09. Superannuation

 

 

REGULATION

 

Superannuation funds are subject to regulation by the Australian Prudential Regulatory Authority (APRA), the ATO and the Australian Securities and Investment
Commission (ASIC).

 

Superannuation funds operate in a regulatory framework governed by the Superannuation Industry (Supervision) Act and Regulations (SIS).To qualify for concessional
tax treatment, the trustees must elect to become regulated soon after fund formation.To fall within Commonwealth regulation this is done by either
the fund declaring its self to be primarily a pension fund or by appointing a company to be trustee, thus falling within the Federal Government’s Corporation
Laws.

 

Trustees who breach requirements may be subject to civil and criminal penalties and this is central to SIS.Under prior legislation, it was the members
who suffered through loss of tax concessions, whilst trustees were usually not held to account.

 

APRA is empowered to ensure that superannuation funds comply with legislation.Except for Self-Managed Superannuation Funds (SMSFs), all superannuation
funds must lodge annual returns and audit reports to APRA.

 

The ATO is responsible for the regulation of Self Managed Superannuation Funds and the number of SMSFs has continued to increase to over 590,000 in recent
years.These funds must be audited and lodge SMSF annual returns to the ATO and pay an annual levy of $259 in advance from 2014-15 onwards.The first-year
levy for a newly registered fund is $518.

 

TAXATION OF SUPERANNUATION FUND INCOME

 

• A concessional tax rate of 15 per cent applies to all taxable contributions made to superannuation funds, provided that the funds are complying superannuation
  funds. Non-complying funds are taxed at the rate of 45 per cent.Note however, the 15% surcharge on very high-income earners discussed at the end
  of the chapter.

 

• The net investment income of complying funds is also taxed at 15 per cent (except any ‘special income’ such as distributions from non-arm’s length
  transactions which may be taxed at 45 per cent).The effect of the deficit levy is that rate of tax for non-complying funds and special income increased
  to 47% for the three years from 1 July 2014 to 30 June 2017.

 

• CGT applies to disposals of assets by all superannuation funds, approved deposit funds and pooled superannuation trusts.

 

• Indexation of CGT assets is frozen as of 30 September 1999. Complying superannuation funds can be taxed on either two-thirds (i.e. at an effective
  rate of 10% rather than 15%) of the nominal capital gain (for assets held for at least one year) or, where the asset was acquired on or before
  21 September 1999, the whole gain calculated using indexation to 30 September 1999.

 

• A category of ‘no-TFN contributions income’ (taxed at 45%) applies to superannuation entities where a member’s TFN has not been quoted in respect of
  a contribution.

 

WHAT IS A SELF MANAGED SUPERANNUATION FUND (SMSF)?

 

The following must apply:

 

A self managed superannuation fund is defined as a fund with:

 

• Less than five members,
• Each trustee (or each director of a corporate trustee) is a fund member (except for single member funds with individual trustees),
• Each fund member is a trustee (or director of the corporate trustee),
• No member to be an employee of another member (unless related),
• Trustees do not receive remuneration for their services.

 

In the case of single member funds:

 

• The member is a sole director of the trustee company; or
• Is related to the only other director; or
• If not a corporate trustee, the member and a relative are trustees (or if not a relative, the member is not an employee of the other trustee).

 

In the event these requirements are not met, a SMSF will be regulated by APRA and will have to appoint an approved, independent trustee.This can prove
to be an expensive exercise and is not recommended.

 

OTHER SUPERANNUATION FUNDS

 

A standard employer sponsored fund that has in excess of 49 members and is not a public fund has to comply with the “equal representation” rules.This means
the trustees or directors (if a trustee company) should consist of an equal number of employer and member representatives.If either the employer representatives
or the members’ request it, an additional independent trustee may be appointed providing the governing rules (trust deed) allows for this.

 

Decisions by trustees or directors require a two-thirds vote of the total number (not just those present).

