Topic 7 Investing in Superannuation

Question 1

The superannuation guarantee system

• Employers must currently contribute no less than____% to complying funds or retirement saving accounts (RSA) in their employees’ name based on an employee’s ordinary times earnings
• To _______, an employee must earn $_______ or more in a calendar month (before tax)
• if an employee is younger than ___years of age, he or she must work more than ____ hours a week
• Please note: the ordinary time earnings (OTE) are the total earnings paid to an employee for ordinary hours of work. This may include over-award payments, shift-loadings and commissions. Overtime, expense allowances and payments in lieu of leave are not included.*

Answer 1

The superannuation guarantee system

• Employers must currently contribute no less than 9.5% to complying funds or retirement saving accounts (RSA) in their employees’ name based on an employee’s ordinary times earnings
• To qualify, an employee must earn $450 or more in a calendar month (before tax)
• if an employee is younger than 18 years of age, he or she must work more than 30 hours a week
• Please note: the ordinary time earnings (OTE) are the total earnings paid to an employee for ordinary hours of work. This may include over-award payments, shift-loadings and commissions. Overtime, expense allowances and payments in lieu of leave are not included.*

Question 2

Regulations

• The principal legislations that _______ to superannuation are:
• the Superannuation Industry (Supervision) Act 1993 (SIS Act)
• the Income Tax Assessment Act 1997
• the Corporations Act 2001
• The three bodies ________ superannuation are:
• the Australian Prudential Regulation Authority (APRA)
• the Australian Taxation Office (ATO)
• the Australian Securities and Investment Commission (ASIC)

Answer 2

Regulations

• The principal legislations that apply to superannuation are:
• the Superannuation Industry (Supervision) Act 1993 (SIS Act)
• the Income Tax Assessment Act 1997
• the Corporations Act 2001
• The three bodies regulating superannuation are:
• the Australian Prudential Regulation Authority (APRA)
• the Australian Taxation Office (ATO)
• the Australian Securities and Investment Commission (ASIC)

Question 3

Legislative environment

• In Australia, all superannuation funds operate as trusts
• The deed establishes the basis of ________ each member’s entitlement, while the trustee will usually _______ discretion concerning such matters as the fund’s investments
• For the fund to be entitled to tax concessions, the fund must ________with the SIS Act regulations
• One of the SIS Act requirements is for the fund to ______ the sole purpose test
• to ______ this test, the fund needs to be maintained for the sole purpose of ________ retirement benefits to the fund’s members, or to their dependants if a member dies before retirement

Answer 3

Legislative environment

• In Australia, all superannuation funds operate as trusts
• The deed establishes the basis of calculating each member’s entitlement, while the trustee will usually retain discretion concerning such matters as the fund’s investments
• For the fund to be entitled to tax concessions, the fund must comply with the SIS Act regulations
• One of the SIS Act requirements is for the fund to meet the sole purpose test
• to meet this test, the fund needs to be maintained for the sole purpose of providing retirement benefits to the fund’s members, or to their dependants if a member dies before retirement

Question 4

Three stages of superannuation

• Contribution stage:
• ____% tax paid by the fund on concessional (before tax) contributions, plus additional ____% of Division 293 tax paid by individuals earning more than $________
• _____% tax applies to non-concessional (after tax) contributions or government co-contributions
• Accumulation stage:
• ____% tax paid by the fund on income (such as dividends)
• ____% Capital Gains Tax (CGT), reduced to ____% if assets were held for 12 months or more
• Drawdown stage:
• the tax rate will depend for example, on factors such as the age of the recipient and whether the benefits are paid as income streams or a lump sum

Answer 4

Three stages of superannuation

• Contribution stage:
• 15% tax paid by the fund on concessional (before tax) contributions, plus additional 15% of Division 293 tax paid by individuals earning more than $250,000
• 0 % tax applies to non-concessional (after tax) contributions or government co-contributions
• Accumulation stage:
• 15% tax paid by the fund on income (such as dividends)
• 15% Capital Gains Tax (CGT), reduced to 10% if assets were held for 12 months or more
• Drawdown stage:
• the tax rate will depend for example, on factors such as the age of the recipient and whether the benefits are paid as income streams or a lump sum

Question 5

Division 293 (DIV 293) contributions tax

• All individuals earning more than $_________will need to pay an additional ____% DIV 293 tax on their ____________\_ above the $250,000 threshold (on the top of the 15% contributions tax already paid by the fund)
• if an individual earns less than $_____\_ a year, but by including their concessional contributions the total amount exceeds $_________, the DIV 293 tax will apply to the part of the concessional contributions that is over $____________
• Please note: under this term, income includes taxable income, concessional superannuation contributions, adjusted fringe benefits, total net investment loss, target foreign income, and tax-free government pensions and benefits, less child support.*

