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Personal Wealth Management > Week 8 > Flashcards

Week 8 Flashcards

1
Q

WHAT IS SUPERANNUATION ?

A

Superannuation is the means whereby part of a person’s wealth is saved and invested for use in their retirement

Balance will depend upon:
Employer contributions, Personal Contributions, Returns

As at September 2017:
total invested in superannuation – over $2.5 trillion.
Over 600,000 superannuation funds (99% SMSFs which account for 28% of total super assets)

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2
Q

BENEFITS OF SUPERANNUATION

A

Part of government’s three-tiered approach to retirement funding
(i.e. age pension, Superannuation Guarantee Charge (SGC), voluntary contributions)
Allows individuals to be financially independent in retirement
Decreases reliance on age pensions
Increase level of national savings
Legislation imposes compulsory superannuation contributions to ensure the above

Forced means of saving / investing for retirement

Earnings of superannuation fund taxed at concessional rates (15%)

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3
Q

DRAWBACKS OF SUPERANNUATION

A

Loss of control over investment strategy

Funds generally locked away until retirement

Funds within superannuation environment taxed at three points:

15% contribution tax upon entry
possible additional Excess CC contributions tax (based on Marginal Tax rate)
15% tax on earnings of fund
15% tax on taxable component if amount withdrawn as a lump sum between ages 56 - 59, BUT
0% tax if withdrawn after age 60

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4
Q

SUPERANNUATION REGULATION

A 
Legislation:
Superannuation Industry (Supervision) Act (SIS Act) 
Income Tax Assessment Act and various Amending Act
Regulatory Bodies:
APRA - complying superannuation funds
ATO - self managed funds
ASIC - consumer protection
Superannuation Complaints Tribunal – C’wealth Authority that deals with complaints
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5
Q

WHAT CAN GO INTO AND OUT OF SUPERANNUATION FUNDS?

A

What goes into superannuation?
Members contributions, Employers Contributions, Income from Investments, Spouse Contributions, Government Co-contributions

What is taken out of superannuation
Withdrawal of benefits to members when they leave a fund
Management fees, tax and administration charges
Tax - at three levels
15% contributions tax upon entry
15% tax on earnings of fund
tax on withdrawal of funds as a lump sum. Tax differs for under age 55 (20%) ; 55- 59 (0-15%); 60 + (0%)

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6
Q

TYPES OF SUPERANNUATION FUNDS

A

According to benefit calculation

According to sponsorship of funds

According to SIS Legislation

According to Taxation treatment

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7
Q

Terms of benefit calculated

A

Defined Benefit - Benefit received “defined” according to some type of specified calculation
(sponsor promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment returns).
eg - lump sum retirement benefit equal to 15% of final average salary for each year of service.

Accumulation fund - Contributions defined but benefit received determined by fund performance
(benefit depends on the money put in by you and your employers and the investment return generated by the fund).

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8
Q

According to Sponsorship of Funds

A

(current distributions in terms of assets under
management)

Retail (23%)
Public sector (22%)
Corporate ( 2%)
Small funds (28%)
Industry Funds (22%)
Other - (including life office
statutory funds) (3%)

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9
Q

According to SIS Legislation

A

Self Managed and Small APRA Funds
Standard Employer-Sponsored Superannuation Funds
Public Offer Funds
Public Sector Funds

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10
Q

According to Tax Treatment

A

Complying Funds - 15% tax

Non-complying Funds - 47% tax

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11
Q

Superannuation Contributing: Restrictions

A

Mandated employer contributions
includes: superannuation guarantee contributions (SG) and contributions under an award
SG contributions: accepted indefinitely for employees
contributions under an award: accepted at any age

Non-mandated employer contributions
include: personal contributions, spouse contributions
Acceptance for person under age 75:
Work Test between 65 and < 75

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12
Q

Contributing towards superannuation

A

Acceptance for person aged between 65 and 75:
the member is required to be gainfully employed at time of contribution (at least 40 hours over a period of 30 consecutive days).
SG payable.

personal contributions accepted towards their superannuation fund as long as they are gainfully employed. However, these contributions will not be tax deductible.

From 1 July 2007 -Persons aged 70 -75 – personal contributions to be accepted if meet gainful employment test (40 hours in a consecutive period of 30 days in the financial year)

Persons aged 75+
no personal contributions accepted

Spouse contributions - spouse under 65

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13
Q

Can super funds accept contributions?

A

Nature of contributions:
Voluntary (personal, salary sacrifice etc)
Compulsory—SG.

Eligibility to contribute:
Under 65: No employment test.
65 to 74: Gainful employment test (at least 40 Hours in 30 consecutive days in financial year).
: Mandated or other employer contributions (SG can be contributed indefinitely as mandated employer contributions.

Method of contribution:
Mostly cash (can be in-specie – or asset transfer)
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14
Q

Contributions to Superannuation

A

Employers

Members on their own behalf

Members on behalf of spouse

Government Co- Contributions

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15
Q

Tax deduction available to:

A

Employers: (SG and salary sacrifice)
Self employed persons (eg Sole Traders)
Employees provided conditions are met

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16
Q

No tax deduction

A

▪Personal contributions (for which no tax deduction is claimed)
▪Spouse contributions (& associated tax offset).
▪Government Co-contributions.