 

Those funds with between five and 49 members must comply with:

 

• The above equal representation rules;
• An alternative agreed representation rule;
• An appointed trustee appointed by mutual agreement by a majority of employers and members;
• An APRA approved management agreement – this requires agreement by a majority of fund members and employers, then approval by APRA.

 

Public offer fundsmay only appoint trustees who have been approved by APRA.

 

DUTIES OF TRUSTEES

 

Trustees are required to:

 

• Apply ordinary prudent care, skill and diligence;
• Always act in the best interests of fund members;
• Act honestly at all times;
• Not enter into any contract or arrangement which would prevent or hinder them from properly performing or exercising their functions and powers;
• Keep the fund assets separate from any assets held by the trustees personally and separate from any assets held by the employer;
• Formulate and implement an investment strategy for the fund which has regard to liabilities, risk and return, diversification, liquidity;
• Allow members access to relevant information and documents;
• Prudently manage any reserves in line with the investment strategy;
• Notify APRA of any significant adverse event affecting the fund’s financial position;
• Provide information to members and provide annually a report on the fund’s performance and statements showing members’ balances;
• Establish an internal mechanism for handling enquiries and complaints and advise members when they join the fund and at each year after that; and
• Give each member a final member statement on termination.

 

SOLE PURPOSE TEST

 

A superannuation fund must be maintained for the sole purpose of providing retirement benefits to members:

 

On their retirement, or later on reaching the age for payment of preserved benefits; or

For beneficiaries if a member dies.

 

The following ancillary purposes may be allowed in certain circumstances:

 

Benefits on termination of employment;

Benefits to a member suffering permanent disability;

Benefits to a member’s dependants or estate upon the member’s death.

 

Trustees should carefully consider this requirement when making investment decisions.The sole purpose test may be contravened if the nature of investments
suggests a non-retirement purpose behind the decision.The provision of retirement benefits to members must be the overriding consideration behind all
investment decisions.

 

INVESTMENT STRATEGY

 

Trustees are required to formulate and implement an investment strategy.The following key factors must be considered:

 

Investment risk relative to the fund’s objectives and cash flow requirements;

The composition of investments and diversification;

Liquidity of investments relative to cash flow requirements; and

Ability to meet current and prospective liabilities.

 

In managing the fund, trustees should consider that superannuation is by its nature a long-term investment which generally requires a balanced portfolio.This
may involve acceptance of some volatility in short-term investment returns.The investment objectives and investment strategy should be stated to members
in the trustee’s annual report.There is scope for members to direct the trustee’s strategy from a menu of strategies that have been vetted by them.

 

RECORD KEEPING OBLIGATIONS

 

Trustees are required to:

 

Retain copies of the trust deeds and any amendments;

Keep minutes of trustee meetings and a record of all changes of trustees for at least 10 years;

Maintain accurate and accessible accounting records;

Prepare annual financial statements which show the financial position of the fund, together with an operating statement showing the profit or loss of the
fund and details of all members’ accounts with the fund; and

Ensure the accounts are audited by an approved auditor in the approved format.

 

PROHIBITED INVESTMENTS AND BORROWINGS

 

Trustees must not lend money or give any financial assistance to a member of the fund or a relative of a member.

 

Trustees must not acquire an asset (apart from “business real property” or listed securities) from a member or relative of a member.Business real property
means commercial property being actively used in a business.

 

Self managed superannuation funds (with less than five members) may, however, acquire business real property from a member or relative provided it is acquired
at market value.As long as the investment strategy allows, the value of the property can be up to 100% of the value of all assets of the fund.

 

Trustees are not allowed to borrow money on the funds behalf (except for limited recourse borrowing arrangements are allowed).

 

All investments must be made on a commercial arm’s length basis.

 

Each time a major investment is made, trustees should consider the fund’s investment strategy as a reference point.

 

Trustees are restricted from making loans to or investments in assets owned by employer-sponsors or associates.These are called in-house assets.From 1
July 2000, there must be no more than 5% of assets held in-house based on market values.

