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Lecture 5

Lecture 5 - Superannuation and Retirement

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LECTURE 5 – SUPERANNUATION AND RETIREMENT Overview of superannuation The Importance of Superannuation  Superannuation funds receive contributions and invest them for the benefits of their members. o Superannuation contributions and their earnings are then applied by the trustees of the fund to pay benefits to the fund’s members on their retirement (or, in the case of their death to a nominated beneficiary). Benefits may be paid either as a lump sum or as an income stream.  To ensure that superannuation savings are effectively used for funding retirement, there are a number of restrictions placed on the member’s access to these funds. o Members are eligible to access benefits when they have reached the “preservation age” (55 for people born before 1/1/1960) and left the workforce. o The basic operation of superannuation can be illustrated by the following diagram: Contributions: Employers’ contributions Personal contributions Contribution by other persons Superannuation fund Trustees invests contributions Contributions and earnings used to pay benefits to members Benefits Paid on retirement ( lump sum or income stream) Regulation of the superannuation industry  The provisions governing superannuation are: o The Superannuation Industry (Supervision) Act 1993 (SISA) o The Superannuation Industry (Supervision) Regulations 1994 (SISR). o There are also specified provisions in the Corporations Act 2001 which relate to financial products that are interests in superannuation entities.  -managed funds  The two main bodies responsible for the regulation of the superannuation industry are the Australian Prudential Regulation Authority (APRA) and the ATO. o APRA is responsible for:  Ensuring the funds’ compliance with the Superannuation Industry (Supervision) Act 1993 (excluding SMSFS) and its regulations;  The administration and supervision of most superannuation funds. o The ATO has the responsibility for:  The administration of self managed funds; (less than 5 members) o The largest population in the superannuation industry  The assessment and taxation of complying and non-complying funds  The assessment of benefitspaid from superannuation funds. Taxation of superannuation entities  Superannuation is “tax driven” in the sense that superannuation investment is encouraged through a provision of tax concessions. Superannuation tax concessions fall into three categories: A. Taxconcessionsforcontributorswho,ifconditionsaremet, are ableto claim ataxdeductionfor contributions B. Taxconcessionsforeligiblesuperannuationentities.”Complying” superannuationentitiespay areducedtax rateof15%oncontributions andearningsreceived C. Taxconcessionsinrelationto benefits.Benefitsareeithertaxfreeortaxedconcessionally when receivedby members  Provisions dealing with the taxation of superannuation entities are in Division 295 ITAA 1997. Division 295 appliesto thefollowingentities(s295-5(1) ITAA1997): o Complying superannuation funds o Non-complying superannuation funds o Complying Approved Deposit Funds (adfs) o Non-complying adfs o Pooled Superannuation Trusts (psts) Termsaredefinedinsection 995-1 ITAA 1997.  A Superannuation fund is essentially a trust. o It has a board of trustees appointed under the deed and it has beneficiaries o The trustee of a complying superannuation fund is liable to pay tax on the taxable income of the fund calculated as if the trustee were a resident taxpayer (s 295-5 ITAA 1997). Complying and non-complying superannuation funds What is a "complying superannuation fund"?  A "complying superannuation fund" is a complying superannuation within the meaning of Section 45 of SISA (Section 995-1)  A “non-complying superannuation fund" is a fund other than a complying fund i.e. a genuine superannuation fund which does not comply with the relevant standards required by the regulator.  Section 42 of SISA: regulator will issue such a notice if o The fund is a "regulated superannuation fund"; and o The trustees have not contravened the SISA during the year. The complying superannuation fund requirements may be summarised as follows: Complying superannuationfund  Regulatedsuperannuationfund + compliancewith Act   fund isa superannuationfund basically: +  operatingstandards trusteeisconstitutionalcorporation  governingrules OR  borrowing rules fund isage-pension provider  lendingrules +  in-house assetrules Electionto besubjectto Act  equalrepresentation rules  accountingrequirements  trustee, investment manager, actuary andauditorstandards  publicofferrequirements A Superannuation fund is defined under Section 10 of the SISA and may be: 1. An employer-sponsored fund 2. A gainfully occupied person's fund 3. A productivity fund 4. A government fund 5. A foreign Superannuation fund 6. Retirement Savings Accounts 7. Self Managed Superannuation Funds 8. Allocated Pension or Annuity Funds  A “superannuation fund” to have the same meaning as in section 10 of the SISA (Section 995-1)  Section 19 of SISA: To qualify as a regulated superannuation fund, a fund must satisfy the following conditions: a. The trustee of the fund must be a company, or the governing rules of the fund must provide that the sole or primarypurposeofthefundistheprovisionofoldagepensions. b. The trustee must irrevocably elect for SISA to apply to the fund by lodging the election in the approved form with APRAwithin60daysofsettingupthe fund.  