Topic 9 - Superannuation

Question 1

What is the principal source of income for Australians when they retire?

Pages 353-354

Answer 1

Question 2

What is superannuation?

Page 354

Answer 2

Question 3

Differentiate between the definition of superannuation and the pension in Australia.

Page 354

Answer 3

Question 4

Why do we need superannuation?

Pages 354-355

Answer 4

• We are living longer
• Aging population
• In 1970 there were 7.5 people in the workforce for each person aged over 65 — in 2050 it is predicted the ratio will have fallen to only 2.7 — the tax base will therefore be smaller, individuals will have to fund their own retirement

Question 5

What are the risks associated with a self-managed superannuation fund?

Not in the syllabus

Answer 5

Question 6

What are the three pillars of the superannuation policy?

Page 355

Answer 6

Question 7

• Superannuation Industry (Supervision) Act 1993 (SIS Act) is the cornerstone legislation
• A superannuation fund is a form of trust and is administered by trustees who have common law fiduciary responsibilities to act in good faith
• A complying fund enjoys tax concessions
• The income of a non-complying fund is taxed at the highest marginal tax rate

What are the prerequisites of allowing a super fund to exist?

Pages 355-357

Answer 7

• Only funds complying with the SIS Act qualify for taxation concessions
• A complying fund holds a ‘notice of compliance’ from APRA or ATO
• A superannuation fund must meet the definition as per the SIS Act
• Must have a trustee — responsible and accountable to regulator and members
• Must be established and controlled in Australia

Question 8

What is the structure of a superannuation fund regarding the trustee and its beneficiaries?

Pages 355-357

Answer 8

Question 9

What role do APRA and ASIC play in the regulation of the superannuation industry?

Pages 355-357

Answer 9

• Australian Prudential Regulation Authority — the prudential regulator for ADIs and superannuation funds
• Australian Securities and Investment Commission — regulates market conduct and disclosure

Question 10

What role do ATO and SCT play in the regulation of the superannuation industry?

Pages 355-357

Answer 10

• Australian Taxation Office — the regulator of SMSFs in addition to tax collection and audit role
• Superannuation Complaints Tribunal — deals with complaints by members against the decisions of trustees

Question 11

There are two types of superannuation funds.

Describe the accumulation account.

Pages 357-358

Answer 11

Accumulation accounts

— balances increase with positive investment returns as well as contributions — investment risk is borne by the individual

Question 12

There are two types of superannuation funds.

Describe the defined benefits scheme.

Pages 357-358

Answer 12

Defined benefit funds

— contributions are made by an employer into a pooled fund designed to meet the benefits accruing to members

— the ultimate benefit is defined by a formula

— the risk is usually borne by the provider

Question 13

Describe a non-contributory defined benefit scheme.

Page 358

Answer 13

Question 14

Who oversees the major providers of superannuation funds?

Pages 359-360

Answer 14

Question 15

Why should we try and work for as long as possible in our life?

Pages 360-362

Answer 15

•From white-collar to blue-collar to no collar

–Superannuation now available to most employees

•The need to stay at work longer

–Policy initiatives are aimed at encouraging us to work longer to lower the social security burden

•The tax-concessional environment

–Getting the balance right

•Is everybody treated equally?

–Does the system favour higher-income earners?

Question 16

What are the tax implications from taking out a lump sum from your superannuation fund?

Page 362

Answer 16

Question 17

What are the tax implications of withdrawing a lump sum from your super account after the age of 60?

Page 362

Answer 17

Question 18

How much tax do we pay for contributions and earnings within the superannuation fund?

Pages 362-364

Answer 18

Question 19

What sort of contributions can an individual make while they are under 65 and then over 65 years old?

Page 365

Answer 19

• People aged <65 can contribute without restriction
• Between ages 65 and 75 the member must be gainfully employed at least on a part-time basis
• > 75 the only contributions allowed are employer-mandated contributions under an award
• Contributions are preserved until the member satisfies a condition of release
• Superannuation is, therefore, a very long term investment

Question 20

What is a ‘condition of release’, a ‘preservation age’ and a ‘transfer balance cap’?