 

The Superannuation Legislation Amendment Act (No. 4) widened the definition of in-house assets to include:

 

Loans to, or investments in a related party;

An investment in a related trust of the fund; and

An asset of the fund subject to a lease between the fund and a related party.

 

Superannuation funds cannot invest in a related unit trust in order to acquire a geared investment, nor can they acquire plant or motor vehicles and lease
them to members or employer-sponsors (unless the market value of the leased item is less than 5 per cent of the total value of all assets).

INVESTMENT MANAGER

 

Although trustees usually cannot delegate their duties, trust deeds often allow for the delegation and appointment of investment managers.If an investment
manager is appointed, there must be a written agreement specifying the precise roles of each party and the trustees’ expectations of the manager should
be supplied to the manager.

 

TAX CONCESSIONS

 

Employer contributions made to a complying superannuation fund are tax deductible to the employer.

 

Complying superannuation funds pay a concessional tax rate of 15 per cent of employer contributions and fund earnings.If the fund invests in shares, it
is possible that the excess imputation credits (at 30%) will further reduce the total tax payable.

 

Non-concessional contributions are received by the fund tax-free.Providing an asset has been held longer than 12 months, complying funds are able to claim
a discount of one-third on a taxable capital gain, meaning the fund will pay an effective CGT rate of 10 per cent.

 

Superannuation funds become eligible for these tax concessions by making an election with the ATO, within 60 days of formation, to become a SIS complying
fund.The fund will then receive written confirmation from the ATO that it is a complying fund.

TAX DEDUCTIONS FOR PERSONAL CONTRIBUTIONS

 

Providing the below criteria is met, a person may claim a tax deduction for 100% of personal contributions made to super.Personal contributions, where
a tax deduction is claimed, are concessional contributions, which are subject to a person’s concessional contributions cap.Excess concessional contributions
are effectively taxed at individual marginal tax rate.

 

Conditions for claiming a tax deduction for personal super contributions

 

The following primary conditions must be met to claim a tax deduction for a personal super contribution:

 

–The taxpayer makes a personal contribution to a complying super fund or RSA for themselves, for the purpose of providing super benefits.

-The taxpayer may only deduct the contribution for the income year in which the contribution is made.

-The taxpayer must submit a valid notice to the fund trustee.

-The fund trustee must have given the taxpayer an acknowledgement of receipt of the valid notice.

Age restrictions

-If the taxpayer is aged 75 years or older, they can only claim a deduction for contributions made before the 28th day of the month following the month
in which they turned 75.

 

-If the taxpayer is under 18 when the contribution was made, a tax deduction can only be claimed if the taxpayer also earned income as an employee or a
business operator during the year.

Work test

-If the taxpayer is 65–74 years old when a contribution is made, they will need to satisfy a work test in order for the fund to accept the contribution
for which they can claim a tax deduction.

 

Taxpayer’s Valid Notice

 

To deduct the contribution, or a part of the contribution, a taxpayer must have given the trustee of the fund a valid notice of their intention to claim
the deduction, and the trustee must have given the taxpayer an acknowledgement of receipt of the notice.

 

It is not compulsory to use the ATO version of this form.These notifications can be made to the super fund in various ways and funds may create their own
form for their members to use.The ATO form sets out the minimum data requirements.

 

Timing

 

The notice must be given to the fund provider before the earlier of:

 

-The day the taxpayer lodges their income tax return for the income year in which the contribution was made, or

-The end of the next income year following the year of the contribution.

 

EMPLOYER CONTRIBUTION VS PERSONAL CONCESSIONAL CONTRIBUTION

 

Note: A contribution for tax purposes does not include a rollover super benefit or super lump sum paid from a foreign super fund.