A regulated superannuation fund is subject to operational and prudential standards.  Superannuation trustees are required to take all reasonable steps to ensure that the fund complies with the relevant standards. Contravention of SISA  The SISA contains a series of rules which the fund is required to comply with.  Each year the trustees of the superannuation fund are required to lodge an annual return with the regulator. o This return is used to determine whether the fund has satisfied the superannuation fund conditions.  Therefore a Superannuation fund is considered to be a complying fund if it meets the requirements of both section 19 and section 45(1) of SISA. Non-complying superannuation funds  Generally a fund will be non-complying because: o The trustee(s) did not electto be a regulated fund under the SISA; o The fund does not satisfy the residency tests; or o The fund has since failed specific requirements of the SISA. Basic taxation concepts (S295-5)  A complying Superannuation fund is subject to tax on its taxable income at the rate of 15% under section 26(1) Income Tax Rates Act 1986, o Aa non-complying fund is taxable at the top marginal rate (i.e 45%) (Section 26(2).  The taxable income of a superannuation entity is calculated using the method statement in 295-10: which can be summarised as follows: 1 Workouttheno-TFNcontributionsincomeandapplytheapplicabletaxratesto thatincome 2 Workouttheentity’sassessableincomeanddeductionstakinginto accountthespecialrulesinDiv 295 3 Workouttheentity’staxable income as if itstrusteewas aresident 4 Work out the low tax component and the non-arm’s length component of a complying superannuation fund 5 Applyapplicabletaxrates 6 Subtracttheentity’staxoffsets Assessable income  Thefourmostcommonclassesofassessableincomeforasuperannuation fundsare: o Contributions o Ordinary earnings o Non-arm’s length income o Capital Gains Assessable contributions Basically, contributions which are tax deductible to the contributor are included in the assessable income of the superannuation fund. SUPERFUND Deductible contributions Assessable income Untaxed rollovers Non-deductible contributions Taxed rollovers Non assessable income  There are three types of assessable contributions under Subdiv 295-C ITAA 1997: o Those made by a contributor ( e.g. employer) on behalf of someone else(eg. an employee) o Those madeon the contributor’s own behalf for which the contributor is entitled to a tax deduction o Those transferred from a foreign superannuation fund to an Australian superannuation fund  Morespecifically thefollowing contributions areincluded inassessableincome: o Employer contributions including compulsory superannuation guarantee contributions and salary- sacrificed amounts (s 295-160) o Personal contributions by self-employed persons under a valid notice stating that the eligible person intends to claim a deduction for those contributions (s 295-190) o Transfers from a foreign superannuation fund to the extent that the amount transferred exceeds amounts vested in the member at the time of transfer( s 295-200) o Contributions received in respect of which a TFN has not been quoted by 30 June each year  An additional tax equal to 31.5 % for complying funds and 1.5 % for non-complyingfunds is charged on” no -TFN contributions” ( s 295-610) Excluded contributions  Certaincontributionsareexpressly excludedfrom asuperannuation fund’sassessableincome: o Rollover superannuation benefit to the extent that it contains an untaxed element that is not an excess untaxed rollover amount ( s 306-10 &306-15 ITAA 1997) o Personal contributions other than those covered by anotice for the purposes of claiming a tax deduction ( also called non-concessional contributions) ( s 295-195 ITAA 1997) o Government co-contribution (s 295-170 ITAA 1997) o The pre- July 1983 component of an employer ETP rolled over between 10May 2006 and 30 June 2007 o Contribution provided by someoneelse for a person under 18 (s 295-170 ITAA 1997) o Contributions made by the trustee for the benefit of someoneelse ( s295-173 ITAA 1997) o Contributions by a memberspouse under the Family Law Act 1975 for the benefit of a non-member spouse in satisfaction to the non-member spouse entitlement in respect of superannuation interests (s 295-165 ITAA 1997) Transfer of tax liabilities for investing in PSTs and life insurance policies  PST = pooled superannuation trust which invests in superannuation  A complying superannuation fund that would otherwise be subject to tax on contributions is able to transfer the tax liability on those amounts to a PST or life insurance company in which it has invested, subject to agreement with the transferee (s 295-260 ITAA 1997). o In practice that means that a complying superannuation fund will be able to claim a deduction for amounts invested in a PST or a life insurance policy(s 295-100 ITAA 1997). o On the other hand, the transferred amount will be included in the assessable income of the transferee.  