Answer 5

Division 293 (DIV 293) contributions tax

• All individuals earning more than $250,000 will need to pay an additional 15% DIV 293 tax on their concessional contributions above the $250,000 threshold (on the top of the 15% contributions tax already paid by the fund)
• if an individual earns less than $250,000 a year, but by including their concessional contributions the total amount exceeds $250,000, the DIV 293 tax will apply to the part of the concessional contributions that is over $250,000
• Please note: under this term, income includes taxable income, concessional superannuation contributions, adjusted fringe benefits, total net investment loss, target foreign income, and tax-free government pensions and benefits, less child support.*

Question 6

Concessional, non-concessional contributions caps

• Concessional (before tax) contributions cap is $_________ for all individuals
• Non-concessional (after tax) contributions cap is $________ a year, or $_________ over a _________ period - the bring forward rule
• individuals with superannuation balances over $___________million (2017/18) will not be able to make after tax contributions
• taxpayers aged ___________ years can make non-concessional contributions providing they meet a work test but are not entitled to use the bring forward rule

Please note: individuals in breach of the non-concessional cap can withdraw the amount in excess of the cap. Those who will not, will pay ______% tax on this amount.

Answer 6

Concessional, non-concessional contributions caps

• Concessional (before tax) contributions cap is $25,000 for all individuals
• Non-concessional (after tax) contributions cap is $100,000 a year, or $300,000 over a three-year period - the bring forward rule
• individuals with superannuation balances over $1.6 million (2017/18) will not be able to make after tax contributions
• taxpayers aged 65 - 75 years can make non-concessional contributions providing they meet a work test but are not entitled to use the bring forward rule

Please note: individuals in breach of the non-concessional cap can withdraw the amount in excess of the cap. Those who will not, will pay 47% tax on this amount.

Question 7

General transfer balance cap

• A general transfer balance cap of $_________, indexed periodically, is a limit on the total amount of superannuation that can be transferred into the retirement phase
• accumulation phase - before an individual starts drawing funds from the superannuation account, the funds are considered to be in accumulated phase
• pension phase - when an individual starts drawing funds from the superannuation account, permitted only after meeting a condition of release (discussed under topic – retirement planning), the funds are considered to be in pension phase
• Any earnings in pension phase (income or capital gain) are taxed at ____%

Answer 7

General transfer balance cap

• A general transfer balance cap of $1.6 milion, indexed periodically, is a limit on the total amount of superannuation that can be transferred into the retirement phase
• accumulation phase - before an individual starts drawing funds from the superannuation account, the funds are considered to be in accumulated phase
• pension phase - when an individual starts drawing funds from the superannuation account, permitted only after meeting a condition of release (discussed under topic – retirement planning), the funds are considered to be in pension phase
• Any earnings in pension phase (income or capital gain) are taxed at 0%

Question 8

Voluntary contributions – age and work tests

• There is _________ age limit to qualify for Superannuation Guarantee
• The __________\_ still remain in place for ___________________ – concessional and non-concessional contributions
• Voluntary contributions can be made until the person turns ___, or if made on behalf of the spouse, until the spouse turns _____
• A work test must be satisfied for people aged ____ and over to be eligible to make or receive (in the case of the spouse) a voluntary super contribution
• to satisfy the work test, a person must have been gainfully employed on a full or part-time basis for at least 40 hours in 30 consecutive days in the financial year

Answer 8

Voluntary contributions – age and work tests

• There is no upper age limit to qualify for Superannuation Guarantee
• The age restrictions still remain in place for voluntary superannuation contributions – concessional and non-concessional contributions
• Voluntary contributions can be made until the person turns 75, or if made on behalf of the spouse, until the spouse turns 70
• A work test must be satisfied for people aged 65 and over to be eligible to make or receive (in the case of the spouse) a voluntary super contribution
• to satisfy the work test, a person must have been gainfully employed on a full or part-time basis for at least 40 hours in 30 consecutive days in the financial year

Question 9

Salary sacrifice arrangements

• To take advantage of a low tax superannuation environment, an employee may decide to sacrifice some of their pre-tax salary as a contribution to a superannuation fund
• Salary sacrifice contribution is a concessional contribution, therefore the superannuation fund will pay ___% of contributions tax on the salary sacrificed amount, and where applicable, the taxpayer will pay the Division 293 tax
• the salary sacrificed amount is counted towards ________________________
• Please note: salary sacrifice contributions are exempt from Fringe Benefit Tax and are tax deductible for employers*