 

SELF MANAGED SUPER FUNDS

 

Recently the ATO outlined SMSF specific compliance risks. These are as follows:

 

Residency

 

In relation to residency there are strict rules which funds must meet.A self managed superannuation fund that is not a resident fund at all times during
the income year, is not a complying fund for tax purposes in that year.Initial analysis shows that there are some who may not meet the residency requirements
for complying superannuation funds.The main concern is where trustees are absent from Australia for an extended period of time.

 

Trustees who will be temporarily going overseas for more than two years need to ensure, prior to going overseas, that the fund does not become a non-resident
fund and as such, ineligible for concessional tax treatment.Steps that trustees should consider taking include:

 

Appointing a legal personal representative who holds an enduring power of attorney to act on their behalf as a trustee for the period that they will be
overseas; and

 

Ensuring that, during their absence, the accumulated entitlements of the funds resident active members will be more than 50 per cent of the total accumulated
entitlements of all active members.In some cases, this might be achieved by ceasing contributions for the relevant period; or

Resigning as the non-resident trustee and rolling the benefits into a public offer fund.

Recording keeping

 

The second area is record keeping.The ATO has identified poor and inadequate record keeping as a problem for self managed superannuation funds.Decisions
made by trustees should be recorded properly.

 

Relevant records include minutes of meetings, investment decisions, changes of trustees, and so on.If a compliance team undertakes an audit and finds that
proper records have not been kept, the ATO has immediate concerns about the fund.

 

Superannuation rulings and Practical Compliance Guidelines

 

The ATO has continued to prepare rulings relating to the above issues.The new series of rulings has improved clarity on the Commissioner’s views about
how the SIS Act applies to Self-Managed Superannuation Funds.At publication date there had been six SMSF Rulings issued in 2008/2009, two in 2010 and
one in 2012.None have been issued for the last three years.

 

In 2016 the ATO began to issue Practical Compliance Guidelines which aim to provide clear and practical public advice and guidance.

 

EXISTING AND FUTURE SMSF RULINGS DEALING WITH THE FOLLOWING ISSUES:

 

Prohibited financial assistance

 

Financial assistance is not defined in the Superannuation Industry (Supervision) Act 1993. SMSFR 2008/01 expands on the ordinary meaning of the
term and includes examples of financial assistance in instances where it may be allowed and prohibited.

 

Incidental Benefit – Identifying a breach in the Sole Purpose Test

 

The sole purpose test states that trustees must ensure that a fund is continuously maintained solely for one or more core purposes, or additionally one
or more ancillary purposes provided for in the legislation.

 

In some cases, fund members or others may derive incidental benefits from the conduct of the fund’s investment activities.SMSFR 2008/2 clarifies circumstances
when such incidental benefits will not constitute a breach of the Act.

 

What constitutes Business Real Property for Self Managed Super Funds?

 

SMSFR 2009/1 explores the definition of ‘business real property’ and provides guidance on each of the tests that must be met when determining whether or
not the definition is satisfied.

 

Acquisition of assets from related parties

 

SMSFR 2010/1 considers and provides guidance on, the general prohibition as well as each of the exceptions.

 

SMSFR 2012/1 deals with limited recourse borrowing announcements.

 

PCG 2016/5 deals with the arms’ length terms for LBRAs.

 

Approved auditors

 

ASIC now registers SMSF auditors and commenced issuing SMSF audit annual statements from 31 January 2014.All approved and suspended SMSF auditors must
now complete their annual statement within 30 days of their registration anniversary date each year.

 

TAXATION OF SUPERANNUATION BENEFITS

 

The Reasonable Benefit Limits were abolished on 1 July 2007.

 

Below are the new tables…

 

Low Rate Cap Amount and Untaxed Plan Cap Amount

 

The application of the low rate threshold for superannuation lump sum payments is capped. The low rate cap amount is reduced by any amount previously applied
to the low rate threshold.

 

 

The untaxed plan cap amount limits the concessional tax treatment of benefits that have not been subject to contributions tax in a super fund.The untaxed
plan cap amount applies to each super plan from which a person receives super lump member benefits.