Any CGT gain by a PST is overlooked  The assessable income of a complying superannuation fund does not include income received in relation to units held in a PST (s295-105 ITAA 1997). o Likewise, the sale by a complying superannuation fund of units in PST does not give rise to a CGT liability (or a capital loss) (s 118-350 ITAA 1997). Ordinary earnings  The same criteria apply as for other taxpayers in relation to the time at which rental, trust, dividend and interest income is included in assessable income (Subdiv 295-E ITAA 1997)  All investment earnings of superannuation funds are subject to the normal tax rules o Generally included in assessable income under sec 6-5, sec 44 of the ITAA 1936 for dividends, dividends are grossed up under Division 207 ITAA 1997 Non-arm’s length income  Non-arm’s lengthincome includes: o Private company dividends received by the fund unless the Commissioner feels that it is unreasonable for this to occur. o Trust distributions other than because of holding a fixed entitlement to the distribution, and fixed entitlements distributions in excess of an arm’s length amount o Income derived by the superannuation entity from a scheme( e.g. loan interest, rent) if the parties were not dealing with each other at arm’s length and the income is greater than would be expected if the parties were dealing with each other at arm’s length ( see TR 2006/7)  Taxed at the top marginal tax rate (Section 295-550) Exempt income  Certaintypesofincomederived by complyingsuperannuationfundareexemptfrom incometax.  Therearethree broadcategoriesofexemptincome(Subdiv295-FITAA1997): o Income is exempt to the extent that it is from segregated assets to meet current pension liabilities (s 295- 385) o A proportion of incomethat is otherwise assessable income isexempt. The proportion corresponds to the proportion of current pension liabilities compared to superannuation liabilities ( s 295-390) o Grant of financial assistance under Part 23 of the SISA ( s 295-405) Change from complying to non-complying fund.  A fund that was previously a complying fund and has become non-complying will become liable for tax on the value of its assets less un-deducted contributions (ss295-320 & 295-325 of the ITAA 1997).  This amount is included in the assessable in the first year in which the fund has a different status. o The amount will be taxed at 45%. o The value of the fund’s assets is determined as the sum of the market value of those assets immediately before the start of the income year when the tax is imposed. Capital gains tax General rules  Non-complying funds are treated like all other taxpayers and normal CGT provisions apply. o These funds have pre and post CGT assets and receive the same CGT discount as a trust – this is 50%. o Lower discount because a superfund in this situation becomes a trust for CGT purposes  A complying superannuation fund is entitled to a 1/3 discount on capital gains made from CGT assets that have been held for more than 12 months. o Alternatively, where the asset has been held for more than 12 months and acquired before the 21 September 1999, the fund can choose the indexed method to calculate the capital gain. “pre-30 June 1998” assets  Superannuation funds became subject to taxation from 1 July 1988. Complying funds were deemed to have acquired their pre-existing assets (known as "30 June 1988 assets") on 30 June 1988.  CGT applies in respect of the disposal all funds assets irrespective of their date of acquisition (s 295-90) o Complying superannuation funds will be taxed on the disposal of their assets regardless of whether or not these assets are pre-CGT assets ( i.e. acquired before 20 September 1985). o However, for assets acquired before the 1 July 1988, the cost base used for the calculation of capital gains or losses will be the market value of the asset as at 30 June 1988 or its actual cost of acquisition, whichever yields the smaller gain or loss on disposal.  This deemed cost base of assets is subject to indexation from 1 July 1988.  Can choose whichever option which gives the smallest gain/loss  One issue with this in practice is that if you were to purchase an asset in 1984 (pre-CGT) and no tax, why would you keep records for this? o For disposals occurring on after 21 September 1999, the fund can choose between the indexation method or the discount method. Allowable deductions  Superannuation funds are subject to the same rules in relation to deductions as other taxpayers with a few special rules (s 295-10 ITAA 1997)  Deductions may be claimed against assessable income where they would be allowable under section 8-1 of the ITAA 1997 or other provisions. o Allowable deductions may also be claimed against contributions. o In determining what an allowable deduction is, any amount that is a non-taxable contribution is taken to be assessable income (s. 295-95 ITAA 1997).  