordinary times
earnings” and charged as a percentage for the financial year.
The funds must then be paid to a complying superannuation fund, an RSA or ADF.
When must the contributions be made?
Quarter
Cut-off date for contributions to
be paid to super fund
Due date for lodgment of the
SGC statement to the ATO
1 July - 30 September
28 October
28 November
1 October - 31 December
28 January
28 February
1 January - 31 March
28 April
28 May
1 April - 30 June
28 July
28 August
If an employer fails to meet their obligations under the SGC requirements, either through failing to
provide choice when they were obliged to or not meeting the 9.25% contribution the following
applies:
What must a company do if it hasn’t met their obligations
If you haven't met your super obligations as an employer, you have to lodge a Superannuation
guarantee charge statement - quarterly (NAT 9599) and pay a superannuation guarantee charge to
the ATO.
You'll have to do this if you:

don't pay enough super contributions for your employee - this is called a super guarantee
shortfall
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
don't pay super contributions by the quarterly cut-off date for payment

don't pay super to your employee's chosen super fund - this is called a choice liability.
The super guarantee charge is made up of the super guarantee shortfall amounts (including any
choice liability), interest at 10% per annum, and an administration fee of $20 per employee per
quarter.
Also, the business might lose the tax deduction it would normally get. The super guarantee charge is
not tax deductible and neither are most late payments.
In the May Federal Budget in 2011 the Labor Government announced that SGC will be increase from
the 9% to 12% between 2013 and 2019. The table below shows the incremental increases employers
will be subject to.
The super guarantee charge percentage (%)
Period
Super guarantee rate
(charge percentage)
1 July 2003 - 30 June 2013
9%
1 July 2013 - 30 June 2014
9.25%
1 July 2014 - 30 June 2015
9.5%
1 July 2015 - 30 June 2016
10%
1 July 2016 - 30 June 2017
10.5%
1 July 2017 - 30 June 2018
11%
1 July 2018 - 30 June 2019
11.5%
1 July 2019 - 30 June 2020 and onwards
12%
This is an effort to help Australian’s fund their own retirement rather than rely on the Centrelink Age
Pension.
What are ordinary time earnings (OTE)?
Ordinary time earnings are simply the salary or wages you pay your employees for ordinary hours of
work, not including overtime. It includes over-award payments, shift allowances, commissions, and
paid leave up to the maximum contributions base for the quarter. The maximum contributions base
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is a maximum limit on the amount of superannuation contributions you’re expected to pay for any
employee, and it’s subject to annual indexation.
The maximum contribution you have to make for any quarter in the 2013-14 year is $4,443.70. This
is 9.25% of the quarterly maximum contributions base of $48,040.
The following link shows some of the most common payments covered by salary or wages and/or
ordinary time earnings.
Cooling Off Provisions
The Financial Services Reform Act 2001 replaced several pieces of legislation that related to
insurance and financial services and replaced them with Pt 7.9 of the Corporations Act 2001.
Pt 7.9 requires superannuation funds, risk insurance products; investment linked life policies and
approved deposit funds to have provisions for a 14 day cooling off period after a person has lodged
an application for a policy or initial investment.
This cooling off provision provides the client the right to request a redemption (get their money back
subject to market fluctuations) within 14 days from the earlier of


the time when the confirmation requirement is complied with i.e., you get an
acknowledgement of your investment such as policy documents;
the end of the 5th day after the day on which the product was issued to the client.
A request for the return of the money paid must be in writing, electronically or in any other way
specified by the Corporations Act 2001 sec 1019B(2)(a)-(c)).
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Taxation of contributions
Contributions to a superannuation fund may be subject to taxation. The taxation treatment depends
on a number of factors including
-
where the contributions came from; and
-
whether a tax deduction will be claimed for the contribution
Certain contributions or parts of a contribution will be treated as taxable contributions. Taxable
contributions are included in the taxable income of the superannuation fund, ADF or RSA (ITAA 1936
sec 274).
Taxable contributions include
-
all employer contributions whether tax deductible (SGC & pre-tax salary sacrifice) or
not;
-
personal contributions to the extent that a tax deduction has been claimed; and
Tax concessions for superannuation contributions
Significant changes took place from 1 July 2007 in relation to the tax concessions on superannuation
contributions.
Type of Superannuation Contribution
Taxable
Personal contribution (no tax deduction claimed)
No
Personal contribution (tax deduction claimed)
Yes
Employer Contribution
Yes
Eligible Spouse contribution
No
May 2013 Federal Budget Changes
Superannuation
The budget essentially confirmed previous superannuation announcements and in some areas
provided additional clarification. The key measures previously announced include:
Concessional contributions cap increased to $35,000
The Government will increase the concessional contributions cap to $35,000 (unindexed) as follows:
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
For the 2013/14 financial year, the higher cap of $35,000 will apply if you are 59 years or
over on 30 June 2013. For everyone else the general cap of $25,000 applies; and

For each financial year from 2014/15 onwards, the higher $35,000 cap will apply if you are
49 years or over on 30 June of the previous financial year.
The higher concessional contribution cap will apply until the general concessional contribution cap
reaches $35,000 due to indexation (expected to occur from 1 July 2018). That is, the higher cap will
only be temporary.
The current $150,000 Non Concessional Contribution limit together with the additional 2 year "bring
forward" rules for non-concessional contributions remain completely unchanged.
Excess concessional contributions taxed at marginal rates
If you make excess concessional contributions, they will be taxed at your marginal tax rate, plus an
interest charge to recognise that the tax on excess contributions is collected later than normal
income tax.
You'll also have the option of deciding whether you want to withdraw your excess concessional
contributions from your superannuation fund.
These reforms will apply to all excess concessional contributions made from 1 July 2013.
Under the current arrangements, concessional contributions in excess of the annual cap are taxed at
the top marginal tax rate regardless of your personal marginal tax rate. In addition, you can only
withdraw excess concessional contributions the first time you make an excess contribution after 1
July 2011, and only up to a maximum amount of $10,000.
Contributions tax doubling to 30% if you earn over $300,000
In the May 2012 Federal Budget the Government announced a proposal to apply an additional 15%
tax to concessional contributions made from 1 July 2012 if your combined annual income and
concessional contributions are greater than $300,000.
The key details of this measure are summarised below:

If you exceed the combined $300,000 annual threshold, you will generally have to pay an
additional 15% tax on your concessional contributions.
The additional 15% tax will not apply to any concessional contributions that are in excess of
the concessional contributions cap, or to any excess concessional contributions on which
you accept an offer from the ATO to have them refunded and taxed as income.
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
The definition of income for the combined $300,000 threshold is a modified version of the
income definition used for Medicare Levy surcharge purposes. The modified definition is
broadly:
Taxable income PLUS concessional contributions (within the concessional contributions cap)
PLUS reportable fringe benefits PLUS total net investment losses.
Any taxable component of a superannuation withdrawal that is within the low rate cap amount
($180,000 for 2013/14) is excluded from taxable income when calculating the threshold.
Excess concessional contributions will generally not count towards the combined $300,000
threshold.
If your income before including your concessional contributions is less than $300,000 but the
inclusion of the concessional contributions pushes them over, then only that part of the
contributions in excess of the $300,000 threshold will be subject to the additional tax.
Example
Jack's income, as defined above, before including his concessional contributions is $285,000. After
adding his concessional contributions of $20,000 this takes his combined income to $305,000.
So Jack’s super fund will only pay the additional 15% tax on $5,000 of his contributions (i.e. an
additional $750 in tax).
Source of Federal Budget Changes AMP
Treatment of late contributions
Some superannuation funds finance their benefits by making large one-off contributions. The
trustee of the fund, with the consent of the contributor, can then elect for these contributions not to
be taxable. Some funds also allow their members to elect whether their benefits are paid from a
taxed or untaxed source. Where taxed benefits are paid, the concessional cap will be applied on the
basis of the notional contributions for each year. Members of new schemes will be unable to elect
whether their benefits are paid from a taxed or untaxed source.
Administrative arrangements for contributions tax
Superannuation funds, except those that are untaxed, will report to the ATO all taxable
contributions (including notional taxable contributions) made for the benefit of an individual.
It was proposed that any additional liability for tax on contributions over $50,000 per annum would
be determined in respect of an individual but levied on superannuation funds. Following
consultation on the plan, the Government has decided that any additional liability for tax will be
levied on the individual. The individual will be able to elect for their superannuation fund to release
monies to pay the tax. The ATO will be able to reduce the amount of excess contributions subject to
tax in the event of inadvertent breaches of the cap.
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Age-based limits and deduction rules
Employers
Employers will be able to claim a full deduction for all contributions to superannuation funds made
on behalf of their employees.
Self-employed
Contributions made by the self-employed will be treated in the same way as contributions made by
employers for the benefit of employees. Superannuation contributions will be eligible for a full
deduction.
Personal deduction – Eligibility
The rule that determines a person’s eligibility to claim a deduction for personal contributions will be
simplified. The test will be changed so that it will only determine how much of a person’s assessable
income and reportable fringe benefits is attributable to employment as an employee, mirroring the
test currently used for determining eligibility for a Government co-contribution.
A person who wishes to claim a tax deduction for a superannuation contribution will need to notify
their superannuation fund by the time they lodge their income tax return, or the end of the
following financial year after the contribution was made, whichever is earlier. This notification
cannot be varied after this time. This will ensure that the ATO will have the relevant information to
count the contribution against the relevant cap and to determine eligibility for a co-contribution.
Non Concessional (Undeducted) contributions
The removal of lump sum benefits tax and RBLs will increase the amounts individuals can
accumulate in superannuation. These changes, in conjunction with the tax exempt status of
superannuation pension assets, will make superannuation an attractive vehicle in which to retain
assets to avoid paying tax. There will also be an incentive for high-wealth individuals to transfer large
amounts of assets currently held outside superannuation to the concessionally taxed
superannuation system.
Non concessional contributions (NCCs) are generally contributions that are not tax deductible to the
contributor and not assessable to the fund, such as personal after tax contributions and spouse
contributions.
To ensure the concessions are targeted appropriately, a cap of $150,000 a year (this will remain at
three times the level of the cap on concessional contributions and will increase as the concessional
cap moves with indexation) on the amount of post-tax superannuation contributions a person can
accrue will apply.
A ‘3-year’ NCC cap will allow individuals to bring forward two years of future contribution
entitlements giving them a cap of $450,000 over three financial years provided they are under 65 at
any time in the first year. For example, a person under age 65 would be able to make $450,000
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contribution in the 2013-14 financial year but will then be unable to make further post-tax
contributions until the 2016-17 financial year.
From 1 July 2007, once a person turns age 65 they are able to make $150,000 of post-tax
contributions each financial year provided they satisfy the work test. This will ensure that people will
not inadvertently breach the cap by not meeting the work test in the future two years. To simplify
the operation of the cap, people aged 63 and 64 who contribute $450,000 will not be required to
meet the existing work test in the two years after they make the contribution.
NCCs do not include:

Government co-contributions;

contributions relating to personal injury payments;

contributions from the disposal of small business assets (up to $1 million
indexed);

contributions paid out as a superannuation benefit in the same year that they
are contributed as an untaxed element (this would generally apply to untaxed
schemes);

roll-over superannuation benefit; or

amounts that are specifically excluded from a fund's assessable income because
they are included in the concessional contributions cap
Contributions made directly by a taxpayer into their spouse's account will be counted against the
receiving spouse's non-concessional contributions cap.
Exemptions to the cap
There are a number of contributions that can be made that will not be counted towards the NCC
cap. Two of which are personal injury payments and contributions form the disposal of small
business assets. These are discussed below:
Personal injury payments
To be excluded from the cap the contribution must have been derived from:

a structured settlement payment; or

an order for a personal injury payment, or

a worker’s compensation payment, taken as a lump sum.
The exclusion only applies to that part of the payment that is compensation or damages for personal
injury. Two legally qualified medical practitioners must certify that the individual is unlikely to ever
be gainfully employed in the capacity for which they are reasonably qualified by education, training
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or experience due to the injury. The payment must be made to the superannuation fund within the
later of 90 days of receipt of the payment or the structured settlement or order coming into effect.
The individual must give notice to the superannuation fund that the contribution is being made
under this exemption before, or when, making the contribution.
Small business CGT exemption
Contributions made from certain amounts arising from the disposal of qualifying small business
assets are exempt from the NCC cap up to a lifetime limit of $1 million (indexed) provided it is a
personal contribution for which no deduction is claimed. A client's CGT cap is reduced by the amount
of each contribution they elect to be covered by the exemption from the NCC cap.
Contributions allowed under the CGT cap are:

Capital gains from the disposal of assets that qualify for the CGT retirement
exemption provided the lifetime limit of $500,000 has not been exceeded.

Capital proceeds from the disposal of assets that qualify for the 15 year CGT
exemption, including capital proceeds that would have qualified for the 15 year
CGT exemption except that:
-
the disposal did not result in a capital gain or a capital loss;
-
the asset was a pre-CGT asset; or
-
the disposal occurred before the required 15-year holding period had
elapsed because of the permanent incapacity of the client (which occurred
after the asset was purchased).
Timing rules apply in relation to making the contribution. Following the CGT event, the contribution
must be made no later than the date they are required to lodge their income tax return or 30 days
from receipt of the capital proceeds. Where the client is a CGT concession stakeholder who qualifies
for the CGT cap, the contribution must be made within 30 days of receiving the disposal proceeds
(provided the entity makes the payment in the required timeframe, usually within 2 years of the
event). A contribution will only count towards the CGT cap if the client notifies their superannuation
provider before, or when, the contribution is made.
Other taxable contributions
Transfers from overseas superannuation funds
Where a superannuation benefit is paid from an overseas fund more than six months after the
individual becomes an Australian resident, a tax liability may arise. The tax liability arises in respect
of an amount (the taxable amount) which reflects earnings on the overseas superannuation while
the individual was an Australian resident.

Where the benefit is paid directly to the individual, the taxable amount is included in their
assessable income and taxed at their marginal tax rate.
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
Where the benefit is transferred to an Australian superannuation fund, the member can
elect to have the taxable amount instead treated as a taxable contribution in the Australian
fund (and therefore subject to the 15 per cent tax on contributions).
It is proposed that where an individual elects for the taxable amount to be treated as a taxable
contribution, then the taxable amount will remain taxed at the flat rate of 15 per cent when
contributed to superannuation. This is appropriate as the taxable amount represents earnings on
overseas superannuation during the relevant period.
These earnings would have been taxed at 15 per cent if they had been in the Australian
superannuation fund.
Other benefits (that is, the amount of the transfer exceeding the taxable amount mentioned above)
will be regarded as NCC contributions and count against the NCC contributions cap.
You can learn about a Qualifying Recognised Overseas Pension Scheme (QROPS) such as the
transferring of a UK Pensions to an Australian Superannuation fund by referring to this MLC
publication.
Transfers from untaxed schemes
Transfers of untaxed benefits from an untaxed scheme into a taxed fund are currently subject to
contributions tax when paid into the fund. This will generally continue. New withholding
arrangements will apply to the transferring fund (the untaxed scheme) when transferring a benefit.
These new arrangements are discussed in the untaxed Schemes section of this paper.
Breaching contribution caps
Where a person's concessional contributions have exceeded the concessional contributions cap in a
financial year, the amount in excess of the cap is subject to excess concessional contributions tax.
This tax is assessed to the taxpayer at the rate of 31.5%. This is because 15% tax has already been
deducted from the original concessional contribution so the actual total tax paid on the excess
amount is 31.5% + 15% = 46.5%.
Non-concessional contributions made during the financial year which exceed the non-concessional
contributions cap will be subject to excess non-concessional contributions tax. This tax is imposed on
the taxpayer at the highest marginal tax rate plus Medicare levy (i.e. 46.5%).
The Commissioner must make an excess contributions tax assessment of a taxpayer's excess
concessional and non-concessional contributions for a financial year. Both excess concessional and
non-concessional contributions tax are imposed in an excess contributions tax assessment. The
Commissioner must give the taxpayer notice in writing of an excess contributions tax assessment as
soon as practicable after making the assessment.
The ATO will provide individuals with a 'release authority' stating the amount of tax payable. The
taxpayer has 21 days from receiving the excess contributions tax assessment to pay the tax liability;
otherwise the general interest charge is imposed.
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The individual can choose whether to withdraw the tax from the super fund for excess concessional
contributions, however, this is mandatory for non-concessional contributions. Superannuation funds
have 30 days to release the money which can be paid to the individual or directly to the ATO
(depending on the instructions of the individual). Penalties apply for non-compliance with these
timeframes.
The excess contributions tax assessment may be amended by the Commissioner or at the request of
the taxpayer within four years after the date of the original excess contributions tax assessment.
The following diagram illustrates the process by which an excess tax liability is determined and a
release authority issued in respect of the payment.
Contribution Splitting
Contributions can be split with the contributor's spouse with the split being made after the end of
the financial year. When a person opts to roll over their benefits to another fund, they can make a
request to the original fund to split their funds for that financial year prior to rolling over.
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Superannuation contribution splitting allows a couple to build two separate superannuation
accounts even if one spouse is on a low income or not working.
Any regulated superannuation fund that provides accumulation interests may offer a contribution
splitting service (on a voluntary basis) for contributions made each financial year. In general, a
member can only split eligible contributions in the financial year following the year in which the
contributions were made. The only exceptions to this rule apply where the member is cashing out or
rolling over their entire benefit.
A spouse may split the lesser of:

85% of the concessional contributions for the financial year comprising employer
contributions (including salary sacrifice and employer contributions made from plan
reserves) and personal deductible contributions.

The concessional contribution cap for that financial year.

Non-concessional contributions of any type cannot be split.
Note: Contributions made by others on behalf of the client that are assessable to the fund
and overseas transfer amounts continue to be non-splittable.
A member of a regulated superannuation fund may make an application to split an amount of
either/both taxed splittable contributions or untaxed splittable contributions. The application must
be either made:

in the following financial year (i.e. application must be made between 1 July following the
end of the financial year in which the contributions were made and the following 30 June),
or

during the financial year if the entire benefit is to be transferred in that financial year.
The superannuation contributions spitting application must specify the amount of the member's
untaxed splittable contributions (Undeducted) or taxed splittable contributions (post 30 June 1983)
that are to be split.
The member will also have to provide evidence to the Trustee of the regulated superannuation fund
that at the time of the application the receiving spouse:

has not reached preservation age

is between preservation age and 65 years of age and has not retired*
An application is invalid if the:

amount to be split exceeds the maximum splittable amount

receiving spouse is 65 years or older, or is between preservation age and 65 and retired*
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
member has already made an application relating to the same spouse and the trustee is
considering or has processed that application.
The Trustee of a regulated superannuation fund must give effect to a splitting request which they
have accepted as soon as practicable and in any event within 90 days of receiving the application.
If a member intends to claim a personal tax deduction for personal contributions made to
superannuation, a notice must be lodged before the superannuation contributions splitting
application can be lodged. If the notice is lodged after the application to split, no deduction will be
allowed.
Source - MLC Limited, Technical Update, 8 May 2007
* APRA has provided guidance in relation to the retirement requirement for the receiving spouse in
Superannuation Circular I.A.1. In APRA's view, the following conditions would meet the
requirements of the splitting regulations:

The receiving spouse is less than preservation age (currently 55, until 30 June 2015).

The receiving spouse is aged between preservation age and 64 years and is currently
gainfully employed

The receiving spouse is aged between preservation age and 64 years, is not currently
employed for but does not have the intention never to resume gainful employment, or

The receiving spouse is aged between preservation age and 64 years and has never been
gainfully employed.
Source: APRA Superannuation Circular No. I.A.1 (updated September 2006)
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TEST YOUR KNOWLEDGE
1. Within how many days must an employer provide a super choice form to a new employee?
2. Explain the difference between a Defined Benefit superannuation fund and an Accumulation
fund.
3. Do you think the compulsory minimum life insurance insured amounts held inside a default
corporate super plan are sufficient?
4. A new client of yours, Shane Grant, has recently commenced his own business – “Better
Plumbing Pty Ltd”. Shane is unsure of his superannuation obligations in relation to his 2
staff members (an apprentice plumber and a sub-contractor).
As Shane’s financial planner, advise him on his obligations in relation to superannuation
generally, in relation to his staff, and discuss with Shane the eligibility rules of the
government’s co-contribution in relation to the self-employed.
5. Explain in simple terms the tax implications of an employee making a salary sacrifice
contribution versus an after tax contribution from their pay?
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Accessing Superannuation
When you pay benefits from your superannuation fund it must be in accordance with the
Superannuation Industry (Supervision) Act 1993 (SISA) and the Superannuation Industry
(Supervision) Regulations 1994 (SISR).
For a member to access their superannuation benefit a condition of release must be first met.
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's possible that a benefit may be payable under the super laws, but can’t be paid under
the rules of a SMSF.
The superannuation conditions of release for paying out benefits are:











Retirement: Actual retirement depends on a person’s age and, for those under 60 years old,
their future employment intentions. A retired member can’t access their preserved benefits
before they reach their preservation age.
Termination of an employment contract after age 60. E.g. Changing employers after reaching the
age of 60 entitled a member to access their super benefit tax free
Attaining age 65: A member who reaches age 65 may cash their benefits at any time. There are
no cashing restrictions. (It isn't compulsory to cash out a member’s benefits merely because they
have reached a certain age.)
Permanent disability (trustee of the super fund will make decision)
Terminal medical condition (evidence required from two medical practitioners (one a specialist))
Upon death
Upon permanent departure from Australia for certain temporary residents holding a temporary
visa
Compassionate grounds (Department of Human Services)
Financial hardship (receipt of Centrelink benefits for: 26 weeks consecutively and unable to meet
reasonable and immediate family living expenses or 39 weeks cumulatively if over preservation
age and not gainfully employed)
Transition to retirement (attaining preservation age): Members who are under 65 and have
reached preservation age, but remain gainfully employed on a full-time or part-time basis, may
access their benefits as a non-commutable income stream.
Member superannuation account balance < $200 can be cashed in at any age.
Preserved or restricted non-preserved benefits which accrue after a condition of release has been
satisfied (e.g. through subsequent contributions, transfers) may only be cashed if another condition
of release is satisfied for subsequent cashing. This may involve reconfirming that the original
condition of release still applies e.g. retirement before age 65 from any remaining or subsequent
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gainful employment arrangements, permanent incapacity or satisfying a new condition of release
e.g. reaching age 65.
The following pages explore the condition of releases mentioned above in greater detail.
Retirement
A retired member cannot access their preserved benefits before they reach their preservation age.
The preservation age differs according to when a member was born and allows access to benefits
from age 55 to age 60. This is due to the ageing population and the ability of people to work for
longer.
Source: APRA Superannuation Circular No I.C.2 (updated Sept 2006)
Preservation age
Date of birth
Preservation age
Before 1 July 1960
55 years
1 July 1960 - 30 June 1961
56 years
1 July 1961 - 30 June 1962
57 years
1 July 1962 - 30 June 1963
58 years
1 July 1963 - 30 June 1964
59 years
After 30 June 1964
60 years
Where a member has reached a preservation age that is less than 60, their retirement occurs when:


an arrangement under which the member was gainfully employed has come to an end. This
may have occurred at any time, including prior to their preservation age, and
the trustee is reasonably satisfied that the member intends never again to become gainfully
employed either part-time or fulltime, (i.e. for 10 or more hours per week).
The trustee must be satisfied that retirement has occurred. This may include obtaining evidence:



of the member's age
that the member's gainful employment has ceased (e.g. a statement from the employer), and
of the member's intention, at the time of the claim, to never again be gainfully employed
either part-time or full-time (i.e. for 10 or more hours per week).
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While a trustee generally does not need to form an opinion on the member's intentions concerning
future gainful employment where the member has reached age 60, the trustee must obtain
satisfactory evidence of the cessation of an employment arrangement and the member's age.
Where a member, aged 60 or more, is in two or more employment arrangements at the same time,
the cessation of one of the employment arrangements is the condition of release in respect of all
preserved benefits accumulated up until that time. The occurrence of the 'retirement' condition of
release in these circumstances will not enable the cashing of any preserved or restricted nonpreserved benefits which accrue AFTER the condition of release has occurred. A member will not be
able to cash those benefits until a fresh condition of release occurs.
If a member aged 60 to 64 commences a new employment arrangement after satisfying a condition
of release, such as retirement from a previous employment arrangement at or after age 60, benefits
in respect of the new employment will remain preserved until a further condition of release is
satisfied.
Source: APRA Superannuation Circular No I.C.2 (updated September 2006)
Transition to retirement
From 1 July, 2007, pensions commenced under the transition to retirement condition of release will
allow no more than 10% of the account balance (at the start of each year) to be withdrawn in one
year.
Pensions commenced prior to 1 July, 2007 will be deemed to satisfy this requirement.
Since 1 July 2005, a condition of release has been available for clients who reach preservation age
but do not retire permanently from the workforce. For these clients, benefits can be taken in the
form of a non-commutable allocated annuity or pension, or a non-commutable complying annuity or
pension.
What is transition to retirement?
The transition to retirement measure allows people who have reached their preservation age, to
have access to their superannuation benefits without having to retire or leave their job. This
measure allows people to access their superannuation savings by drawing down certain noncommutable superannuation income streams called transition to retirement income streams.
From 1 July 2007, new rules apply to transition to retirement income streams.
Income streams which commenced before 1 July 2007 and that complied with the transition to
retirement rules at the time are deemed to satisfy the new requirements and may continue to be
paid under the former rules.
Income streams form part of the retirement planning topic covered in 4.
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A couple examples of the transition to retirement strategy can be found by clicking here.
Terminating gainful employment - less than $200
A member may cash their preserved and restricted non-preserved benefits upon terminating
employment with a standard employer-sponsor (on or after 1 July 1997) if their preserved benefits
at the time of the termination are less than $200 and the governing rules of the fund allow this. A
standard employer-sponsor is an employer that contributes to the fund (or has ceased temporarily
to contribute) wholly or partly pursuant to an arrangement between the employer and the trustee
of the fund.
Source: APRA Superannuation Circular No I.C.2 (updated September 2006)
Temporary incapacity
Subject to the governing rules of the fund a member may access their benefits where the trustee is
satisfied that temporary incapacity exists i.e. the member temporarily ceases work as a result of
physical or mental ill-health which does not constitute permanent incapacity. It is not necessary for
the member's employment to fully cease.
Benefits may be paid where a member makes a partial return to gainful employment whilst
incapacitated, provided that the member's remuneration plus the temporary incapacity benefits do
not exceed the member's remuneration at the time the member became ill.
Payment of preserved benefits and restricted non-preserved benefits on temporary incapacity is
subject to the following restrictions:









the benefit is paid as a non-commutable income stream
the purpose of the payment is to continue (in whole or in part) the gain or reward which the
member received before the temporary incapacity
generally a member on fully paid leave (e.g. sick leave) will not be eligible to receive
temporary incapacity benefits;
the period of benefit payments must not exceed the period of incapacity from full
employment of the kind engaged in immediately before the member became ill (including the
level of weekly hours); and
the benefits must not be paid from the member's minimum benefits (refer to Superannuation
Circular I.C.1. "Minimum Benefits Standards").
a non-commutable income stream:
has no residual capital value;
pays benefits at least monthly; and
payments may increase from month to month in accordance with the definition in regulation
6.01(2).
SIS does not limit the term of the payment. However, where payments are made beyond two years
there are taxation implications in relation to the deductibility of insurance premiums. For further
information refer to Taxation Determination 98/27.
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Source: APRA Superannuation Circular No I.C.2 (updated September 2006)
Permanent incapacity
A member may access their preserved benefits and restricted non-preserved benefits on the
grounds of permanent incapacity if:



the governing rules permit;
the member ceases gainful employment i.e. working at least 10 hours each week (a member
who has never been gainfully employed is therefore unable to satisfy the permanent
incapacity of release); and
the trustee is reasonably satisfied that the member is unlikely, because of physical or mental
ill-health, ever again to engage in gainful employment for which the member is reasonably
qualified by education, training or experience.
A trustee is not required to assess the extent of the incapacity at the time the member ceased
gainful employment. That is, the full extent of the incapacity may have developed at some later time
and the trustee's decision should take account of these developments.
Where a member settles a Total and Permanent Disability (TPD) claim, including a settlement
conciliated through the Superannuation Complaints Tribunal, the member's preserved benefits will
include the settlement amount and will be able to cashed under the permanent incapacity condition
of release only where the trustee is reasonably satisfied that the member is unlikely because of ill
health ever again to engage in gainful employment for which the member is reasonably qualified by
education, training or experience.
Source: APRA Superannuation Circular No I.C.2 (updated September 2006)
Severe financial hardship
Subject to the governing rules of the fund, benefits maybe released on the grounds of severe
financial hardship. Different conditions for release apply depending on the age of the member.
For a member who has not reached their preservation age plus 39 weeks, the trustee must be
satisfied on written evidence that the member:


is unable to meet reasonable and immediate family living expenses; and
has received a relevant Commonwealth income support payment for at least the previous 26
weeks from a Commonwealth Department or Agency i.e. Centrelink, Department of Veterans'
Affairs or a Commonwealth Community Development Employment Projects (CDEP)
organisation.
The payment of benefit on grounds of severe financial hardship must be a single gross lump sum of
no more than $10,000 and no less than $1,000, or a lesser amount if the balance of the member's
benefit is less than $1,000. Only one payment per member is permitted in any twelve month period.
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Where a member has reached their preservation age plus 39 weeks, benefits may be released on the
grounds of severe financial hardship if the member:


has received a relevant income support payment provided by a Commonwealth Department
or Agency for a cumulative period of at least 39 weeks or more after reaching their
preservation age; and
is not gainfully employed (for at least 10 hours per week) on the date of the application.
Benefits released for these members are not subject to cashing restrictions.
Applications for release on severe financial hardship must be made directly to trustees, many of
whom have forms and information available. Before dismissing applications, or referring them to
APRA for consideration under compassionate grounds, trustees should ensure that no other means
for release are available to the member e.g. cashing unrestricted non-preserved amounts,
retirement etc.
Source: APRA Superannuation Circular No I.C.2 (updated September 2006).
There are two tests which may be used to determine whether a person is taken to be in severe
financial hardship, as follows:
Test 1:
Any age
Financial Hardship Test
Received (and in receipt of, at the
time of application) Commonwealth
income support payments
continuously for 26 weeks; and the
trustee is satisfied that the person is
unable to meet reasonable and
immediate family living expenses.
Payment amount
A single lump sum of not less than $1,000
(except where preserved and restricted
non-preserved amounts are less than this)
and not more than $10,000)
Financial Hardship Test
Payment amount
Test 2:
Received Commonwealth income No limit to amount withdrawn.
support payments for a cumulative
Over
period of 39 weeks after reaching
preservation
preservation age; and is not gainfully
age plus 39 employed for at least 10 hours per
weeks
week.
For someone under preservation age plus 39 weeks: only Test 1 may be used.
For someone preservation age plus 39 weeks or more: either Test 1 or Test 2 may be used.
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Note with Test 2 that trustee discretion does not apply and there is no limit on the amount which is
able to be taken.
Source: Macquarie Bank Limited - Technical Services, Financial Services Group
Compassionate grounds
Preserved benefits and restricted non-preserved benefits maybe released on specified
compassionate grounds where a member does not have the financial capacity to meet the expense,
release is allowable under the governing rules of the fund and APRA determines, in writing, that
release is permitted.
Further information on accessing superannuation under severe financial hardship and
compassionate grounds is available through the Department of Human Services website.
Release of benefits for ancillary purposes
The Regulator may give written approval for the cashing of benefits in restricted circumstances.
Under s. 62(1)(b)(v) of the SIS Act, the Regulator has the power to determine ancillary benefits for
which funds may be maintained. Accordingly, the Regulator has the power to approve circumstances
in which those benefits may be cashed.
Approval will only be given where this is consistent with the purpose and intent of SIS legislation and
the Government's retirement incomes policy (refer to Superannuation Circular No. III.A.4 The Sole
Purpose Test). Applications for an approval under s. 62(1)(b)(v) of the SIS Act would need to address
this.
Source: APRA Superannuation Circular No I.C.2 (updated September 2006)
Access to super for non-residents permanently departing Australia
In summary
Effective from 1 July 2002, temporary residents can remove preserved benefits from superannuation
prior to meeting a 'standard condition of release'.
Access for temporary residents
People who have been in Australia on an 'eligible class' of temporary visa that has since expired or
access their preserved benefits when they permanently depart Australia.
It is important to note that a benefit will only be treated as a 'departing Australia superannuation
payment' if the benefit is applied for under this condition of release.
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If it is applied for under a 'standard condition of release', the benefit will be treated as
superannuation member benefits and taxed as such.
Will Australian citizens who permanently depart Australia also be able to access their
superannuation?
No, they will not meet the eligible criteria.
Will New Zealand citizens be able to access any Australian superannuation on leaving Australia?
Yes, from 2013/14 super benefits can be transferred to the equivalent superannuation system in
New Zealand. It cannot be withdrawn into a personal account unless a condition of release is met.
How does a temporary resident apply for payment under this measure?
The individual will have to apply to their fund for payment of their benefit. In doing so they will need
to prove their eligibility.
Where an individual's benefit in the fund is less than $5,000, they will need to provide:


a copy, or other evidence, of an eligible visa, showing they were the holder and that the visa
has expired or been cancelled; and
a copy of their passport showing they have departed Australia.
If the individual's benefit in the fund is $5,000 or more than the required evidence is a written
statement from the Department of Immigration and Multicultural and Indigenous Affairs (DIMIA)
that the individual was a holder of an eligible visa which has expired or been cancelled and that they
have permanently departed Australia. To obtain this the individual will need to complete a
'Confirmation of Immigration Status' form. This will be available from the DIMIA and ATO web sites
from July 2002 and can only be sent to DIMIA once the temporary resident has left Australia.
Funds will normally be required to make payment within 28 days of receiving a valid request.
Source: Excerpt from Australian Tax Office publications titled "Temporary residents - eligible
temporary resident visas" - NAT6851 and "Temporary residents departing Australia" NAT6850
'copyright Commonwealth of Australia reproduced by permission'
Treatment of early release benefits
Where a temporary resident accesses benefits under the 'temporary resident condition of release' it
will form a 'departing Australia superannuation payment'.
You can access further information on the ATO website.
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Illegal early access
Australians are being warned to steer clear of illegal offers to release their superannuation benefits
before retirement.
Avoid illegal schemes that try to get your super money out early, and save yourself from getting
cheated and from heavy tax and legal penalties. These schemes are sometimes promoted by word of
mouth or shady advertising.
Report to ASIC or the ATO anyone who tries to talk you into getting your preserved benefits early
through a self-managed super fund or for a fee.
Avoid illegal schemes deliberately target people experiencing financial difficulties. It’s
understandable that people may be attracted to such promotions particularly when they are doing it
tough with meeting financial commitments, such as home loan repayments.
In very limited circumstances it may be legally possible to access some of your super early, however,
this should really be a last resort because it will leave you with less money in retirement. Look into
other options to deal with financial difficulties first such as making an application for a hardship
variation on your loans or getting assistance from a free and independent financial counsellor.
Some promoters have also enticed people to roll their super into a self-managed super fund (SMSF)
so they can access the money early to pay off their debts. Unless the legal tests for accessing super
early are met, this is illegal. ASIC has seen some illegal early release promoters take significant fees
of up to 30 per cent before forwarding the rest of the super savings to the client, which they’re not
entitled to access anyway.
As well as the risk of losing their hard-earned super savings, victims may suffer severe tax
complications as a result of the fraudulent payments involved with early release schemes.
Schemes offering early access to super are illegal and attract significant legal and financial penalties
to promoters and clients. If you’re in an SMSF, you are the trustee of your fund and must operate
the fund in accordance with the law. Failing to meet this obligation is, in most cases, breaking the
law.
If you receive an offer to access your super through an illegal scheme, contact ASIC’s Infoline on
1300 300 630 or the ATO on 13 10 20 to report your concerns.
Handling of superannuation complaints
Regulated superannuation funds that have five or more members and approved deposit funds that
have more than one member must establish a mechanism to deal with enquiries or complaints made
by beneficiaries under section 101 of the SIS Act and the Superannuation (Resolution of Complaints)
Act 1993.
Complaints are initially to be made by beneficiaries to the trustee and the trustees are required to
have procedures to properly consider and deal with the complaint within 90 days after the
complaint has been made.
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When the trustee makes a decision in relation to the complaint, it must provide the complainant
with information about the Superannuation Complaints Tribunal (SCT) and its function.
If the complaint is not resolved to the satisfaction of the member or beneficiary, the person can take
the complaint to the Superannuation Complaints Tribunal (SCT). The complaint can only go to the
Tribunal once the member or beneficiary has exhausted all avenues with the trustees.
Ed Note: This does not apply to SMSFs
Superannuation Complaints Tribunal (SCT)
Complaints to the Tribunal must be made in writing. The Tribunal has the power to resolve disputes
firstly by conciliation, and if that fails the Tribunal will make a decision in respect of the matter under
its arbitration review powers. If the member or beneficiary is still not satisfied with the
determination made by the Tribunal they may appeal to a Federal Court where there is a question of
law involved.
The procedure for making a claim is set out by the SCT and the complainant must:




Complete a "Registration of Complaint" form (available from the SCT)
Attached a copy of the trustee's reply to the complaint
State why they are not satisfied with the trustees decisions; and
State if any other person or organisation needs to be included as part of the resolution.
It should be noted that members or beneficiaries are not able to take complaints to the Tribunal
which relate to the management of the fund as a whole. For example, the Tribunal cannot deal with
matters such as poor investment performance of a fund, rather, if the trustees had not implemented
a satisfactory investment strategy such as appropriate diversification then the trustees may be liable
to civil or criminal action pursuant to the SIS Act.
The Superannuation Complaints Tribunal (SCT) contact details can be viewed here.
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TEST YOUR KNOWLEDGE
1. Joe, aged 48 has been unemployed for 7 months and is in desperate need of $6,000 to make
repayments for his home loan otherwise the bank in going to reposes the home. Joe wants
to apply for severe hardship provisions to make a partial withdrawal from his super:
a. What documents does he need to apply to have funds released from his super
account?
b. If he has the above documents available up to how much may he be entitled?
c. What will be the taxation consequences if he makes a partial withdrawal from his
super
2. If a member has income protection insurance within their super under which condition of
release(s) do you think the benefit amount can be released from the super fund to the
member’s individual bank account?
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Chapter 3 - More on Super
Portability of benefits
Superannuation funds will generally process your rollover between 3 and the maximum 30 day limit
once all the required information is provided.
All funds are required to accept a standard form for portability requests. The form includes standard
proof of identity requirements to ensure uniformity amongst funds. The standard form makes it
easier for members to provide the necessary information. You can view the generic super rollover
form for full transfers here.
From July 2013 super providers are able to rollover member’s funds electronically. Until this time it
was only possible to transfer via cheque. The ability to now electronically transfer super account
balances will speed up the processing time and also help reduce loss or damaged (e.g. damp) mail.
Lost Super
The Government in conjunction with the ATO has developed a Super Seeker tool to help members
with lost super funds locate them. A common example of a lost super fund is one where the super
provider had mail returned to the sender due to the member changing addresses and not providing
them with the new details.
Preserved & Non-Preserved Superannuation Amounts
Preserved benefits
All contributions made by or on behalf of a member, and all earnings since 30 June 1999, are
preserved benefits. Employer eligible termination payments (ETPs) rolled over into a super fund
after 30 June 2004 are also preserved benefits. Please note that since 1 July 2012 it is no longer
possible for ETPs to be contributed to super.
Preserved benefits may be cashed voluntarily only if a condition of release is met and subject to any
cashing restrictions imposed by the super laws. Cashing restrictions tell you what form the benefits
need to be taken in.
Restricted non-preserved benefits
These benefits can't be cashed until the member meets a condition of release specific to these
benefits. Generally, they stem from employment-related contributions (other than employer
contributions) made before 1 July 1999 or to rolled-over employer ETPs made before 1 July 2004 and
can be cashed once the employment they relate to has been terminated. E.g. Changing jobs will
move restricted non-preserved benefits to be unrestricted non-preserved.
Unrestricted non-preserved benefits
These benefits don't require a condition of release to be met, and may be paid upon demand by the
member. They include, for example, benefits for which a member has previously satisfied a
condition of release and decided to keep the money in the super fund.
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Spouse super contribution tax offset
A tax offset may apply if contributions are made on behalf of a spouse to a:

complying super fund

retirement savings account (RSA).
This tax offset applies to contributions made on behalf of non-working or low-income-earning
spouses, whether married or de facto.
Those eligible are able to claim an 18% tax offset on super contributions of up to $3,000 made on
behalf of a non-working or low-income-earning spouse.
Eligibility
Maximum entitlement for the tax offset of up to $540 each financial year is available if:

a tax deduction is not claimed for the contribution

both spouses were Australian residents when the contributions were made

at the time of making the contributions both spouses were not living separately and apart on
a permanent basis

the sum of the receiving spouse's assessable income, including total reportable fringe
benefits amounts and reportable employer super contributions (RESC) for the financial year,
was less than $10,800

the contribution was made to a super fund which was a complying fund in the income year
in which the contribution was made.
Where the income of the receiving spouse is greater than $10,800 the offset reduces dollar for dollar
for each dollar earned by the spouse above $10,800 until an income of $13,800 where the offset is
reduced to zero.
E.g. John earns $185,000 and makes a non-concessional (NCC) contribution of $3,000 into his wife
Jane’s super account. Jane’s assessable income for the financial year was $11,000.
Therefore John is entitled to claim an offset of $2,800 in his tax return. [$3,000 – ($11,000 $10,800)].
Government Co-contribution
The superannuation (super) co-contribution is a government initiative to help eligible individuals
boost their super savings for the future.
If it available to low or middle-income earners. If eligible, one can take advantage of the super cocontribution payment by making eligible personal super contributions to a super fund or retirement
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savings account (RSA). The government will then match the personal super contributions up to the
maximum amount.
How it works
When a member makes an after-tax contribution (NCC) into their super, and they earn up to
$33,516, the government will contribute up to a maximum of $500 tax-free into their super fund.
The amount decreases by 3.33c for every dollar above this and cuts out at $48,516 (2013-14). This
represents an instant return of up to 50% on the $1,000 contribution.
The government's co-contribution is not taxed on its way into the fund and is not included in the
member’s non-concessional contributions cap. The co-contribution is not included as income in the
member’s tax return.
Eligibility
A member of a fund will be eligible for the super co-contribution if all of the following apply:

they make one or more eligible personal super contributions during the financial year into a
complying super fund or RSA, and don't claim a deduction for all of them

the two income tests are met:
o
total income (minus any allowable business deductions) for the financial year is less
than the higher income threshold
o
10% or more of your total income comes from eligible employment-related
activities, carrying on a business or a combination of both
 less than 71 years old at the end of the financial year

not the holder of a temporary visa at any time of the financial year, unless from New
Zealand or holder of a prescribed visa
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Super co-contribution table for 2013/14 financial year
If your personal non-concessional contribution is:
$1,000
$800
$500
$200
And your income is:
The government will contribute:
$33,516 or less
$500
$400
$250
$100
$35,516
$433
$400
$250
$100
$37,516
$367
$367
$250
$100
$39,516
$300
$300
$250
$100
$41,516
$233
$233
$233
$100
$43,516
$167
$167
$167
$100
$45,516
$100
$100
$100
$100
$48,516 or more
$0
$0
$0
$0
Source AMP
Low income super contribution
The low income super contribution (LISC) is a government superannuation payment of up to $500
each financial year to help low-income earners save for their retirement.
If one earns $37,000 or less a year, they may be eligible to receive a LISC payment directly into their
super fund account. If eligible, LISC is automatically paid into the members account.
The idea behind LISC is that lower income earners should not have to pay the 15% concessional
contribution tax for concessional contributions.
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The maximum payment one can receive for a financial year is $500, and the minimum is $10 – but if
a member is eligible for less than $10, the ATO will round this up to $10.
Super account members are eligible for the LISC if they satisfy all the following requirements:




Concessional (before tax) contributions are paid into a complying super fund – this includes
super guarantee amounts
The member earns $37,000 or less a year – based on their actual or estimated 'adjusted
taxable income'
The member hasn’t held a temporary resident visa at any time during the income year (note
that New Zealand citizens in Australia are eligible for the payment)
The member lodges an income tax return and 10% or more of their total income comes
from business and/or employment, or the member does not lodge an income tax return and
10% or more of their total income comes from employment.
E.g. Sarah earns an adjusted taxable income of $30,000 in this financial year. Her employer pays SGC
at 9.25% or $2775 into her super fund. As this is a concessional contribution the super fund deducts
tax at 15% or $416.25. In the following financial year Sarah’s super will receive a credit of $416.25
under the LISC provision.
Death Benefits
When someone dies, it can be a tough time for the family - emotionally and financially. Disputes
over money can drive families apart. This can all be prevented by putting in place the right
measures. It will also reduce stress levels and the time it takes for the intended recipient to receive
the death benefit.
When a superannuation account member dies, the super fund trustee normally pays the death
benefit to one or more of their dependants or to the member’s estate.
For super death benefits, the term 'dependants' includes:

A spouse (this includes same-sex de facto partners)

Children under the age of 18

People with whom there was an interdependent relationship

People who were financial depends
Most super funds allow members to nominate who they want their death benefit paid to, either as a
non-binding or binding nomination.
If no one is nominated, the super fund trustee will decide who will receive the money. This can lead
to delays and may cause lengthy/expensive legal action. It is interesting to note the cost of legal
proceedings comes out of the death benefit amount and there have been many cases where this has
been reduced to zero due to large legal fees.
Binding nomination
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A binding nomination leaves the member’s super fund trustee with no choice as to who will receive
their death benefit.
Through a binding death nomination the money can go to:

One or more dependants; or

The member’s legal personal representative, who must pay out the money according to the
Will
Non-binding nomination
A non-binding nomination guides the super fund trustee on who will receive the super benefits.
However, the trustee still has the final say, especially if the member nominates someone who
doesn't depend on the passing member. The trustee is not required to follow the instructions in the
member’s will.
How much is the death benefit?
The total amount of money or 'death benefit' includes the money in the deceased's super account at
the time of death plus any life insurance cover through the super fund.
Death benefit = super account balance + any life insurance payment
The following link provides an example of a binding and non-binding nomination. Please note with a
binding nomination the form must be signed in the presence of two witnesses who are above the
age of 18 and not listed as a beneficiary.
Tax on death benefits
You may recall that super funds have two types of components. The first is taxable component
which is made up of funds received by the account through concessional contributions and the
second is tax free component which comprises of funds received through non-concessional
contributions.
A superannuation benefit is tax free if it is paid to a person who is a dependant. This can be paid as
an income stream or a lump sum.
If the benefit amount is being paid to a non-dependent then there may be a tax liability and this will
now be explored in greater detail.
Maximum tax rate for lump sums paid to non-dependants
Taxed element of the benefit
15% plus Medicare levy
Untaxed element of the benefit
30% plus Medicare levy
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An untaxed element in a super fund is uncommon and has not been covered until now. They exist in
some government funds where no concessional contribution tax is paid when concessional
contributions are made however tax is payable when the member withdraws the fund. The idea
behind not taxing the fund with each CC is to help grow the member’s account balance. With no tax
being taken out until the funds are being drawn down allows compounding returns over time to
provide the member with a greater account balance.
E.g. A government super fund doesn’t tax out concessional contribution tax and therefore the
members balance is classified as an untaxed element. The member receives $10,000 in concessional
contribution. Since the fund is untaxed the full $10,000 remains in the account and no CC tax is
taken out. This means there is $10,000 invested and providing the fund with a return on investment
(assuming the assets invested in increase in value). Should the member pass away and the super
benefit is left to a non-dependent tax at a rate of 30% + Medicare levy will be taken out.
Anti-detriment payment
An anti-detriment payment forms part of the total lump sum death benefit and is paid to the
member's spouse, ex-spouse or child (including adult children). Simply put, the payment is a refund
of contributions tax that may have been paid by a member over their lifetime.
When a death benefit is paid to a member's beneficiaries, it can be made up of a number of parts,
including the member's account balance and any insurance benefit that may apply. It may also
contain an additional payment called an ‘anti-detriment payment'. Superannuation funds are able to
determine their own policy for anti-detriment payments and such payments are not compulsory for
a fund.
Tax may be payable on anti-detriment payments to adult children, as it does for death benefits, the
amount of which will depend on the individual's circumstances. As with all estate planning and
decisions about super, everyone's situation is different and it is always recommended that
professional advice is sought from a licensed financial adviser.
How it works
If a payment is eligible, then the super fund can apply to the Australian Tax Office for a rebate on the
concessional contribution tax paid during the member’s life. Some super funds will only pay antidetriment payments when a claim is made by the members' beneficiaries. As different funds treat
these payments differently, it's important to speak to the fund in question for information about
their anti-detriment policy.
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Self Managed Superannuation Funds (SMSF)
What is a self managed superannuation fund?
A self managed superannuation fund (SMSF) is a fund that meets all of the following requirements:

there are fewer than five members (i.e. four members or less);

all members are trustees and there are no other trustees (except for a single member fund);

no member of the fund is an employee of another member of the fund, unless the members
concerned are relatives; and

no trustee or director of the corporate trustee receives any remuneration in respect of
duties or services as trustee of the fund.
There are many benefits to starting your own SMSF. However, it is an onerous responsibility and one
should understand their responsibilities before commencing.
Single member funds
Under trust law it is not possible for an individual to be both the sole trustee and the sole beneficiary
of a trust. It is possible to set up a SMSF with only one member if the single member of the fund has
a corporate trustee, the member must be one of the following:

the sole director of the corporate trustee

one of only two directors, that is either
o
related to the other director
o
any other person but not an employer of the member.
If you choose not to have a corporate trustee, you must have two individual trustees. One trustee
must be the member and the other must be a trustee that is either:

a person related to the member

any other person but not an employer of the member.
Why set up a self-managed super fund?
There are many advantages to setting up a self-managed superannuation fund. The main advantages
are outlined below:

Control over the fund, including making investments decisions within the fund. This allows
the trustee/member and their financial adviser to tailor an investment strategy that suits the
member’s circumstances and risk profile.
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
Having a SMSF gives a wide range of investment options, such as direct shares and direct
property, including property used by the member’s business. In some circumstances, the
fund can purchase assets from members of the fund.

In many cases, particularly for larger amounts of money, a self-managed super fund can be
cheaper to run than investing in retail super funds.

A SMSF can be tailored to meet the member’s own personal circumstances in relation to
estate planning. Family members can be included as long as there are no more than four
members in the fund.

A SMSF can be used as a vehicle to accumulate superannuation benefit whilst employed and
can be maintained well into retirement and beyond, particularly where there are other
family members in the fund.
What are the obligations?
A member of a self-managed super fund must also be a trustee of the fund (or a director, if a
corporate trustee is used). If a SMSF is established, it is the trustees responsibility of the fund to
ensure that the fund complies with the law at all times. It is therefore important that the trustee
understands their obligations and seek professional help (if necessary).
When establishing and maintaining a self-managed super fund the trustee/member will need to look
at a broad range of responsibilities. Read chapter 5-050 (page 367) through to 374) in the Australian
Master Financial Planning Guide for the obligations for a SMSF and what is required when
establishing a fund.
There are severe penalties for trustees who fail to ensure that a super fund is properly administered.
Therefore, it is advisable that, where necessary, the member obtains the service of professionals
who can assist in ensuring the compliance of the fund.
Investment Laws
It is important for SMSF trustees to possess a detailed working knowledge of the key superannuation
investment laws, which are broadly designed to protect a member's superannuation benefits.
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Will doing it yourself save money or waste it?
ASIC knows of a number of cases where SMSFs have been set up for people with as little as $10,000
or less in superannuation. This is likely to prove a terrible waste of money.
According to statistics from the ATO (2011) SMSFs with account balances between $200,000 and
$500,000 generally cost between $2,740 and $6,850 per annum. Remember there are also
significant costs in setting it up in the first place.
The ATO warns:
'Funds with low asset values can have diminished potential to generate returns due to their
operational costs. Funds with low asset values are also at risk of not having a sufficiently diversified
portfolio of assets, therefore subjecting members' benefits to increased risk. Our experience also
shows that funds with low asset values are sometimes used for [illegal] early access.’
FIDO suggests you need at least $200,000 in super to make SMSFs worthwhile. The average account
balance of an SMSF is currently $507,825 (ATO December 2012).
This extraordinary growth suggests that self-managed super may be being recommended to people
for whom it's totally unsuitable. It suggests that many people may be moving their money into an
SMSF without realising that such a move may cost them far more than their current fund.
Will you lose valuable benefits by changing your current fund to an SMSF?
Changing your superannuation funds can be an important financial decision. Of course, if you have
to change because you're changing jobs and your current fund is not available with your new
employer, then that's just a fact of life.
However, if you choose to change, make sure you keep all the important benefits of your current
scheme. Here's a brief checklist of the most basic benefits. You will probably need to check other
factors as well.
Benefit
Large professionally-run fund
Your own SMSF fund
Investment
strategy and
returns
Look for a fund with a sound
investment strategy that's
delivered reasonable returns to
members over the long term.
You must design your fund's own
strategy to make sure it can meet
your retirement needs.
Investments are diversified to
It's wise to avoid risking all your
retirement savings in one or a few
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Low fees
spread the risk. (One or two years
of poor returns in every seven to
ten years is regarded as normal.)
investments. You'll need to find
and purchase suitable investments.
Shop around.
You face yearly running costs of at
least $1,000 to $1,500 but you
must also take into account the
additional cost of locating and
managing suitable investments
without the 'wholesale' purchasing
power of the professionals.
Industry funds often have the
lowest fees, but you might want to
pay more for extra features. Use
the FIDO superannuation
calculator for help on fees.
Suitable
insurance
cover for death
and total or
permanent
disability
Some people may not realise they
even have insurance through their
super.
Cover is often purchased for all
members at group rates. (You may
need to check you have enough
cover for your own needs.) More
about special benefits
No special benefits or cover unless
you arrange it, and this may be
more expensive without the
'wholesale' purchasing power of
the professionals.
Investment Strategy - SMSF
Under superannuation laws, all trustees must draft and implement an investment strategy.
Many trustees' use the "cart before the horse'' method. They decide what assets they want their
fund to own and then attempt to write their investment strategy to justify the purchasing or holding
of those assets.
This process is unavoidable if a trustee has been running a fund for some years and is trying to
correct inadequate or inappropriate documentation.
Most people setting up SMSFs often make this same mistake. Ideally these people should set up
their fund, develop their investment strategy and then decide what assets to purchase.
There is widespread confusion and doubt about precisely what the law says an investment strategy
should contain.
Consequently some SMSF trustees ignore these requirements while others adopt a strategy that
would not survive an impartial review by the Australian Tax Office. Despite the uncertainty, all
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relevant ATO SMSF documents state that a SMSF investment strategy is not only an important legal
obligation but is also a good practical requirement.
It is therefore left to trustees and their advisers to work out whether the investment strategy, its
implementation and regular review all get pass marks.
When examining a SMSF investment strategy the ATO will not make a judgment as to its quality from
an investment perspective. The length of your investment strategy document is not important. It
could be a paragraph or 300 pages.
The key issues are, is it in writing, does it comply with all the legal requirements, has it been
reviewed regularly and can the trustees show how it has been implemented?
It is here that the law and its administration by the ATO are deficient. The law provides no guidance.
The ATO appears unwilling to help trustees to understand where borderline cases are unacceptable
except on a case-by-case basis during formal fund auditing.
A strategy cannot exist without objectives and you cannot set objectives unless you have some idea
of where you are currently at and where you want to go. Before drafting an investment strategy,
trustees must understand their fund and develop some investment objectives.
Legislation requires a trustee to take into account risk and return, diversification, liquidity
requirements and ability to discharge existing and prospective liabilities of the whole fund. Some
trustees build a spreadsheet model of their fund and then they change the assumptions to see how
robust their strategy is.
Trustees might also find it helpful to decide at what point corrective action may be required with
their investment strategy and asset holdings if the fund's investment objectives are not being met.
For example, economists believe that three consecutive quarters of negative growth means that an
economy is in recession. Five negative quarters normally signifies a depression has hit an economy.
What corrective action can be taken in these circumstances?
An investment strategy must also comply with the fund's trust deed and all other investment
restrictions and obligations contained in the super laws. Developing, implementing and reviewing an
investment strategy are not difficult.
Initially they will require an investment of time and effort.
A trustee might want to involve a fund's professional advisers such as accountants and financial
planners to act as a valuable sounding board on the practical and legal aspects of establishing and
reviewing investment strategies.
Restrictions
Super laws place restrictions on the types of entities your fund can invest in or with, and the entities
that your fund can acquire assets from.
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Investment restrictions exist because they protect fund members by making sure fund assets are not
exposed to undue risks, like a business failing.
The investment rules are one of the most important requirements of the super laws. Failure to
comply with the rules can result in your fund losing its complying status and you as trustee of the
fund being either:

disqualified

removed

prosecuted, which may result in you being fined or imprisoned.
Loans or financial help to members or a member’s relative
You can’t lend money or provide direct or indirect financial help (including the provision of credit)
from your fund, to a member, or a member’s relative. For example, using fund assets to guarantee a
personal loan would contravene this investment restriction.
A member or a member’s relative means any of the following:

a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or
adopted child of that individual or of his or her spouse

a spouse of that individual or of any individual specified above.

From 1 July 2008, changes were made to the definition of spouse to include those in samesex relationships.
Borrowings
A SMSF can only borrow money in very limited circumstances.
The circumstances include:

borrowing money for a maximum of 90 days to meet benefit payments due to members or
to meet an outstanding surcharge liability. The borrowings can’t exceed 10% of the fund’s
total assets

borrowing money for a maximum of seven days to cover the settlement of security
transactions if the borrowing does not exceed 10% of SMSF’s total assets. One can only
borrow to settle security transactions if at the time the transaction was entered into it was
likely that the borrowing would not be needed

borrowing, using instalment warrants or instalment warrant like arrangements that meet
certain conditions

borrowing using a bare trust. The SMSF can invest in commercial or residential property, but
this can’t be the members’ residence. You can’t have any dealings with a related party when
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investing in residential property. So you can’t live in the property, use the property as a
holiday house or have a family member live in it. It should be for the sole purpose
of investment of your SMSF. Refer to page 390 and 396 in the AMFPG for further
information on borrowing within a SMSF.
Acquisition of assets from a related party
A member of SMSF can’t acquire assets from a related party. However, there are limited exceptions
to this rule where:

the asset is a listed security (for example, shares, units or bonds listed on an approved stock
exchange) and the asset is acquired at market value

the asset is business real property and acquired at market value

the asset is an in-house asset, but the level of your fund’s in-house assets does not exceed
the threshold for SMSFs of a maximum 5% of total fund assets, or is an asset specifically
excluded from being an in-house asset.
A related party of a fund covers all members and associates, and all standard employer-sponsors of
your fund and their associates.
An associate of a particular member of an SMSF includes the following:

every other member of the fund

the relatives of each member

the business partners of each member

any spouse or child of those business partners, any company a member (or the members
and/or their associates) controls or influences and any trust the member (or the members
and/or their associates) controls.
(From 1 July 2008, changes were made to the definition of spouse to include same-sex
relationships.)

Associates of standard employer-sponsors include business partners and companies or trusts
the employer controls (either alone or with their other associates), or companies and trusts
that control the employer.

A standard employer-sponsor is an employer who contributes to a super fund for the benefit
of a member, under an arrangement between the employer and the trustee of a fund.

Business real property generally relates to land and buildings used wholly and exclusively in a
business.

If business real property is used in a primary production business, such as a farm, it can still
meet the test of being used wholly and exclusively in a business, if an area of land, no more
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than two hectares, contains a dwelling that is used for private or domestic purposes.
However, the main use of the whole property can’t be for domestic or private purposes.
In-house assets

An in-house asset is a loan to, or an investment in a related party of your fund, or an
investment in a related trust of your fund. An asset of your fund that is leased to a related
party is also an in-house asset. In general, as a trustee you are restricted from lending to,
investing in or leasing to a related party of your fund more than 5% of your fund’s total
assets.

There are some exceptions, including for business real property that is subject to a lease
between the fund and a related party of the member. There is a limited exemption for
certain investments in related non-geared trusts or companies.
Investments need to be made and maintained at arm’s-length

Any time a SMSF makes an investment, it needs to be made and maintained on a strict
commercial basis. This is referred to as an investment at arm’s-length. The purchase and sale
price of fund assets should always reflect a true market value for the asset.

Income from assets held by a fund should always reflect a true market rate of return.

Investing in business real property

The trustee needs to ensure the level of investment in business real property still meets the
investment strategy of the fund, including diversification of assets, liquidity and maximisation
of member returns in the fund. A fund with 100% investment of assets in business real
property could have some problems meeting these requirements.

As with other super fund investments there can’t be a charge over an asset (that is a loan or
covenant).
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Chapter 4 - Retirement Planning
It is a common misconception that retirement planning through a financial adviser is focused on how
clients will fund their retirement. Whilst this is a very important part of it the role of a financial
adviser reaches beyond this where the preparation for retirement and lifestyle that will be lead in
retirement needs to be discussed with clients.
Research indicates that many people approaching retirement fall into the trap of not preparing
properly. When working the intellectual stimulation and social needs of most people are met
through interactions at their workplace. Upon retirement people can feel isolated and lonely as they
no longer have the same level of social interaction as they are use to and interactions may be few
and far between if careful planning isn’t incorporated. This can lead to anxiety, depression and a
general feeling of low self-worth resulting in an increase in medical bills and a reduced life
expectancy.
As a financial planner it is important to discuss with clients what plans they have made for
retirement and ask through provoking questions to ensure big mistakes are avoided which can be
costly both health wise and financially.
For example, John and Sarah (married couple) retire and decide to downsize their Sydney home and
move 4 hours up the coast. After a few weeks of settling in to their new home they realise their
family and friends are back in Sydney. Driving 4 hours each way on a weekly or fortnightly basis is
too much and building solid relationships with strangers can take time and be difficult to do. After 6
months the couple decide the relocation was a bad idea and move back to Sydney.
Financially they would have lost out through:





The real estate agent commission for the sale of their original Sydney home
The cost of moving up the coast
Stamp duty paid on their home up the coast
Real estate agent commission for the sale of the property up the coast
Stamp duty paid to purchase the new home in Sydney
Events like the one above can be avoided through financial planners asking the right questions and
ensuring their clients make a well informed and educated decision by thinking through the outcomes
of each decision.
With clients approaching retirement example of questions an adviser can ask clients include:






Who do often socialise with people from work?
What are your interests outside of work?
Have you looked into joining any social groups (e.g. bushwalking club, art group, lawn bowls,
golf…)?
Do you have children or grandchildren that you see on a regular basis?
How do you plan building your health and fitness?
(if relocating) have you considered renting in the area you wish to move to and renting out
your home for the first 12 months to ensure you are happy with the new area?
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These questions could have saved John and Sarah (the clients in the example provided above)
over a hundred thousand dollars and a lot of stress!
Best practice is for an adviser to explore with the client what they will do in retirement.
ASIC provides Australians with a retirement planning booklet which can be downloaded through
their website. This booklet provides a solid overview on the options available to Australian’s upon
retirement along with the pros and cons of each option. It is highly recommended you read this
booklet before reading further. Below explores in greater detail the specific areas pertinent to
financing the desired lifestyle of clients by planning for retirement.
Types of income streams
1 July 2007 marked a new era for retirement income streams in Australia. The array of choice and
complex arrangements of the past ceased to exist for new retirees, particularly from 20 September.
For existing pre-1 July 2007 retirees, there is the consideration: should they retain their existing
income stream, or commute to a new 'simpler super' annuity or pension? New income stream
design features, new drawdown percentages, new taxation treatment together with commutation
and transaction costs are some of the issues to consider when looking at alternative scenarios for
clients.
'Simpler Super' income stream features
In the world of 'simpler super', from 1 July 2007 incomes streams there were three areas of change:

New design features where income streams are subject to new minimum standards and are
classified as either account based or non-account based.

The tax treatment of income streams is significantly enhanced and a new proportional
drawdown system has been introduced, with only a taxable, and a tax free component.

Estate planning opportunities are more limited, with much tighter rules around paying
pensions to children and the tax treatment of non-dependants.
Account based pension
Account based pensions are pensions for which there is an account balance attributable to the
recipient and which meet the standards of sub-regulation 1.06(9A) of SIS.
An account based pension is a regular income stream paid from the account within the
superannuation environment. Investment earnings such as dividends and capital growth in
underlying investment assets are added to the account and income, in the form of a pension, is paid
from it on a regular basis.
Unlike some other superannuation pensions or annuities, an account based pension allows the
member to retain access to their capital. All or part of the account pension balance may be cashed
out as a lump sum, and any capital remaining upon the member’s death can be paid to their
dependants or to their estate.
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The amount used to purchase the account pension is credited to an account in an individual’s name
and placed in one or more investment options of their choice. The choice of options will depend on
the person’s risk profile. If an individual invests and achieves high returns their account balance will
grow and their income payments may increase. If they invest and achieve low returns their account
balance will grow more slowly or even fall and their income payments may be lower. In all cases, the
investment risk is with the account holder.
The features of these pensions are:

They can only be purchased with superannuation money.

