Superannuation in Australia

Superannuation in Australia refers to the arrangements people make in Australia to accrue funds to replace their income in retirement. Superannuation in Australia is government-supported and encouraged, and minimum provisions are compulsory for employees. Employers are required to pay a proportion on top of an employee's salaries and wages (9.5% as of 1 July 2014) into a superannuation fund, however people are encouraged to further supplement their superannuation. From 1 January 2014, employers are required to pay default contributions to an authorised MySuper product. The minimum obligation required by employers is planned to increase from 9.5% to 12%, gradually increasing annually between 2021 and 2025.

An individual can withdraw funds out of a superannuation fund when the person meets one of the conditions of release contained in Schedule 1 of the Superannuation Industry (Supervision) Regulations 1994.

Introduction

Before 1976, superannuation arrangements had been in place for many years under industrial awards negotiated by the union movement between wage increases. In 1992, the Keating Labor government introduced a compulsory "Superannuation Guarantee" system as part of a major reform package addressing Australia's retirement income policies. It was calculated that Australia, along with many other Western nations, would experience a major demographic shift in the coming decades, resulting in the anticipated increase in age pension payments placing an unaffordable strain on the Australian economy. The proposed solution was a "three pillars" approach to retirement income:

• A safety net consisting of a means-tested Government age pension system
• Private savings generated through compulsory contributions to superannuation
• Voluntary savings through superannuation and other investments

The change came about through a tripartite agreement between the government, employers and the trade unions. The trade unions agreed to forgo a national 3% pay increase which would be put into the new superannuation system for all employees in Australia. This was matched by employers contributions which were set to increase over time to a proposed 12%. Subsequent changes meant this has been capped at the lower employer rate of 9%.

Since its introduction, employers have been required to make compulsory contributions to superannuation on behalf of most of their employees. This contribution was originally set at 3% of the employees' income, and has been gradually increased by the Australian government. Since 1 July 2002, the minimum contribution has been set based on an employee's ordinary time earnings and is thus not payable on overtime rates but is payable on remuneration items such as bonuses, commissions, shift loading and casual loadings.

Though there is general widespread support for compulsory superannuation today, it was met with strong resistance by small business groups at the time of its introduction who were fearful of the burden associated with its implementation and its ongoing costs.

As of 30 June 2015, Australians have over AUD$2.02 trillion in superannuation assets.

Compulsory superannuation in combination with buoyant economic growth has turned Australia into a 'shareholder society', where most workers are now indirect investors in the stock market. Consequently, a lively personal investment marketplace has developed, and many Australians take an interest in investment topics.

Operation

Employer contributions

Employers are required by law to pay "superannuation guarantee" contribution amounts to a designated superannuation fund for their employees at 9.5% of their wages and salaries. Employers are not required to make employer contributions for employees earning less than $450 per month, not working more than 30 hours per week, or for employees aged under 18 or over 70 years. If however employees are earning $450 per month before tax and working more than 30 hours per week full-time, part-time or casual, the employer is required to pay superannuation regardless of whether the person is under 18. Additionally, if employees aged over 70 years pass the work test and work more than 40 hours in a 30-day period, the employer can still pay contributions. The employer can still pay over 70 if the employee passes the work test, working more than 40 hours in a 30-day period. They are also required to complete one per tax year.

From 1 January 2014, employers must only make default contributions (where an employee has not elected to choose their own fund) into an authorised MySuper product, which is designed to be a simple superannuation fund with few, standardised fees and a single balanced investment option. See the main MySuper page for further information.

Employer contributions are required to be paid to a fund at least every three months. The superannuation contributions are invested over the period of the employees' working life and the sum of compulsory and voluntary contributions, plus earnings, less taxes and fees are paid to the person when they choose to retire. The sum most people receive is predominantly made up of compulsory employer contributions.