Page 365

Answer 20

Question 21

Differentiate between a concessional and a non-concessional contribution.

Pages 366-370

Answer 21

• Concessional contributions are contributions for which a tax deduction has been claimed
• Concessional contributions are taxed at 15%

–Limited to an indexed amount of $25 000 per year (age >50 cap is $35 000 per year effective July 2014)

–Excess contributions taxed at 46.5%

•If a person is self employed the process now works the same way

Question 22

Describe the superannuation guarantee scheme.

Pages 367-369

Answer 22

• Employers must contribute 9% of employee’s salary to a superannuation fund
• In 2010 the federal Labor Govt. proposed that this limit be increased to 12% by 2019-20
• Contributions must be made quarterly
• ATO administers the scheme
• ATO imposes a Superannuation Guarantee Charge if contributions are not made

Question 23

Describe the concept of salary sacrifice.

Pages 369-370

Answer 23

Question 24

Income tax savings from salary sacrifice.

Page 369

Answer 24

Question 25

What is the low-income superannuation tax offset (rebate)?

Page 370

Answer 25

Question 26

How does the low-income superannuation tax offset (rebate) work?

Page 370

Answer 26

Question 27

Describe non-concessional contributions to your superannuation fund.

Pages 371-372

Answer 27

Question 28

What is the co-contribution scheme?

Pages 371-372

Answer 28

Question 29

Describe the spouse tax offset.

Page 372

Answer 29

Question 30

What are the rules about a non-concessional contribution from the sale of a small business?

Page 372

Answer 30

Question 31

What is an ‘in-specie contribution’?

Page 372

Answer 31

Question 32

What about our choice of superannuation fund?

Pages 372-373

Answer 32

Question 33

Describe the bankruptcy provision.

Page 373

Answer 33

Question 34

Comment on investment objectives and strategies of a superannuation fund.

Page 376

Answer 34

Question 35

Differentiate between a fund and a sub-fund.

Pages 376-377

Answer 35

Question 36

List some investment restrictions.

Pages 377-378

Answer 36

Question 37

How is assessable income taxed going into a super fund?

What are the two important tax credits?

Pages 379-380

Answer 37

Question 38

What happens to a superannuation fund in the event of a divorce?

Pages 381-382

Answer 38

Question 39

What types of fees and charges apply to a superannuation account?

Pages 383-384

Answer 39

Question 40

Overview of fees.

Pages 383-384

Answer 40

Question 41

What are the main points we need to know from the superannuation topic?

Pages 386-387

Answer 41

Question 42

Feng, aged 38 has $250,000 to invest in order to help fund his retirement but is unsure as to how to invest the funds. Assume each of the following investments is returning 5% per annum—superannuation, share portfolio and rental property. How would you advise Feng?

Answer 42

If Fen invests in superannuation, he needs to realise that his money will be preserved until retirement. However, earnings on funds invested in a superannuation environment are only taxed at 15% compared to the individual’s marginal tax rate when those earnings are made outside a superannuation environment. The 5% return is the total return compared to the returns he may be able to generate from a share portfolio or a rental property (see below).

In terms of the share portfolio, Fen needs to know if the 5% represents only the dividend income or the dividend income and capital gain combined. Fen also needs to know if only the cash income has been included within the 5% or whether this figure has been grossed up in recognition of the tax credits associated with the dividends. If he invests in the share market, he can sell the investment at any time he chooses.

Similarly, with the rental property, Fen needs to know if the 5% represents only the rental income or the rental income and capital gain combined. The investment could be sold at any time but may not be as liquid as investing in the share market.

Question 43

What is the three pillars policy? What tax incentives drive the third pillar?