There is no apportionment of expenses between taxable and non-taxable contributions to arrive at taxable income.  The cost of amending a trust deeds is not deductible as they are not incurred while earning assessable income and are considered to be capital in nature. o However, costs of amendments due to changes in the tax and superannuation law are deductible if they ensure that day to day operations continue to satisfy the requirements to be a complying funds  It has been widespread practice for employers to pay expenses on behalf of the superannuation they sponsor and then reclassify the expenses as superannuation contributions. o This can be the case of accountancy fees paid by the employer for the audit of the superfund. The practice generally including a journal entry after the expense is paid.  The ATO considers that such payments by a third party such as the employer sponsor on behalf of the superannuation fund are deductible superannuation contributions  Complying superannuation funds are denied a deduction for the payment of superannuation benefits to members (s 295-495 ITAA 1997).  A complying fund that provides death and disability benefits may claim a deduction corresponding to a portion of the premium it pays for the insurance policy (s 295-465 of the ITAA 1997) Offsets and credits  Superannuation funds receive full franking offsets on franked dividends received from Australian resident companies (subsection 207-20(2) ITAA 1997). o They are also able to receive credit for dividend and interest withholding tax on income received from foreign sources.  Complying superannuation funds are subject to the Refundable Tax offset rules contained in Division 67 of the ITAA 1997. o Can get a refund of excess tax offsets. Tax concessions for superannuation contributions  Three basic incentives are available in order to encourage retirement savings: o Tax deductions are generally made available for contributions made by employers to complying superannuation funds for the benefits of their employees and for personal contributions made by substantially self-employedpersons. o Tax offsetsmay be available for contributions by persons to complying superannuation funds for the benefits of their low income earning spouses. o Entitlement to a government co-contribution for low income employees who make personal contributions to a complying superannuation funds Deductibility of superannuation contributions  There is no limit on the amount of contribution or tax deduction for an employer who contributes on behalf of an employee  There is no deduction limit on personal contributions for a taxpayer who satisfies the deductibility tests. o However, the legislation imposes an “excess contribution tax” on contributions that exceed the relevant contribution cap for the year.  Contributions for which a deduction is allowed are referred to a “concessional contributions” while contributions which are not deductible are called “non-concessional contributions”.  There is no limit imposed on the deductibility that is allowed for personal contributions as long as a number of conditions are satisfied (s290-150 ITAA 1997): o A deduction is only allowable in the year the contribution is made (s 290-150(3) ITAA 1997) o The contribution must be made to a complying superannuation fund (s 290-155 ITAA 1997) o In the year, the contribution is being made, less than 10% of the contributor’s assessable income and reportable benefits total must be attributable to employment-related activities ( s295-160 ITAA 1997) o The contributor must be under 75 (s290-165(2) ITAA 1997) o The contributor must give notice to the trustee ofthe fund stating the intention to claim a deduction for the whole or part of thecontribution, and the trustee must acknowledge receiptof the notice (s290-170) Excess contributions tax  Excess contributions tax is imposed on superannuation contributions from 1 July 2007 where the amount of the contribution exceeds the relevant contributions cap for the year. This applies to both employer contributions and personal contributions. There are two types of excess contributions tax: o Excess contributions tax onexcessive concessional contributions o Excess contributions tax imposed on excessivenon-concessional tax Excess contributions tax on concessional contributions  Excess contributions tax is imposed if concessional contributions for a member exceed the concessional contribution cap (s292-20(1) ITAA 1997). o The cap for 2008 and 2009 years was $50,000. o For the 2010 and later years it is $25 000 (s292-20(2) ITAA 1997).  For members aged 50 and above, a transitional cap of $100,000 applied for the 2008 and 2009 years.
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