Special rules apply in relation to employers providing "defined benefit" arrangements. There are less common traditional employer funds where benefits are determined by a formula usually based on final average salary and length of service. Essentially, instead of minimum contributions, employers need to provide a minimum level of benefit.

The government promised in the 2014 Federal Budget that the SG rate increase will stall for 3 years (from 1 July 2015), rising to 10% from 1 July 2018. The SG rate would then increase by 0.5% each year until it reached 12% by July 2022. The Liberal government is now proposing that the SG rate will stall from 1 July 2015 for 7 years (until 30 June 2021), and then increase by 0.5% each year following until SG reached 12% from 1 July 2025.

The minimum contribution rates are currently as follows

Year	Percentage
1992-93	3 / 4*
1993-94	3 / 5*
1994-95	4 / 5*
1995-96	5 / 6*
1996-97	6
1997-98	6
1998-99	7
1999-2000	7
2000-01	8
2001-02	8
2002-13	9
2013-14	9.25
2014-21	9.5
2021-22	10
2022-23	10.5
2023-24	11
2024-25	11.5
2025-26 and subsequent years	12

—For the period 1993-1996 there was a higher contribution rate for employers whose annual national payroll for the base year exceeds $1,000,000, with the employer's minimum superannuation contribution percentage the subsequent year which is outlined in the above table with an asterisk.

Personal contributions

People can choose to make extra voluntary contributions to their superannuation and receive tax benefits for doing so. However, the current superannuation legislation states that individuals who contribute more than what is allowed under "the annual superannuation concessional contributions cap" must pay the superannuation excess concessional contributions tax which is set at 31.5%.

Access to superannuation

As superannuation is money invested for a person's retirement, strict government rules prevent early access to preserved benefits except in very limited and restricted circumstances, including severe financial hardship or on compassionate grounds, such as for medical treatment not available through Medicare.

Generally, superannuation benefits fall into three categories:

• Preserved benefits;
• Restricted non-preserved benefits; and
• Unrestricted non-preserved benefits.

Preserved benefits are benefits that must be retained in a superannuation fund until the employee's 'preservation age'. Currently, all workers must wait until they are at least 55 before they may access these funds. The actual preservation age varies depending on the date of birth of the employee. All contributions made after 1 July 1999 fall into this category.

Restricted non-preserved benefits although not preserved, cannot be accessed until an employee meets a condition of release, such as terminating their employment in an employer superannuation scheme.

Unrestricted non-preserved benefits do not require the fulfilment of a condition of release, and may be accessed upon the request of the worker. For example, where a worker has previously satisfied a condition of release and decided not to access the money in their superannuation fund.

Preservation age

Date of birth	Preservation age
Before 1 July 1960	55
1 July 1960 – 30 June 1961	56
1 July 1961 – 30 June 1962	57
1 July 1962 – 30 June 1963	58
1 July 1963 – 30 June 1964	59
After 30 June 1964	60

Eligibility for access to preserved benefits depends on a worker's preservation age. The Howard government announced changes in 1997 to the superannuation system designed to induce Australians to stay in the workforce for a longer period of time, delaying the effect of population ageing. Previously, any Australian could access their preserved benefits once they reached 55 years of age. However, after legislation was passed in 1999, an employee's preservation age depends on their date of birth.

Hence, by 2025, all Australian workers wishing to access their superannuation would be at least 60 years old.

Once a person reaches preservation age they must also meet a Condition of Release to access their super. Before age 60, workers must cease employment and sign off that they never intend to work again (not work more than 40 hours in a 30-day period). Those aged 60 to 65 can access super if they cease employment regardless of their future employment intentions so long as they are not working at the time. Anyone over age 65 can access super regardless of employment status. Employed individuals who have reached preservation but are under age 65 may still access up to 10% of their super using a Transition to Retirement pension.

If an Australian worker has transferred funds from their New Zealand KiwiSaver scheme into their Australian superannuation scheme, they cannot access the ex-New Zealand portion of their superannuation until they reach the age of 65, regardless of their preservation age.