Pages 355, 366, 371-372, 380

Answer 43

Tier 1 - A taxpayer-funded social security pension (a safety net) which is means-tested

Tier 2 - Compulsory employer contributions to superannuation for employees.

Tier 3 - Tax incentives for voluntary contributions to superannuation

• Concessional contributions are tax deductible
• Government co-contribution and spouse rebate encourage non-concessional contributions.
• Earnings are taxed at 15%.
• Capital gains are effectively taxed at 10% (2/3rds of 15%)

Question 44

Superannuation in Australia is primarily regulated by the Superannuation Industry (Supervision) Act 1993. What are the key underlying principles upon which this Act is based?

Page 356

Answer 44

• The trustees remain responsible for all the decisions of the fund.
• Where possible members should participate in the decision-making process.
• All investment decisions must be directed toward funding retirement.
• Compliance with the Act does not guarantee the performance or the financial viability of the fund.

Question 45

Distinguish between the roles of APRA, ASIC and the ATO with respect to the regulation and control of the superannuation industry.

Pages 356-357

Answer 45

• APRA
  
  • Monitors the risk-taking behaviour of individual (non-SMSF) funds
  • Ensures the compliance of individual funds to the SIS Act
  • Issues RSEs (Registrable Superannuation Entities licence)
• ASIC
  
  • Protects consumers
  • Ensures markets are conducted in a fair, orderly and transparent manner
  • Issues AFSLs (Australian Financial Services Licence)
• ATO
  
  • Prudential regulator of SMSFs
  • Collecting tax from superannuation funds
  • Administers the tax concessions available to individuals.
  • Auditing employers to ensure they meet their requirements under the Superannuation Guarantee (Administration) Act 1992.

Question 46

Why has there been a shift away from defined benefit schemes and towards accumulation schemes in Australia?

Pages 357-358

Answer 46

In most defined benefit schemes the investment risk is borne by the employer. By encouraging new employees into accumulation-style schemes, the employer is able to shift the investment risk to the employee.

Defined benefit schemes are also better suited to employees who stay with the one employer for a number of years – as employees become more ‘mobile’ the attractiveness of defined benefit schemes decreases.

Question 47

Why are actuarial calculations and estimations critical to the viability of defined benefit schemes?

Pages 358-359

Answer 47

In a defined benefit fund the amount notionally accumulated is determined by a formula. Actuaries are required to prepare the formula and to monitor the performance of the fund over time. If the actuaries get the formula right, there will be enough money in the fund to pay out members as they retire. This can be contrasted to an accumulation fund where the claim of the individual is equal to the balance of their account, in which case, by definition there can never be a shortfall of funds.

The formulae applied by various funds will vary from fund to fund.

A simple formula might take the form of:

Final average salary times years of services times a factor = defined benefit account balance.

This formula will require actuaries to estimate the growth of salaries over time and estimate how long individuals are likely to remain members of the fund and this information has to then be fed into the determination of the ‘factor’ to ensure that the rate of contributions and earnings will be sufficient to cover the fund‘s commitments.

Question 48

Distinguish between funded and unfunded superannuation schemes. How will the commitments to unfunded schemes be met?

Pages 359-360

Answer 48

A funded superannuation scheme is where the employer has actually contributed the cash to the nominated fund of the member. The obligation to the member is matched by a pool of assets invested on the member’s behalf.

An unfunded superannuation scheme is where the employer has not contributed the cash to the nominated fund of the member. The obligation to the member is effectively a promise to pay. Some public sector schemes are unfunded or partially funded.

Ultimately the obligation to members of unfunded public sector schemes is underwritten by the government’s ability to levy taxes and raise the funds it requires. The Australian government has created the Future Fund and some of the assets in this fund will be used to meet this unfunded liability as it falls due.

Question 49

What public policy initiatives have been introduced to encourage Australian’s to stay at work longer?