 

Income Year	Low Rate Cap Amount	Untaxed Plan Cap Amount
2018-19	$205,000	$1,480,000

Note: The low rate cap amount is indexed in increments of $5,000.

Super Lump Sum Tax Table

 

Income Component Derived in The Income Year	Age at The Date Payment Is Received	Amount Subject to Tax	Maximum Rate of Tax (Including Medicare Levy)
Member benefit – taxable component – taxed element	Under preservation age	Whole amount	22%
	Preservation age to 59	Amount up to the low rate cap amount	Nil
		Amount above the low rate cap amount	17%
	Aged 60 and above	Whole amount	Nil
Member benefit – taxable component – untaxed element	Under preservation age	Amount up to untaxed plan cap amount	32%
		Amount above untaxed plan cap amount	47%
	Preservation age to 59	Amount up to the low rate cap amount	17%
		Amount above the low rate cap amount and up to the untaxed plan cap amount	32%
		Amount above the untaxed plan cap amount	47%
	Aged 60 and above	Amount up to the untaxed plan cap amount	17%
		Amount above the untaxed plan cap amount	47%
Death benefit lump sum benefit paid to non-dependants – taxable component – taxed element	Any	Whole Amount	17%
Death benefit lump sum benefit paid to non-dependants – taxable component – untaxed element	Any	Whole Amount	32%
Death benefit lump sum benefit paid to dependants – taxable component – taxed and untaxed elements	Any	None	Nil
Rollover superannuation benefits – taxable component – taxed element	Any	Whole Amount	Nil
Rollover superannuation benefits – taxable component – untaxed element	Any	Amount up to the untaxed plan cap amount	Nil
		Amount above the untaxed plan cap amount	47%
Superannuation lump sum benefits less than $200	Any	None	Nil

Element taxed in the fund of a Superannuation Income Stream

 

The table below summarises the taxation of a superannuation income stream paid with an element taxed in the fund.

The tax-free component is not included. This component is NOT assessable income and NOT exempt income in all cases.

 

Age of Recipient	Income Stream
Age 60 and over	Not assessable, not exempt income
At or above preservation age and under 60	Taxed at marginal tax rates. Tax offset of 15% is available
Under preservation age	Taxed at marginal tax rates, with no tax offset. Tax offset of 15% is available if a disability superannuation benefit

*Note: Medicare Levy (2%) is added to whichever rate of tax applies. 

Element untaxed in the fund of a Superannuation Income Stream

 

The table below summarises the taxation of a superannuation member income stream paid with an element untaxed in the fund.

 

The tax-free component is not included. This component is NOT assessable income and NOT exempt income in all cases.

 

Age of Recipient	Income Stream
Age 60 and over	Taxed at marginal rates, with a 10% tax offset
At or above preservation age and under 60	Taxed at marginal rates, with no tax offset
Under preservation age	Taxed at marginal rates, with no tax offset

*Note: Medicare Levy (2%) is added to whichever rate of tax applies. 

 

PERSONAL SUPERANNUATION CONTRIBUTIONS INCLUDING SELF EMPLOYED PERSONS

 

These are personal contributions for which you do not receive a tax deduction.

 

Non-concessional contributions cap

 

The non-concessional contributions cap decreased on 1 July 2017 to $100,000, down from $180,000.

 

Non-concessional contributions include personal contributions for which you do not claim an income tax deduction.

 

Non-concessional bring-forward cap

 

The bring-forward non-concessional cap decreased on 1 July 2017 to $300,000, down from $540,000.

 

People aged less than 65 years on 1 July in a financial year may be able to make non-concessional contributions of up to three times their non-concessional
contributions cap over a three-year period – this is known as the “bring forward” rule.

 

The bring-forward cap is three times the non-concessional contributions cap of the first year.If you brought forward your contributions in 2017/18, it
would be 3 x $100,000 = $300,000.

 

This consequential change to the non-concessional contributions cap means you can put less into super.

 

To maximise non-concessional contributions, you may consider the strategy