Reasonable benefit limits

Reasonable benefit limits (RBL) were the maximum amount of retirement and termination of employment benefits that a person could receive over their lifetime at concessional tax rates. RBLs were abolished from 1 July 2007.

There were two types of RBLs - a lump sum RBL and a higher pension RBL. The lump sum RBL applied to most people. Generally, the higher pension RBL applied to people who took 50% or more of their benefits in the form of pensions or annuities that met certain conditions (for example, restrictions on the ability to convert the pension back into a lump sum).

Each year, RBLs were indexed according to movement in Average Weekly Ordinary Time Earnings published by the Australian Bureau of Statistics. For the financial year ending 30 June 2005, the lump sum RBL was $619,223 and the pension RBL was $1,238,440.

Superannuation taxes

Main article: Taxation of Superannuation in Australia

Contributions

Contributions made to superannuation, either by an individual or on behalf of an individual, are taxed differently depending on whether that contribution was made from 'pre-tax' or 'post-tax' money.

If a contribution is made from 'post-tax' funds - that is money where income tax or contributions tax has already been paid, typically no further tax is withheld from that contribution when it is made to a fund. This type of contribution is known as a 'non-concessional' contribution.

'Pre-tax' contributions, known as 'concessional contributions', made into superannuation attract a 'contributions tax' of 15%. These types of contributions comprise mainly of mandatory employer contributions and additional salary sacrificed contributions. These contributions are taxed by the superannuation fund, as no income tax is payable at time of contribution. For individuals who earn greater than $300,000, the contributions tax is levied at 30%.

Both contribution types are subject to annual caps. Where the annual cap is breached, additional tax is payable, either at your marginal tax rate for concessional contributions, or an additional 31.5% for non-concessional contributions (total 46.5%).

Investments in the Fund

Investment Earnings (i.e. dividends, rental income etc.) are taxed at a flat rate of 15% within the superannuation fund. In addition where an investment is sold, Capital Gains Tax is payable by the superannuation fund at 15% also.

Much like the discount available to individuals and other trusts, a superannuation fund can claim a Capital Gains Tax Discount where the investment has been owned for at least 12 months. The discount applicable to superannuation fund is 33%, reducing the standard Capital Gains Tax from 15% to 10%.

These taxes contribute over $6 billion in annual government revenue. Superannuation is a tax-advantaged method of saving as the 15% tax rate on contributions is lower than the rate an employee would have paid if they received the money as income. The Federal government announced in its 2006/07 budget that from 1 July 2007, Australians over the age of 60 will face no taxes on withdrawing monies out of their superannuation fund if it is from a taxed source.

Discontinued Surcharge Tax

In 1996, the federal government imposed an extra 'superannuation surcharge' on higher income earners as a temporary levy to raise revenue. As part of the 2001 election campaign, the government promised to reduce the surcharge from 15% to 10.5% over three years. The superannuation surcharge was eventually scrapped in the 2005/06 budget, and has been abolished since 1 July 2005.

Superannuation co-contribution scheme

Since 1 July 2003, the Government has made available incentives of a Government co-contribution of up to $1,500 for lower income employees who make personal contributions to their own superannuation fund. Depending on individual income thresholds, the Government pays up to $1.50 for every $1 contributed. The amount has since been lowered and is now a matching contribution up to $1,000 (up to and including FY 2012). As of April 2013, a bill is under consideration that will be decrease the maximum entitlement (to $500, down from $1,000) and reduce the government contribution (to 50%, down from 100%) for the 2012-2013 financial year.

The 2007 Federal Budget announced a one-off double payment of the co-contributions paid due to personal contributions in the 2005/2006 financial year. Lower income earners received up to $3000 co-contribution for $1000 of personal contributions in that year.

Effect on Taxable income and Age Pensions

Income Tax

The reason that people invest in superannuation is to reduce their income tax liability and possibly to be able to receive an age pension while still receiving supplementary income.