Pages 361-362

Answer 49

• A progressive increase in the age pension entitlement age for women from 60 to 65.
• An increase in the age pension entitlement age from 65 to 67 for both men and women over the period 2017 to 2023
• The introduction of a Transition to Retirement (TTR) Income Stream
• The introduction of the Work Bonus Scheme
• A progressive increase in the preservation age from 55 to 60 (the minimum age at which funds can be released from superannuation)
• The Howard/Costello superannuation changes in 2007 to encourage people to keep working at least until 60 years of age in order to release money from superannuation tax-free

Question 50

What is the difference between a concessional and a non-concessional contribution? What are the different tax consequences when these contributions enter the superannuation fund?

Pages 365-366

Answer 50

A concessional contribution is where a tax concession has been claimed –effectively the individual is streaming some of their income into superannuation. Concessional contributions are taxed at 15% when they enter the fund.

A non-concessional contribution is where a tax concession has not been claimed – effectively the individual is moving some of their capital (after-tax dollars) into superannuation. Non-concessional contributions are not taxed when they enter the fund.

Question 51

Why is it important to distinguish between an employee and a contractor? How do we distinguish between them?

Pages 367-369

Answer 51

If a person is considered an employee then the superannuation guarantee contribution needs to be added to the cost of their employment. If the person is a contractor, then the superannuation guarantee contribution does not need to be added.

No one factor is necessarily decisive in determining whether a worker is an employee or a contractor – it is generally some combination of factors which helps determine the issue. The following factors would tend to suggest contractor rather than an employee:

• The client has limited control over the workers’ actions — the worker decides what to do and how to do it.
• The worker has their own business organization.
• The worker has a large number of clients.
• The worker bears the risk of unsatisfactory work or results and cost increases.
• The worker has the freedom to employ others.
• The worker provides their own tools.

The ATO has provided guidance on this issue with the Commissioner’s view given in Superannuation Guarantee Ruling SGR 2005/1.

Question 52

Each investment choice within a superannuation fund must have an investment objective which must be supported by investment strategies. What are the key investment strategies which must be addressed?

Page 376

Answer 52

· Risk and return

· Diversification

· Short-term liquidity

· Long-term liquidity

Question 53

Determining the balance of a defined benefit account ***

Tran is a member of a defined benefit superannuation scheme. His superannuation entitlement is determined by the following formula:

Final average salary times years of service times a factor.

Final average salary is determined by taking the average salary over the last three years of work. His salary over the last three years has been $80,000.

Years of service is equal to the number of equivalent full-time years he has worked for the firm. Tran has worked with the firm for over 25 years however some of that has been part-time work and there was also a period of six months where he took leave without pay. Tran has the equivalent of 18 years of equivalent full-time service.

The factor which is relevant to Tran is determined by a number of variables. The key variable is the rate of salary sacrifice that Tran has made to the fund over the years. The choices for Tran were 0%, 5% and 7%. Tran has salary sacrificed 5% during his working career. As a result, his factor is 15%.

(Note that the question does not provide the calculation of the factors. These are given.)

(a) What is Tran’s current superannuation balance?
(b) Tran has noticed that if his rate of salary sacrifice was 7% rather than the current 5% his factor would rise to 18% and this would give him a superannuation ‘windfall’. Advise Tran on the benefits of increasing his rate of salary sacrifice.
(c) Tran has recently been offered a promotion which would increase his salary by 40% however the new position is highly stressful and Tran is not sure how long he would be able to cope with the stress. Advise Tran on the arguments for and against taking the promotion.

Answer 53

(a) What is Tran’s current superannuation balance?

$80,000 * 18 * 15% = $216,000

(b) Tran has noticed that if his rate of salary sacrifice was 7% rather than the current 5% his factor would rise to 18% and this would give him a superannuation ‘windfall’. Advise Tran on the benefits of increasing his rate of salary sacrifice.