Answer 9

Salary sacrifice arrangements

• To take advantage of a low tax superannuation environment, an employee may decide to sacrifice some of their pre-tax salary as a contribution to a superannuation fund
• Salary sacrifice contribution is a concessional contribution, therefore the superannuation fund will pay 15% of contributions tax on the salary sacrificed amount, and where applicable, the taxpayer will pay the Division 293 tax
• the salary sacrificed amount is counted towards the concessional contribution cap
• Please note: salary sacrifice contributions are exempt from Fringe Benefit Tax and are tax deductible for employers*

Question 10

Government superannuation co-contributions

• To be eligible for the government co-contribution, a person must:
• make a ____________________\_ contribution to a complying fund
• be a permanent resident under the age of ____years
• earn less than $_________(in 2017/18) (which is the person’s net
• assessable income, reportable fringe benefits and reportable
• employer superannuation contributions)
• earn ______% or more of income from eligible employment, running a business, or a combination of both
• lodge a tax return for the previous financial year

Please note: the maximum co-contribution amount of $_______is reduced if the individual contributes less than $_______and/or his or hers income exceeds $_______(2017/18).

For the 2017/2018 year: If your ‘total income’ is $36,813 or less (for the 2017/2018 year), the federal government pays $0.50 for every dollar you contribute to your super fund in after-tax dollars, up to a maximum of $500 a year. If your ‘total income’ is more than $36,813, your co-contribution entitlement reduces by 3.33¢ for every dollar you earn over $36,813, until it cuts out at $51,813.

Answer 10

Government superannuation co-contributions

• To be eligible for the government co-contribution, a person must:
• make a non-concessional superannuation contribution to a complying fund
• be a permanent resident under the age of 71 years
• earn less than $51,813 (in 2017/18) (which is the person’s net
• assessable income, reportable fringe benefits and reportable
• employer superannuation contributions)
• earn 10% or more of income from eligible employment, running a business, or a combination of both
• lodge a tax return for the previous financial year
• Please note: the maximum co-contribution amount of $500 is reduced if the individual contributes less than $1,000 and/or his or hers income exceeds $36,813 (2017/18).*
• For the 2017/2018 year: If your ‘total income’ is $36,813 or less (for the 2017/2018 year), the federal government pays $0.50 for every dollar you contribute to your super fund in after-tax dollars, up to a maximum of $500 a year. If your ‘total income’ is more than $36,813, your co-contribution entitlement reduces by 3.33¢ for every dollar you earn over $36,813, until it cuts out at $51,813.*

Question 11

Tax-deductibility of superannuation contributions

• Employers can claim tax deductions for superannuation contributions
• A deduction can also be claimed by individuals who contributed personal super contributions (concessional contributions) if they derive their income from:
• ___________ (above of what their employers are contributing)
• _____________ (e.g. self-employment)
• ___________ (including interest, dividends, rent and capital gains)
• _____________ or ___________, ___________
• ____________ or trust distributions
• a foreign source
• These individuals need to notify their superannuation funds (must be a complying fund) of their intention to claim a deduction

Answer 11

Tax-deductibility of superannuation contributions

• Employers can claim tax deductions for superannuation contributions
• A deduction can also be claimed by individuals who contributed personal super contributions (concessional contributions) if they derive their income from:
• salary and wages (above of what their employers are contributing)
• a personal business (e.g. self-employment)
• investments (including interest, dividends, rent and capital gains)
• government pensions or allowances, Superannuation
• partnership or trust distributions
• a foreign source
• These individuals need to notify their superannuation funds (must be a complying fund) of their intention to claim a deduction

Question 12

Tax-offset for low income earning or non-working spouse

• A tax offset of ____% can be claimed when an amount of up to $_________has been contributed to a complying superannuation fund or a retirement savings account (RSA) on behalf of a non-working or low income earning spouse, giving a maximum rebate of $______
• The maximum rebate of $______ applies if the spouse’s assessable income plus reportable fringe benefits is $________ or less and the full amount of $_______ is contributed
• the rebate is reduced if the contributed amount is less than $________or/and the spouse earns more than $_________
• rebate phases out at $__________

Please note: the spouse’s non-concessional contributions cap cannot be breached.

Answer 12

Tax-offset for low income earning or non-working spouse

• A tax offset of 18% can be claimed when an amount of up to $3000 has been contributed to a complying superannuation fund or a retirement savings account (RSA) on behalf of a non-working or low income earning spouse, giving a maximum rebate of $540
• The maximum rebate of $540 applies if the spouse’s assessable income plus reportable fringe benefits is $37,000 or less and the full amount of $3,000 is contributed
• the rebate is reduced if the contributed amount is less than $3,000 or/and the spouse earns more than $37,000
• rebate phases out at $40,000

Please note: the spouse’s non-concessional contributions cap cannot be breached.