Compulsory employer contributions are taxed at the concessional rate of 15%, or more for higher income earners. People may choose to make additional payments at the same rate as "Salary Sacrifices", but only if their employer agrees to do so. Additional payments made without the cooperation of an employer are taxed at full income tax rates and are subject to different rules.

Income earned in the fund is also taxed at 15%, depending on circumstances.

Income retrieved from the fund after preservation age is generally tax free.Tax Office

The full details are extremely complex.

Pensions

The Australian Government pays an Age Pension to people over 67 years old being $766 every two weeks for singles and $577.40 each for couples (as at 2014). This is reduced by 50% of any income over $160 every two weeks for singles or $284 for couples. The pension may also be reduced for 0.15% of assets other than the home over $202,000 or $286,500 for single or couples. The pension is reduced by the maximum of the income and assets test. Assets may also be deemed to earn between 2% and 3% which is counted towards the income test.

Income received from a super fund is considered to be income for the purposes of pensions, and so reduces the pension by 50% of the income received that is over the limit. However, if this is received as a "Super Pension" then the effect on the age pension is discounted by the "Cost" of the "Super Pension". This "Cost" is calculated by dividing the total super balance by the life expectancy of the receiver at the time the super pension began. This means that if one withdraws ones super evenly over one's expected life expectancy there is essentially no income test on it.

Assets in the pension fund are deemed to earn income. Under new rules it appears that assets supporting a "Super Pension" are also deemed to earn income.

(It is difficult to find reliable information on this complex subject, and the above should only be taken as a guide and not relied upon.)

Superannuation funds

Trustee structure

Superannuation funds operate as trusts with trustees being responsible for the prudential operation of their funds and in formulating and implementing an investment strategy. Some specific duties and obligations are codified in the Superannuation Industry (Supervision) Act 1993 - other obligations are the subject of general trust law. Trustees are liable under law for breaches of obligations. Superannuation trustees have, inter alia, an obligation to ensure that superannuation monies are invested prudently with consideration given to diversification and liquidity.

Investments

Other than a few very specific provisions in the Superannuation Industry (Supervision) Act 1993 (largely related to investments in assets related to the employer) funds are not subject to any asset requirements or investment exposure flaws. There are no minimum rate of return requirements, nor a government guarantee of benefits. There are some minor restrictions on borrowing and the use of derivatives and investments in the shares and property of employer sponsors of funds.

As a result, superannuation funds tend to invest in a wide variety of assets with a mix of duration and risk/return characteristics. The recent investment performance of superannuation funds compares favourably with alternative assets such as ten year bonds.

Types of superannuation funds

Share of superannuation industry fund assets.

There are about 500 superannuation funds operating in Australia. Of those, 362 have assets totalling greater than $50 million. Superannuation assets totalled $2.05 trillion at the end of the March 2015 quarter, a new record according to the Association of Superannuation Funds of Australia.

There are seven main types of superannuation funds:

• Industry Funds are multiemployer funds run by employer associations and/or unions. Unlike Retail/Wholesale funds they are run solely for the benefit of members, as there are no shareholders. Due to union involvement these funds are highly susceptible to corruption.
• Wholesale Master Trusts are multiemployer funds run by financial institutions for groups of employees. These are also classified as Retail funds by APRA.
• Retail Master Trusts/Wrap platforms are funds run by financial institutions for individuals.
• Employer Stand-alone Funds are funds established by employers for their employees. Each fund has its own trust structure that is not necessarily shared by other employers.
• Self Managed Superannuation Funds (SMSFs or Do-It-Yourself Funds) are funds established for a small number of individuals (limited to 4) and regulated by the Australian Taxation Office. Generally the Trustees of the fund are the fund members (where there is a Corporate Trustee, the members are the directors of that company). The SMSF sector is the largest of the Australian super industry, with 99% of the number of funds and 31% of the $1.6 trillion total super assets as at 30 June 2013.