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17
Q

Types of Contributions

A

From 1 July 2007 contributions are of two types;

▪Concessional contribution (CC)-those that are tax deductible to contributor and assessable to the superannuation fund (deducted from your before-tax salary). Include your employer’s compulsory contributions, additional employer contributions, and any salary sacrificed contributions, contribution by self-employed person

▪Non-concessional contributions (NCC)-those that are contributed to the fund without a tax deduction and are non-assessable income to the superannuation fund (previously Undeducted Contribution).

e.g. You sell a property and pay capital gains tax that leaves you with an after-tax profit of $300,000. You want to put this money into super. You have already paid tax on the money so it is a non-concessional contribution. From 1 July 2017 the amount is over the one year limit of $100,000 so you decide to bring forward 2 years-worth of limits and so your limit for the next 2 years is $200,000.

18
Q

Contribution Caps

A

Concessional Cap:
A total of $25,000 p.a. for the 2018/2019 financial year

From 1 July 2018, you will be able to ‘carry-forward’ any unused amount of your concessional contributions cap.

▪Excess penalty if exceeded. Included as taxable income, taxed at marginal tax rate plus an excess concessional contributions charge. (4.76%) Excess counted as a NCC.

19
Q

Non-concessional cap:

A

$100 000 pa.
Members can bring forward 2 years of future contributions.
So total contributions can be $300,000 over a three year period.
Non-Concessional contributions can only be made if your Superannuation balance is less than $1.6 million after the contribution has been made.

20
Q

Employer contributions

A

Can be made on behalf of employees through:

Superannuation Guarantee Scheme ( SG)
Salary sacrifice arrangement

Regarded as Concessional contributions (CC) - For tax deduction the contributions must be made to complying superannuation funds.

If contributions made to a non-complying superannuation funds:
not deductible;
FBT liability.

21
Q

Employee personal contributions - (Non Concessional contributions)

A

Can be made at any time
Limited $100,000 (but 3 year average rules can be used – (Non Concessional Contributions)
Not entitled to tax deduction
Not taxed on entry to fund
Tax free when withdrawn
Effective 1 July 2007, individuals can make personal superannuation contributions up to the age of 75 - The individual must be gainfully employed at least part-time (40 hours in a 30 consecutive days time frame)

22
Q

Self employed

A

Purpose of Contribution? Reduce person income tax and contribute to retirement account as unsupported for SG contribution
Concessional contributions
Are able to claim a full deduction for a contributions up to age 75 – (must meet work test from age 65 years)
Note: Must submit a notice to claim a personal tax deduction to the superannuation fund.

23
Q

Government Co-contribution scheme

A

Those who earn less than $ 37,697 pa will get 50 cents for every $1 placed in superannuation as a personal contribution (from after tax income) to maximum $500

Currently, those who earn between $37,697 and $52,697 will get a co-contribution based on a person’s income for every $1 placed in superannuation as personal contributions>
Co-contribution (max. $500) reduces by 3.333 cents for every dollar over $37,697

Amounts determined by reference to annual tax returns

Income includes reportable fringe benefits

From 1 July 2007- Extend to those who are self-employed

24
Q

Spouse Contributions

A

Requirements:
spouse doesn’t have to be working
spouse required to be less than 65 years unless working at least 40 hours in 30 consecutive days
no limit to size of contribution
are classed as non Concessional contributions

Spouse Contributions - Benefits
Tax benefits of rebate/offset
Superannuation is a tax-effective environment
Income splitting
Make use of two account based pensions
25
Q

SPOUSE CONTRIBUTIONS TAX OFFSET FOR

A

Contributions may be made for contributor’s spouse until spouse reaches 65 years.

Low-income spouse:
assessable income < $37 000;
Australian residents;
complying superannuation fund; and
reduction where income > $37 000 up to $40 000.

Maximum rebate/offset $540 based on the lesser of:
18 per cent of contributions up to $3000; or
$3000 – (AI – $37 000) x 18 per cent.

26
Q

TAX ON CONTRIBUTIONS

A

Contribution Tax - 15% on entry to fund

applies to contributions for which a tax deduction has been claimed ( Concessional Contributions)
i.e. employer contributions (including SG), salary sacrifice and self-employed contributions.

does not apply to Non Concessional Contributions

27
Q

The Taxation of Superannuation Funds

A

Taxable income (Investment earnings etc.) of a super fund is taxed at a maximum of 15%

Capital gains are taxed at 10% if the asset is held for at least 12 months

ie. 2/3 of the capital gains are included within income of superannuation fund and taxed at 15% (2/3 x 15% = 10%)

28
Q

PRESERVATION

A

From 1 July 1999 ALL contributions made by or on behalf of members and ALL earnings of the fund or RSA must be preserved within super.

