lecture 6

Question 1

 What is Superannuation

Answer 1

o A tax effective structure
o Allows a person to save and invest during working life to accumulate funds for retirement
o Anything you put in is taxed at 15%, 15% for earnings and 10% for capital gains
o Regulated by government but funds are private institutions
o Introduced to ensure more people can have a comfortable retirement
–>Also to take pressure off government age pension
o On-top of your salary

Question 2

 Expected accumulated value

Answer 2

o SS is annual starting salary
o Cr = contribution rate
o Te = Tax on contributions
o R is expected net annual compound earning rate of the fund
o G = expected annual compound rate of salary growth
o P = number of times per year funds are added
o N = number of years of accumulation

Question 3

 Preservation

Answer 3

o Super funds are trusts
o They have a trust deed, sole purpose test
o Contributions preserved until condition of release is met

Question 4

 Exceptions to Preservation

Answer 4

o Permanent incapacity, permanent depature from Australia
o Severe financial hardship
o Compassionate grounds
—->E.g. life-threatening illness

Question 5

 Fund types

Answer 5

o Retail super funds e.g. AXA or AMP which anyone can be a part of
o Industry Super funds where memberships were restricted to employees in the industry
o Corporate super funds where memberships are restricted to employees of a particular employer
o Public sector funds where membership is restricted to public servants

Question 6

 How do super funds differ?

Answer 6

o Performance
o Fees, commissions
o Governance structures

Question 7

 Step 3; be assigned to a plan type

Answer 7

o Defined benefit plan
 Not really popular in Australia
 At retirement, you get a payout which depends on
• Period contributed to pension fund and terminating income
 Smoothed income stream over your entire life

o Defined contribution plan
 Contributor takes on the investment risk and has choice of investment asset allocation
 At retirement, you get a payout which depends on
• Level of contributions, duration and performance of the funds
• No guaranteed series of pension payments

Question 8

 Choose an investment option

Answer 8

o Based on your risk tolerance
 Conservative, balanced, growth, high growth
o Mysuper
 Standardised balanced products, is basic, cost effective
o Different ways to define risk

Question 9

 Know how to contribute to your super fund

Answer 9

o Types of contributions
 Concessional contributions aka before tax
• Compulsory employee under SGS contributions
• Award contributions, in some cases a little bit extra
• Salary sacrifice

 Non-concessional contributions aka after tax
• Money has already been taxed
• Personal deductible contributions for self employed
• Government co-contribution
• Spouse

Question 10

 Concessional contributions

Answer 10

o If under 50 years, contribution cap is 25k per year
o If turning 50 years or older in 2016-2017, cap is 25k a year
o Carry forward for up to 5 years if super balance is less than 500k
o Concessional contributions taxed at 15%
o This contributions tax of 15% is effective for those earning less than 250k a year

Question 11

 The purpose of contribution tax

Answer 11

o Average income earner’s marginal income tax rate is 32.5%
o Super contributions taxed at 15%
o Effectively a 17.5% tax concession
o By contrast, high income earners pay 45% tax so effectively a 30% tax concession

Question 12

 Div 293 Tax

Answer 12

o Double contributions tax
o As of July 1st 2017, this applies for those with income above 250k
o Can be paid out of pocket or from super fund
o Tax rate is 15% tax payable on the lesser of excess over threshold or concessional contributions
o Calculate 2 different options and take the lesser
o E.g. 15% of the contribution or 15% of the amount above income threshold

Question 13

 Excess contributions tax

Answer 13

o There is no limit to the amount of concessional contributions
o Your marginal tax rate + short fall interest charge
o If you are already on top marginal tax rate, then only an interest charge applies
o Excess contributions are eligible for a 15% tax offset, to allow for 15% contributions tax already paid

Question 14

 Salary Sacrifice

Answer 14

o Concessional contribution thus subject to contributions tax of 15%
o Payments are made by arrangement between an employee and employer
o Can sacrifice enough by moving down the tax
o However not suitable for
 Low income earners, bigger hit by budget
 Young people, has funds are locked away for a long time

Question 15

 Non-concessional contributions

Answer 15

o Are not subject to contributions tax, after tax dollars
o Cap is 100k
o Or 300k over 3 years bring forward cap, under the age of 65
o NCC can only be acceptable if total super balance is less than 1.6m
o If you exceed the NCC cap, you will have to pay a small charge
o Any excess NCC are required to be refunded tax free

Question 16

 Gov Co-contribution

Answer 16

o You receive a tax free super contribution from the government when you make a NCC contribution to your super account
o Below income test
o The 10% income rule (10% of your total income comes from employment
o Age test (<71 years old)