Recent changes to the SIS act has allowed SMSFs to borrow under limited recourse borrowing rules. Banks have now developed SMSF loans catering purely for this change to the ACT and to enable SMSF's to borrow for residential property, commercial property and industrial property, however funds cannot acquire vacant land. There are restrictions placed upon the fund that the trustees of the fund cannot gain a personal advantage from asset acquired by the fund, or purchase from what’s known as a ‘related party’. For example, you would not be able to live in the home that is owned by your SMSF. SMSF loans are generally available to 70% to 80% of the purchase price and attract a slight margin to the interest rate in comparison to standard loans.

• SMSF property investment has gained considerable momentum since the amendment of borrowing provisions to allow for the purchase of residential real estate. The ability to obtain a limited recourse loan to buy income-producing property in a favourably low tax environment, has affected a rapidly emerging incidence of direct property investment within SMSF structures in recent times.
• Small APRA Funds (SAFs) are funds established for a small number of individuals (fewer than 5) but unlike SMSFs the Trustee is an Approved Trustee, not the member/s, and the funds are regulated by APRA. This structure is often used for members who want control of their superannuation investments but are unable or unwilling to meet the requirements of Trusteeship of an SMSF.
• Public Sector Employees Funds are funds established by governments for their employees.

Retail and Wholesale Master Trusts are the largest sector of the Australian Superannuation Market

Choice of superannuation funds

From 1 July 2005, changes to the law mean that many Australian employees are able to choose the fund their employer's future superannuation guarantee contributions are paid into. Choice of superannuation funds allows workers to:

• change funds when their current fund is not available with a new employer;
• consolidate superannuation accounts to cut costs and paperwork;
• change to a lower-fee and/or better service superannuation fund;
• change to a better performing superannuation fund.

Superannuation industry

Employment (thousands of persons) in the superannuation industry since 1984

Legislation

Superannuation funds are principally regulated under the Superannuation Industry (Supervision) Act 1993 and the Financial Services Reform Act 2002. Compulsory employer contributions are regulated via the Superannuation Guarantee (Administration) Act 1992

Superannuation Industry (Supervision) Act 1993 (SIS)

The Superannuation Industry (Supervision) Act sets all the rules that a complying superannuation fund must obey (adherence to these rules is called compliance). The rules cover general areas relating to the trustee, investments, management, fund accounts and administration, enquiries and complaints.

SIS also:

• regulates the operation of superannuation funds; and
• sets penalties for trustees when the rules of operation are not met.

In June 2004 the SIS Act and Regulations were amended to require all superannuation trustees to apply to become a Registrable Superannuation Entity Licensee (RSE Licensee) in addition each of the superannuation funds the trustee operates is also required to be registered. The transition period is intended to end 30 June 2006. The new licensing regime requires trustees of superannuation funds to demonstrate to APRA that they have adequate resources (human, technology and financial), risk management systems and appropriate skills and expertise to manage the superannuation fund. The licensing regime has lifted the bar for superannuation trustees with a significant number of small to medium size superannuation funds exiting the industry due to the increasing risk and compliance demands.

MySuper

MySuper is part of the Stronger Super reforms announced in 2011 by the Julia Gillard Government for the Australian superannuation industry. From 1 January 2014, employers must only pay default superannuation contributions to an authorised MySuper product. Superannuation funds have until July 2017 to transfer accrued default balances to MySuper.

A MySuper default is one which complies to a regulated set of features, including:

• a single investment option (although lifecycle strategies are permitted)
• a minimum level of insurance cover
• an easily comparable fee structure, with a short prescribed list of allowable fee types
• restrictions on how advice is provided and paid for, and
• rules governing fund governance and transparency.

The Financial Services Reform Act 2002 (FSR)

The Financial Services Reform Act covers a very broad area of finance and is designed to provide standardisation within the financial services industry. Under the FSR, to operate a superannuation fund, the trustee must have a licence to run a fund and the individuals within the funds require a licence to perform their job.