A pension payment must be made every year.

Income payable is flexible (subject to a minimum payment - see below)

They can be cashed out (in full or in part) at any time

When cashed out they will be taxed as a superannuation benefit and are tax free from age
60

The member can select the investment option and bears the investment risk.

The member can outlive the capital so bears the longevity risk.

There is no loss of capital on death.

The member can nominate a reversionary beneficiary or have the balance paid to a
dependant or the deceased's estate.

Income and capital gains from the assets backing the pension will be exempt from tax if the
realised capital gain and income is less than $100,000.

Assets backing the pension will count 100% against the Centrelink assets test.

Income will be treated concessionally in the Centrelink income test (until 2015).
As per the pre-1 July 2007 rules, once an income stream has commenced, no additional amounts
may be contributed to or rolled into it. Additional benefits not taken in cash will need to be taken as
a new, separate income stream or the original income stream can be rolled over to superannuation
phase and then commence a new account pension.
If a client has more than one superannuation interest in an SMSF, any drawdown (pension or lump
sum) must be taken in the same proportion as the total of the superannuation interests. The only
exclusion to this rule is an interest held in an income stream that has already commenced.
Pension earnings over $100,000 to be taxed at 15%
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From 1 July 2014 the amount of exempt current pension income available to superannuation funds
will be limited to $100,000 a year for each individual.
Fund earnings, derived from pension assets, above this limit will be taxed at the 15 per cent rate that
applies to earnings in the accumulation phase.
This $100,000 limit will be indexed to the Consumer Price Index (CPI), and will increase in $10,000
increments.
Prior to 1 July 2014, when a superannuation fund makes a capital gain on assets in the pension
phase, the capital gain amount is also treated as exempt current pension income (and therefore
exempted from tax). However, a capital gains tax event is only triggered in the year that the fund
disposes of the asset.
Special arrangements will apply when assessing capital gains on assets purchased by a fund before 1
July 2014:

For assets that were purchased before 5 April 2013, a full tax exemption will continue to
apply to capital gains that accrue before 1 July 2024;

For assets that are purchased from 5 April 2013 to 30 June 2014, you will have the choice of
including in the $100,000 limit the capital gain, or only that part that accrues after 1 July
2014; and

For assets that are purchased from 1 July 2014, the capital gain will be included in the
$100,000 limit.
When assessing capital gains that are subject to this tax, a 33 per cent discount will apply (where
applicable), to effectively tax the gain at a rate of 10 per cent.
It is important to note that this reform will not affect the tax treatment of withdrawals (both lump
sums and pensions) made from a superannuation fund. Withdrawals will continue to remain tax-free
if you're 60 or over, and be subject to the existing tax rates if you're under 60.
The Government will also ensure that members of defined benefit funds, including federal
politicians, are impacted by this new reform in the same way as members of defined contribution
funds (i.e. that there will be a corresponding decrease in concessions in the retirement phase).
Minimum pension drawdown
The minimum standards for the Simpler Super income streams are as follows:

A minimum pension payment must be taken each year (determined as a minimum
percentage of the portfolio balance as of 1 July). The rule allowing the deferral of first
payment to the next financial year for income streams commencing between 1 and 30 June
inclusive (i.e. the 1 June rule) will remain.
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
There is no maximum payment except for transition to retirement (TTR) income streams,
which will be limited to 10% of the account balance per annum. There is no pro-rata amount
based on the maximum annual amount for a TTR income stream commencing after 1 July. A
provider may choose to pro-rata the maximum.

May be paid as a reversionary pension on death, but only to a tax dependant. Nondependant beneficiaries can only receive a lump sum payment. If payable to a child under 18
it is only payable until age 25, unless the child has a severe disability.

For a pension commencing after 1 July the minimum pension payment is a pro-rata amount
based on the minimum annual amount and the payment period remaining in the financial
year (unless commenced in June as noted above).
Minimum draw-down percentages
Age
Minimum percentage draw-down
(percentage factor)
Under 65
4%
65 - 74
5%
75 - 79
6%
80 - 84
7%
85 - 89
9%
90 - 94
11%
95 or more
14%
Example
Mark commences a TTR income stream on 1 November with $120,000 and requests the 10%
maximum as a monthly payment would receive ($120,000 x 10%)/8 in monthly payments or $1,500
per month for the rest of the financial year.
The minimum payment limit however does take into account the period remaining in the financial
year. For a minimum percentage drawdown factor of 4% the minimum would be 8/12 x (4% x
$120,000) = $3,200 or $400 per month for the eight month period. (No minimum payment applies if
the retirement income stream commences between 1 June and 30 June). Mark can choose an
income payment between the minimum $400 per month and the maximum $1,500 per month.
Does the account pension fund pay tax?
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There is no tax payable on the investment income in an account based pension fund. This includes
all forms of investment income such as interest, dividends and realised capital gains. In fact, the
pension fund will generally receive a refund from the tax office for any imputation credits it may
have received from Australian share investments. An account based pension is a very tax effective
way for Australian’s to fund their retirement.
Death benefit income streams
The way tax applies to a death benefit paid as an income stream depends on several factors, such as:

the age of the person receiving the benefit

the age at which the deceased died

whether the recipient is a dependant, including a child who is permanently disabled.
How do Centrelink and the Department of Veterans Affairs (DVA) assess account based pensions?
The account balance of an account based pension will be fully assessed under the assets test for
Centrelink and DVA purposes. Under the income test, Centrelink and DVA allow for a “Deductible
Amount” which is not assessed as income. This amount is calculated as:
Pension Purchase Price ÷ Life Expectancy
Only the pension income received above this amount will be assessed under the income test.
Therefore if the minimum pension is drawn, usually very little income will be assessable under the
income test.
It is important to note that if a person receiving the age pension draws down a commutation from
their account based pension rather than as part of their regular income stream; this will affect their
“Deductible Amount”. This can lead to a reduction in their Centrelink Age Pension entitlement.
What are the benefits of account based pensions?
Account based pensions are a very popular means of providing retirement income for many reasons,
including:

Concessional tax treatment – earnings and realised capital gains within the pension are tax
free.

The income received for anyone > 60 years of age is tax free. If <59 the account holder will
be entitled to a 15% tax offset on their taxable proportion and the tax free amount of the
fund remains tax free. E.g. A $100,000 pension is made up of 80% taxable and 20% tax free.
An account based pension is commenced by a 59 years old and the maximum 10% is drawn
down. 20% or $2000 (tax free proportion) of the payment will be tax free. The remaining
$8000 (taxable component) will be taxed at the member’s individual tax rate and receive a
15% tax offset.
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
Concessional income treatment by Centrelink and DVA.

Regular pension can be paid weekly, fortnightly, monthly, half-yearly or yearly.

Choice of the amount of pension received, subject to Government limits.

A range of investment options available can be used to tailor the investment to an
individual’s risk profile.

A lump sum withdrawal can be made at any time for any reason.

The pension account balance is available to the estate on death and this can be paid to
dependants as a continuing income stream or a lump sum.
What are the benefits of account based pensions?
Account based pensions are a very popular means of providing retirement income for many reasons,
including:

Concessional tax treatment – earnings and realised capital gains within the pension are tax
free if the realised gain is less than $100,000 in a financial year.

The income received for anyone > 60 years of age is tax free. If <59 the account holder will
be entitled to a 15% tax offset on their taxable proportion and the tax free amount of the
fund remains tax free. E.g. A $100,000 pension is made up of 80% taxable and 20% tax free.
An account based pension is commenced by a 59 years old and the maximum 10% is drawn
down. 20% or $2000 (tax free proportion) of the payment will be tax free. The remaining
$8000 (taxable component) will be taxed at the member’s individual tax rate and receive a
15% tax offset.

Concessional income treatment by Centrelink and DVA.

Regular pension can be paid weekly, fortnightly, monthly, half-yearly or yearly.

Choice of the amount of pension received, subject to Government limits.

A range of investment options available can be used to tailor the investment to an
individual’s risk profile.

A lump sum withdrawal can be made at any time for any reason.

The pension account balance is available to the estate on death and this can be paid to
dependants as a continuing income stream or a lump sum.
Annuities
What is an annuity?
An annuity is an income producing investment that provides a guaranteed level of income for a
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superannuation money. Within Australia, life insurance companies are the main providers of
annuities.
An annuity is generally a fixed interest type of investment and would generally be considered low
risk.
How is the income paid?
Annuities can be paid for a fixed term or for a lifetime. An individual can choose the length of the
term for a fixed term annuity. The minimum term for an annuity is one year. An annuity that is paid
for a fixed term is called a ‘term certain’ annuity.
Generally annuity payments are made monthly, quarterly, half-yearly or yearly. These annuity
payments may index to CPI (inflation) or another fixed amount.
How is your capital returned?
With an annuity the member is able to choose how much of their capital they wish to be paid back
to over the life of the annuity and how much they wish to receive when the annuity has matured.
The amount of capital left at the end of the annuity period is known as the Residual Capital Value
(RCV). When you purchase an annuity the member can choose the level of RCV that you require. For
instance, a member can choose to have 100% RCV, which means that the full amount of their capital
will be returned to them or their estate at the end of the annuity period. Or they may choose 0%
RCV, which means that all of their capital will be returned through regular annuity payments. It is
possible to nominate any RCV amount between 0% and 100%. For example, a member may
nominate a 50% RCV which means that 50% of their capital will be paid through the regular annuity
payments and the remaining 50% will be paid to them or their estate when the annuity expires.
How are annuities taxed?
Annuity payments are taxed as ordinary income less an amount known as the deductible amount.
The deductible amount is based upon any return of capital contained in the annuity payment and is
tax free.
For annuities purchased with ordinary money, the deductible amount is simply the purchase price
divided by the term (or your life expectancy if it is a lifetime annuity). For annuities purchased with
superannuation money (ETP annuities), the deductible amount is calculated as the undeducted
purchase price (UPP) divided by the term (or your life expectancy if it is a lifetime annuity). The UPP
is the sum of Undeducted Contributions + Post June 1994 invalidity component + CGT Exempt
Component.
A tax rebate of up to 15% can be available on any taxable amount of an ETP annuity where the
annuity recipient is below age 60. ETP annuity payments are tax free when paid to a person over the
age of 60. Before the age of 60 the assessable portion of an ETP annuity payment attracts the 15%
rebate, consistent with the removal of RBLs. Once 60 the entire annuity payment is tax free.
The largest drawdown with annuities is they are not flexible once established in terms of income
payment amount and there is no control over how the funds are invested.
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Superannuation Death Benefit income stream (Reversionary Pension)
A superannuation income stream will not be able to revert or be paid to a non-dependant on death;
rather death benefit payments to a non-dependant will have to be made as a lump sum. The
taxation of a death benefit paid as a reversionary pension will depend on the age of the primary and
reversionary beneficiary. If the primary beneficiary was aged 60 or over at the time of death, then
payments to the reversionary beneficiary will be tax exempt.
However, if the primary beneficiary was under age 60 at the time of death, the pension will continue
to be taxed at the reversionary beneficiary's marginal tax rate (excluding any tax free amount or
pension offset) unless or until the reversionary beneficiary is aged 60 or over, in which case it will be
tax free.
Death benefits will be able to be paid as a pension to a dependant if the member dies before
commencing a pension. These pensions will be taxed in the same way as a reversionary pension.
Death benefits will be able to be paid to a dependent child, although when the child turns 25 the
balance in the fund will have to be paid as a lump sum (tax free) unless the child was permanently
disabled.
Note: A superannuation death benefit income stream that was being paid to a non-dependant prior
to 1 July 2007 is taxed in the same manner as a superannuation death benefit income stream paid to
a dependant.
Where a member has reached a preservation age that is less than 60, their retirement occurs when:

an arrangement under which the member was gainfully employed has come to an end. This
may have occurred at any time, including prior to their preservation age, and

the trustee is reasonably satisfied that the member intends never again to become gainfully
employed either part-time or fulltime, (i.e. for 10 or more hours per week).
The trustee must be satisfied that retirement has occurred. This may include obtaining evidence:

of the member's age

that the member's gainful employment has ceased (e.g. a statement from the employer),
and

of the member's intention, at the time of the claim, to never again be gainfully employed
either part-time or full-time (i.e. for 10 or more hours per week).
A member with a preservation age of less than age 60 who ceases gainful employment before age 60
may still retire after age 60, provided that the trustee is satisfied, at the time of the benefit claim,
that the member intends to never again be gainfully employed either part-time or full-time.
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Apart from the circumstances set out in the preceding paragraph, when a member has reached age
60, 'retirement' occurs when an arrangement under which the member was gainfully employed has
ceased on or after the member reached age 60.
While a trustee generally does not need to form an opinion on the member's intentions concerning
future gainful employment where the member has reached age 60, the trustee must obtain
satisfactory evidence of the cessation of an employment arrangement and the member's age.
Where a member, aged 60 or more, is in two or more employment arrangements at the same time,
the cessation of one of the employment arrangements is the condition of release in respect of all
preserved benefits accumulated up until that time. The occurrence of the 'retirement' condition of
release in these circumstances will not enable the cashing of any preserved or restricted nonpreserved benefits which accrue AFTER the condition of release has occurred. A member will not be
able to cash those benefits until a fresh condition of release occurs.
If a member aged 60 to 64 commences a new employment arrangement after satisfying a condition
of release, such as retirement from a previous employment arrangement at or after age 60, benefits
in respect of the new employment will remain preserved until a further condition of release is
satisfied.
Defined benefit pension
A defined benefit pension is a regular income stream paid to you from a superannuation fund. The
income can be payable for the member’s lifetime (and in some cases, the lifetime of their spouse), or
it can be payable for a pre-determined term.
It differs from an allocated pension in that the level of payments received each year set at the start
of the pension is either fixed or indexed to inflation. Unlike an allocated pension, the payments are
not affected by market movements.
What are its basic features?
There are a number of features that can be included in a defined benefit pension, primarily to
ensure payments keep pace with inflation and to preserve some or all of your capital.
A common feature available with defined benefit pensions is indexation of pension payments each
year. Indexation may be either to the annual inflation rate, or to a pre-determined rate. In either
case, the aim is to ensure that payments each year are sufficient to meet increased costs of living.
A defined benefit pension may guarantee that a certain amount of your capital will be paid to the
member or their estate when the payment period finishes upon death. The amount paid at that time
is known as the residual capital value (RCV) of the pension.
A pension which pays back all of the capital when it finishes is called ‘100 per cent RCV’. If no capital
is payable it will be called ‘nil RCV’.
Upon death, a defined benefit pension may continue to be paid to another person, usually a spouse.
This is known as a reversionary pension. The amount of pension paid to a spouse is usually
determined when you first start the pension.
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Does a pension fund pay tax?
There is no tax payable on the investment income in a defined benefit pension fund. This includes all
forms of investment income such as interest, dividends, distributions and realised capital gains.
How are pension payments taxed?
Defined benefit pension payments are taxed as ordinary income in your hands, with certain tax
concessions available because superannuation money was used to buy the pension. Part of your
pension payment, depending on your components, may be tax free. If aged 55 or over, the member
will receive a tax rebate of 15 per cent on the taxable amount of your pension payments from a
taxed source. Once 60, taxed pensions will become tax free.
Pension payments from an untaxed source, such as certain government and employer pensions, will
receive a 10 per cent rebate where paid to a person over the age of 60. Under 60, the payments are
simply assessable income.
What are the benefits of defined benefit pensions?
Defined benefit pensions:

Give a guaranteed income for an agreed period of time,

Are a tax effective way of using accumulated superannuation benefits,

Allow your retirement income to grow with inflation, thus retaining your standard of living,
Non-purchased defined benefit pensions are not assessable under the Centrelink assets test.
Some government retirement benefit plans are defined benefit schemes. The popularity amongst
the private sector has diminished significantly due to the financial burden it places on an
organisation for many years once the employee retires. Occasionally a planner will come across a
client with a defined benefit plan however these are usually with people close to retirement and
who have been with an organisation for a very long term (e.g. over 20 years).
The generally rule is not to touch a defined benefit scheme as the guarantee of income in retirement
is a much better deal than an account based pension.
Chapter 16 of the AMFP Guide provides further information on retirement income streams and it is
suggested students read this chapter for a more comprehensive understanding.
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TEST YOUR KNOWLEDGE
EXERCISE
1. Explain the term ‘account based pension’ and some of its benefits.
2. What is the minimum pension drawdown in dollars for a 66 year old with an account
based pension of $180,000 on 1 July?
3. Is a 17 year old entitled to receive pension payments from the passing of his late
father who lived to 61? If so will there be a possible tax liability?
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Chapter 6 – Social Security
Overview
This chapter provides general information on eligibility for pensions, allowances and other benefits
and means tests. Due to the ever changing nature of social security legislation and the regular
review of benefits and means tests, it is important to check for the latest information prior to giving
advice to clients.
Social security provides a safety net of benefits to those who have retired or unable to work and
support themselves. Many Australians are unable to build the required investments to self fund their
retirement and are therefore reliant on assistance from the government. There are strategies
available to maximise a client’s social security entitlements and this can play an important part in
optimising a client’s quality of life in retirement. This chapter will focus on the aged pension
however it is important to be aware of the other social security benefit available. These include help
for:










Families
Single parents
Job seekers
People with ill health
People with a disability
Students & trainees
Migrants, refugees & visitors
Carers
Rural & remote Australians
Indigenous Australians
Please visit the Department of Human Services website to learn more about each of the above areas.
Centrelink is the government organisation that administers pensions, allowances and other benefits
to eligible persons. Centrelink offices are located throughout Australia.
Age pension
To qualify for the Age Pension a person must satisfy the residential qualifications and have reached
aged pension age.
To be eligible for Age Pension the applicant must satisfy residence requirements:

an Australian resident on the day the claim is lodged, and

be physically present in Australia on the day the claim is lodged
In addition to the above the applicant must have been an Australian resident for a continuous
period of at least 10 years, or for a number of periods that total more than ten years, with one of the
periods being at least five years, unless:

the applicant is a refugee or former refugee, or

the applicant was getting Partner Allowance, Widow Allowance or Widow B Pension
immediately before turning Age Pension age, or
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
the applicant is a woman whose partner died and they were both Australian residents, and
the surviving spouse has been an Australian resident for two years immediately before
claiming Age Pension
If the applicant has lived or worked in a country with which Australia has an international social
security agreement, this may help meet the residence requirements.
Eligibility for Age Pension depends on when the applicant was born. Qualifying age for men born
before 1 July 1952 is age 65. For women born before 1 January 1949 the qualifying age is 64 and a
half.
In the coming years the qualifying age will increase, reaching 67 by 1 July 2023. See table below.
Determining entitlement
There are different rates of Age Pension payments for single people and couples. A person’s
entitlement will also depend on their income, assets, and other circumstances. Click here and look
under the ‘payment rates for age pension’ to view the latest fortnightly rates.
From 20 September 2009 the pension supplement replaced the previous pharmaceutical, utilities,
GST and phone allowances to simplify the system. This is a payment in addition to their age pension
and it can be received either fortnightly or quarterly.
There are two tests that are used to determine if a person/couple are entitled to the age pension
and if what the fortnightly payment will be. The two tests are the income and asset test. The test
that gives the lower pension amount is the one that applies:
Income test
If a persona is permanently blind and currently receiving the Age Pension or Disability Support
Pension they are exempt from the income test.
Different thresholds are used depending on whether the applicant is a home owned or non-home
owner. Click here to view the thresholds.
Deeming is a simple set of social security rules used to assess income from financial assets. Under
the pension income test any income received from financial investments is assessed under these
rules.
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Under these rules Centrelink assumes financial assets are earning a certain amount of income,
regardless of the income they actually earn. Deeming encourages age pension recipients to earn
more income from their investments and reduces the extent payments vary.
The following link provides information on the current deeming rates.
Assets test
To view the thresholds for the asset test click here. Not all assets are assessable with the assets test.
For example the value of principle place of residence is ignored. To view further information on
which assets are included in the test click here.
Work bonus
The Work Bonus applies to pensioners or Age Pension age to encourage paid employment. Any
Australian who is working and entitled to the age pension will have the first $250 ignored for
Centrelink purposes under the income test.
For example, Sarah is entitled to the age pension and earns $250 a fortnight from working one day
per week. Sarah’s age pension entitlement will not be any less because she is working as the first
$250 of her income (which is her entire earned income in this instance) is ignored.
Further reading - it is recommended students read chapter 6 of the Australian Master Financial
Planning Guide to access further information on social security entitlements and to also work
through case studies and examples.
Further to this you can click here to view three fully worked case studies.
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Chapter 7 - Aged Care
As one grows older, people find that more help is required with day-to-day tasks or health care. For
people living alone and not able to get out and about as easily as in the past, an aged care facility can
provide some extra company. Sometimes, the best way to receive help and support can be for
retirees to live in an aged care home either on a permanent basis or for a short stay (called
'residential respite').
Help may be required due to illness, a disability, an emergency, or because of the needs of the
current/previous carer, family or friends. Staff at aged care homes can help with day-to-day tasks
(such as cleaning, cooking, laundry); personal care (such as dressing, grooming, going to the toilet);
or 24-hour nursing care (such as wound care, catheter care).
Aged care homes are owned and run by people who are approved by the Australian Government to
care for older Australians. The aged care system in Australia aims to make sure that all older people
can receive support and quality care when they need it.
There are two groups of aged care:


Lower level residential care – this level of care is suitable for people who are still mobile but
may need help with some everyday tasks. You can read more by following this link.
High level residential care – provides assistance for those who need help with most day to
day living activities. View the following link to read more.
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