Tran might believe that if he worked for two additional years his superannuation balance would become:

$80,000 * 20 * 18% = $288,000

It is unlikely, however, that the rules of the fund will allow him to make such a windfall. If, for example, Tran contributed 7% of his salary for two years, his superannuation balance would become:

(80,000*18*15%) + (80,000*2*18%) = $244,800

If Tran had been allowed his windfall, then all rationale members should contribute at the rate of 0% for all the years they are a member, except for the last when they should increase their rate of salary sacrifice to 7%. Making such decisions is often called making an ‘adverse selection against the fund’. Superannuation funds rules, in the interests of equity for all members, seek to avoid this from happening.

(c) Tran has recently been offered a promotion which would increase his salary by 40% however the new position is highly stressful and Tran is not sure how long he would be able to cope with the stress. Advise Tran on the arguments for and against taking the promotion.

The final average salary tends to be the most volatile factor in the defined benefit equation – earning 40% more for three years would have the same superannuation impact as working on the same salary for another 11.4 years.

(112,000 * (18 + 3) * 15%) = $352,800

($80,000 * (18 + 11.4) * 15%) = $352,800

For Tran, there are a number of factors to be considered. In order to get the most superannuation benefit out of his new stressful job that he will need to stay in for three years. He then needs to consider his position beyond those three years: will he be ready to retire, will he be capable of continuing in this highly stressful role? If he decides not to take on the new role – is he willing to keep on working for another 11.4 years to achieve the same superannuation result?

Question 54

An underfunded defined benefit superannuation scheme is most likely to present adverse financial outcomes for which of the following parties?

Select one:

a. The employer.
b. The superannuation fund member.
c. The fund actuary.
d. None of the above.
* Page 360*

Answer 54

a. The employer.

Question 55

Other than for disability or financial hardship, the earliest age that a person can generally access all of their accumulated superannuation balance is:

Select one:

a. 55 years of age
b. 59 years of age
c. 65 years of age
d. none of the above
* Page 365*

Answer 55

a. 55 years of age

Question 56

Unfunded superannuation schemes in Australia:

Select one:

a. represent a financial liability to the fund employer/sponsor.
b. are typically limited to public sector schemes.
c. both an and B.
d. none of the above.
* Page 360*

Answer 56

c. both an and B.

Question 57

Australia’s system of superannuation is based on how many pillars?

Select one:

a. 3
b. 4
c. 7
d. none of the above
* Page 355*

Answer 57

a. 3

Question 58

In the 2018 financial year James has recently turned 53 years of age. He works part-time for a large corporation earning $20,000 p.a. including his employer’s contribution under the superannuation guarantee scheme and salary sacrifices 100% of his salary into superannuation. James has just sold an investment property and has an assessable capital gain of $250,000 in the 2017 financial year. What is the maximum amount of additional concessional contributions that James can make to his superannuation in the current year?

Select one:

a. $25,000
b. $15,000
c. $5,000
d. $150,000
* Page 366*

Answer 58

c. $5,000

Question 59

Concessional (tax-deductible) contributions to a superannuation fund within the relevant cap are:

Select one:

a. tax-free when received by the fund.
b. taxed at 10% when received by the fund.
c. taxed at 15% when received by the fund.
d. taxed at 15% when withdrawn from the fund.
* Page 366*

Answer 59

c. taxed at 15% when received by the fund.

Question 60

To be a complying superannuation fund the trust deed provisions of the fund:

Select one:

a. must be equivalent to the SIS Act.
b. may be narrower than the SIS Act.
c. may be broader than the SIS Act.
d. have no direct relationship with the SIS Act.
* Page 356*

Answer 60

b. may be narrower than the SIS Act.

Question 61

Reasonable benefit limits (RBLs) for superannuation account balances:

Select one:

a. do not currently apply in Australia.
b. currently restrict the lump sum withdrawal able to be made from superannuation by retirees.
c. currently restrict the annual income stream withdrawal able to be made from superannuation by retirees.
d. none of the above.
* Page 363*

Answer 61

a. do not currently apply in Australia.