With regard to superannuation, FSR:

• provides licensing of 'dealers' (providers of financial products and services);
• oversees the training of agents representing dealers;
• sets out the requirements regarding what information must be provided on any financial product to members and prospective members; and
• sets out the requirements that determine good-conduct and misconduct rules for superannuation funds.

Regulatory bodies

Four main regulatory bodies keep watch over superannuation funds to ensure they comply with the legislation:

• The Australian Prudential Regulation Authority (APRA) is responsible for ensuring that superannuation funds behave in a prudent manner. APRA also reviews a fund's annual accounts to assess their compliance with the SIS.
• The Australian Securities and Investments Commission (ASIC) ensures that trustees of superannuation funds comply with their obligations regarding the provision of information to fund members during their membership. ASIC is also responsible for consumer protection in the financial services area (including superannuation). It also monitors funds' compliance with the FSR. MoneySmart is a website run by the Australian Securities and Investments Commission (ASIC) to help people make smart choices about their personal finances. They provide a number of tools such as the Superannuation Calculator.
• The Australian Taxation Office (ATO) ensures that self-managed superannuation funds adhere to the rules and regulations. It also makes sure that the right amount of tax is taken from the superannuation savings of all Australians.
• The Superannuation Complaints Tribunal (SCT) administers the Superannuation (Resolution of Complaints) Act. This Act provides the formal process for the resolution of complaints. The SCT will try to resolve any complaints between a member and the superannuation fund by negotiation or conciliation. The SCT only deals with complaints when no satisfactory resolution has been reached.

Similar schemes in other countries

• Registered Retirement Savings Plan (RRSP) (Canada)
• Individual Retirement Account (IRA) and 401K (USA)
• KiwiSaver (New Zealand) – Australia and New Zealand have a reciprocal agreement allowing New Zealanders moving to Australia to transfer their KiwiSaver funds to an approved Australian superannuation scheme, and vice versa.
• Mandatory Provident Fund (Hong Kong)
• Vanuatu National Provident Fund (Vanuatu) - The Vanuatu National Provident Fund is a compulsory savings scheme for Employees who receive a salary of Vt3, 000 or more a month, to help them financially at retirement.

Criticism

The interaction between superannuation, tax and pension eligibility is too complex for most Australians to understand. It is very difficult to make considered decisions such as whether to invest excess funds in super or reducing a mortgage.

The Australian superannuation industry is under fire for re-investing funds into questionable investments, to benefit related parties ahead of the investor. Thus, a conflict of interest exists with the parent entity re-investing funds into funds related to the parent entity. Thus the best rate of return is never sought out, and the bank or entity investing the money is not seeking the highest rate of return.

Most non-self managed funds only provide very minimal information to the account holders about how their money has been invested. Usually only vague categories are provided, such as "Australian Shares", with no indication of which shares were purchased. This makes the fund's management largely unaccountable to their members.

Losses to the superannuation funds from the global financial crisis have also been a cause for concern, said to be around $75 billion.

Initial financial discussions determined that the Australian economy would be at risk if citizens were allowed to immediately access and withdraw Superannuation, further confirming the belief that mandatory Superannuation may not be a viable long term fiscal management tool. This was compounded by a lack of proper industry regulation, allegations of fraud and financial misconduct and a host of other issues currently plaguing the industry as a whole - "Thousands of superannuation fund members defrauded in Trio Capital scandal"

See also

• Australian Government Future Fund
• German pensions
• Pension system
• Social Security (Australia)
• UK pensions
• US pensions

External links

• ASIC's consumer and investor website MoneySmart - Superannuation and Retirement
• Australian Taxation Office - Superannuation
• What is Self Managed Super
• Super bailout of $59m - excludes DIY investors
• here Government compensates most trio capital losses
• Business Spectator - Legality and Constitutional grounds for Mandatory Superannuation in Australia
• The flaws of Bill Shortens Superannuation Sham