By 2025, the preservation age will have increased from 55 to 60 (those born after 30 June 1964 – benefits fully preserved until age 60)

29
Q

WITHDRAWAL OF BENEFITS

A

reaching age 65
Preservation Age with no intention to work again
TTR - Age 57, access to super in the form of a Account Based Pension, no access to lump sum, continue to work
reaching age 60 and terminating employment
death
permanent incapacity
severe financial hardship (limited access)
Terminal Illness

30
Q

WITHDRAWAL OF BENEFITS

For balances existing at 30 June 1999

A

Restricted Non preserved
can access under previous release conditions
eg. terminating current employer

Unrestricted non-preserved benefits
able to be cashed in at any time

Preserved benefits
need to satisfy a current condition of release

The rules will substantially remain the same for those under age 60, BUT

After age 60 – from 1 July 2007, benefits taken as a lump sum or as a pension will be exempt from income tax.

31
Q

Transfer Balance Caps

A

Effective 1st July 2017, there are now caps on how much money can be transferred from Superannuation into a Pension/Annuity.

The cap is $1.6 Million for 2018/2019 tax year.

This cap will be indexed in $100,000 increments over the following tax years

Many people had to adjust amount in Super over the 2016/17 to 2017/18 tax year.

32
Q

Choice of Funds to Members: Effective 1 July 2005

A

Members are to be given choice to decide the fund they want the employers contribution to go to

Employers can refuse if the employees do not provide details as the name of the fund and evidence that the fund will accept the contributions

If no choice made, then the employer can continue to make contributions to any complying fund.

Employees can change their choice, by requesting and lodging another form. ( However the employer does not have to provide one, if an employee has received one within the previous 12 months)

employer must provide employee with standard choice form.

33
Q

When Choice Won’t Apply

A

Employers will not be required to provide choice where their employees are covered by :

An Australian Workplace Agreement or a Certified Agreement
A State Industrial Award
Certain Victorian Workplace Agreements
An Unfunded public sector scheme

Approximately 50% of employees are likely to have the choice

34
Q

Transition to retirement policy

A

(From April, 2005)
This policy introduced changes to the access to benefits
Rules. People could access benefits:
If reached preservation age
Purchased with superannuation money
No work test – part-time or full time
Access superannuation benefits while continue to work
Access via a non-commutable Account Based Pension (NCAP) while working
Minimum and maximum payment limits
At age 65 – option to commute
Once a Transition to Retirement policy is started, any earnings on funds invested in superannuation, there will be a tax (15%)

35
Q

Transition to Retirement: Benefits & Strategy

A

Once very popular as the income stream from superannuation was tax free for 60+. However, rules removed this tax loop hole from 2017

Best to conceive of Transition to retirement as a method of reducing work and making up the difference in income from super

36
Q

First Home Super Saver Scheme

A

Use money in your super towards buying your first home
Make voluntary superannuation contributions of up to $15,000 a year, (maximum of $30,000 over several years) for the purposes of purchasing a first home.
Withdrawals available from 1st July 2018.
You will be taxed on withdrawals at your marginal tax rate less a 30% tax offset. E.g. if your marginal tax rate is 34.5%, with the 30% tax offset you will pay a tax rate of 4.5% on withdrawal
Under the scheme rules, the ATO will consider (or deem) that your contributions have earned a return based on the rate earned by 90-day bank bills plus 3%.

37
Q

SELF MANAGED SUPERANNUATION FUNDS

A

Small funds are either: Types are:
a self managed superannuation fund (SMSF)
a small APRA fund (SAF)

Why establish a small fund? Advantages
greater control and flexibility over investment choice
less onerous checks and balances
cost control/reduction

Why not?- Disadvantages
risk of non-compliance
cost reductions may not be available
increased administrative burden
trustees personally liable
38
Q

SMSF’s- Conditions to run a SMSF:

A 
trustees are members of fund
regulated by A.T.O
less than 5 members
all members must be trustees
no member allowed to be an employee of another member, unless relative
no remuneration for trustee duties
39
Q

SAF’s- Conditions to run a SAF:

A

less than 5 members
subject to prudential requirements of APRA
appoints an approved external trustee

40
Q

Gearing in Super

A

Available from 24 September 2007

Requirements

Borrowing used to acquire an asset held on trust so that trustee has beneficial interest in the asset and a right to acquire legal ownership (or replacement) through payment of installments

Lender’s recourse is limited to rights relating to the asset in the event of default or exercise of rights by the trustee

The asset (or its replacement) is one which the fund would be permitted to acquire and hold directly.

41
Q

SMSF & Borrowing to Invest

A

Property or asset is identified for purchase by the SMSF

The SMSF pays the deposit on the asset

The Lender provides remainder of capital (non-recourse loan)

Trustee of the Instalment Trust purchases the asset (holds the legal title) for the beneficial ownership of the SMSF

SMSF as beneficial owner has right to receive ALL Rent, pay expenses and loan repayments (from the SMSF)

Legal title of asset passes to SMSF when loan FULLY repaid

Related party issues still apply

LVR issues – lenders may offer max 70% LVR and limit areas of investment

Personal Wealth Management (11 decks)

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