Question 62

A superannuation fund with all members in accumulation mode receiving its taxable earnings in the current year of income in the form of interest on investments and fully franked dividends at the company tax rate of 30% on shares will have:

Select one:

a. greater gross cash earnings than its assessable income.
b. greater assessable income than its gross cash earnings.
c. gross cash earnings equal to its assessable income.
d. either a or C.
* Pages 380-381*

Answer 62

b. greater assessable income than its gross cash earnings.

Question 63

The tax rate withheld by the recipient superannuation fund on non-concessional contributions within the relevant cap is:

Select one:

a. 15%.
b. 30%.
c. 0%.
d. none of the above.
* Page 371*

Answer 63

c. 0%.

Question 64

Tax-free lump sum withdrawals from superannuation accounts by individuals are generally available:

Select one:

a. once the individual reaches 55 years of age.
b. once the individual reaches 60 years of age.
c. is only available to a family member on the death of the individual.
d. none of the above.
* Page 362*

Answer 64

b. once the individual reaches 60 years of age.

Question 65

Salary sacrifice superannuation contributions are:

Select one:

a. tax-deductible to the employer making the contribution.
b. treated as tax-free upon receipt by the recipient superannuation fund.
c. a decision that must be made retrospectively.
d. all of the above.
* Pages 369-370*

Answer 65

a. tax-deductible to the employer making the contribution.

Question 66

Pursuant to the superannuation choice of fund rules:

Select one:

a. the employer will nominate a default fund on the standard choice form provided to the employee.
b. the employer will not nominate a default fund on the standard choice form provided to the employee.
c. the employee can change their nominated fund at least once every 12 months.
d. both a and C.
* Pages 372-373*

Answer 66

d. both a and C.

Question 67

The fiduciary responsibilities of superannuation fund trustees in Australia are based on the:

Select one:

a. common law.
b. Superannuation Industry (Supervision) Act.
c. both a and B.
d. the APRA Act.
* Pages 355-356*

Answer 67

c. both a and B.

Question 68

An eligible superannuation contribution made on behalf of a spouse has which of the following features?

Select one:

a. Is tax-deductible to the spouse making the contribution.
b. A tax offset for the individual making the contribution.
c. Is taxed at a concessional rate of 10% when received by the fund.
d. All of the above.
* Page 372*

Answer 68

b. A tax offset for the individual making the contribution.

Question 69

In Australia, the rate of superannuation coverage for employees and the minimum rate of superannuation contributions required under the superannuation guarantee system in the last 25 years have:

Select one:

a. both increased substantially.
b. both decreased substantially.
c. remained relatively constant.
d. had no relationship.
* Pages 361 and 367*

Answer 69

a. both increased substantially.

Question 70

For an accumulation-based superannuation account, the investment risk is borne:

Select one:

a. equally by the superannuation fund member and the employer.
b. by the employer.
c. by the superannuation fund member.
d. 25% by the superannuation fund member and 75% by the employer.
* Page 357*

Answer 70

c. by the superannuation fund member.

Question 71

Kyle Templar is still working full-time at 77 years of age. The maximum amount that he can contribute as a personal superannuation contribution in the current financial year (2017) is:

Select one:

a. $25,000
b. $35,000
c. $150,000
d. $0
* Page 365*

Answer 71

d. $0

Question 72

Janine has exceeded her concessional superannuation contributions cap by $5,000 for the financial year. She will pay additional “penalty tax” ignoring the Medicare levy on the excess at a rate of:

Select one:

a. 15%.
b. 30%.
c. 45%.
d. her marginal tax rate.
* Page 366*

Answer 72

d. her marginal tax rate.

Question 73

The ‘in-house’ assets rule exempts:

Select one:

a. residential property.
b. business real property.
c. both a and B.
d. unlisted Australian securities.
* Pages 377-378*

Answer 73

b. business real property.