Superannuation & Retirement Planning
Superannuation is a complex area of financial planning. As such, the information provided below is not comprehensive, nor is it intended to provide the total solution for your superannuation needs. However, we would like to provide you with a level of knowledge to answer your general questions. To ensure completeness and accuracy to your personal situation, we recommend you contact our office (click here) to arrange an obligation free appointment.
We have all heard that the Australian population is ageing. This is applying pressure on the Government to provide retirement income support, given that the number of people in retirement is increasing in proportion to the number of people in the workforce. Therefore, the Government has the dilemma of either increasing taxes from those in the workforce to provide a greater pool of funds for retirement income support, or to find an alternate source for retirement income.
So in an effort to reduce the social security bill, the Australian Government is actively encouraging people to save for their own retirement. Establishing superannuation as an investment option that receives concessional tax treatment has done this. The introduction of compulsory employer superannuation contributions and encouraging personal superannuation via tax concessions has also promoted superannuation as an effective investment vehicle for retirement.
Getting Money into Super
How Much Can Be Contributed to Super?
There is generally no limit to the amount that may be contributed by, or on behalf of, a member of a superannuation fund within a financial year. However, the member will be personally liable to excess tax on contributions made within a financial year that are over government set contribution caps.
Contribution Caps – Summary Table
Contribution caps limit how much may be contributed to an individual’s super in a particular financial year without the member incurring excessive contributions tax. The caps apply to all individuals. Contributions from all sources are added together to determine if the caps have been exceeded. The table below summarises the contribution caps for individuals for 2017/18.
|Concessional contributions cap for 2017/18||$25,000|
|Non-concessional contributions cap for 2014/15||$100,000 or up to $300,000 over three year period (bring fwd prov)|
A concessional contribution is generally one made to a complying superannuation fund which is taxable and included in the super fund’s assessable income. In most instances, this will occur because the contributor (i.e. Employer or Self-employed person*) is entitled to claim a tax deduction for the contribution.
Examples of concessional contributions are:
- Employer contributions (including superannuation guarantee & salary sacrifice contributions)
- Personal contributions made by a member for which a tax deduction is claimed.
A non-concessional contribution is generally a super contribution to a complying superannuation fund which is not included in the fund’s assessable income. It is generally a contribution made by the member with after-tax money.
Contribution Eligibility Rules – Summary Table
In order to make a contribution into a superannuation fund it is necessary to be eligible under superannuation law to make that contribution. The following table summarises the rules for when a person is allowed to contribute or receive contributions to a super fund for the 2014/15 financial year.
Member’s Age at time of contribution
Personal contribution – made by the member
Other contributions – made by someone other than member or employer
Voluntary employer contribution
Mandated employer contribution
|E.g. personal non-concessional, personal concessional contributions||E.g. spouse contribution, co-contribution||E.g. salary sacrifice, other employer contributions in excess of SG||E.g. SGC or contribution under industrial award|
|65 to 69||Work test||Work test||Work test||Yes|
|70 to 74||Work test||No||Work test||Yes|
|75 and over||No||No||No||Yes|
A member meets the work test if the member has been gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in the financial year.
- The work test does not apply to people who at the time of the contribution are under the age of 65.
- The work test, if applicable, must be met prior to the contribution being made.
- From age 65, a member must meet the work test to make member contributions or receive voluntary employer contributions.
- From age 75, a member may not make member contributions or receive voluntary employer contributions regardless of the member’s work status.
- Mandated employer contributions may be made at any age without the member meeting the work test.
- The work test can be satisfied anywhere in the world.
Gainfully employed is employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.
Tax File Numbers
If the fund does not have a member’s tax file number (TFN) on record, a member has 30 days from the date of the member contribution to supply the fund trustee with a TFN, otherwise the fund trustee must refund the contribution.
A super fund does not have to return employer contributions where a TFN has not been quoted; however, this will trigger no-TFN contributions tax.
In-specie contributions are those made using assets other than cash. They may be made at any time by a person who is not a related party of the fund provided that all other relevant superannuation provisions are met and subject to the trust deed. A person who is a related party of the fund can make an in-specie contribution provided that the asset contributed is one that the fund is permitted by superannuation law to acquire from a related party (eg. listed shares, managed funds or business real property acquired at market value).
The market value of the asset being contributed in-specie determines the amount of the contribution to be counted towards the relevant contribution cap.
Tax Deductions for Personal Super Contributions
From 1 July 2007, a person may claim a tax deduction for 100% of personal contributions made to super, provided certain criteria are met. Personal contributions, where a tax deduction is claimed, are concessional contributions, which are subject to a person’s concessional contributions cap. Excess concessional contributions are taxed an additional 31.5%. Speak to your Accountant or contact an Adviser fp Certified Financial Planner to see if you are eligible to claim a personal tax deduction for your contributions to your super.
Employer Tax Deductions for Super Contributions
From 1 July 2007, employers may claim a tax deduction for 100% of any super contributions made on behalf of employees to a complying super fund. The age-based limits that previously applied were abolished from 1 July 2007. While there is no longer any limit on the amount of contributions which an employer may claim as a tax deduction, an employee is unlikely to want their employer(s) to make contributions in excess of their concessional contribution cap because of the excess tax imposed on the individual.
Government Co-contribution for Super Contributions
The Government co-contribution is an initiative introduced on 1 July 2003 to assist eligible low to middle income earners and self-employed people in saving for their retirement.
Subject to eligibility criteria being met, the maximum Government co-contribution for 2012/2013 is 50c for every $1 of eligible personal super contributions made in the financial year up to a maximum co-contribution of $500 (subject to individual reductions).
Until 1 July 2007, the self-employed were unable to claim a Government co-contribution. Now, the self-employed may be able to claim a Government co-contribution if they meet the eligibility criteria.
The Government co-contribution does not count toward either the concessional or the non-concessional cap.
Preservation of Superannuation
Superannuation has been established for the sole purpose of providing retirement benefits. As such, access to benefits is restricted, with all superannuation contributions and earnings from 1 July 1999 being compulsorily preserved, that is, cannot be paid out as a benefit until certain criteria are satisfied.
Benefits are generally preserved (i.e. not accessible) in Super until a condition of release has been met. Where a trustee of a regulated super fund is reasonably satisfied that a member has met a condition of release, with a nil cashing restriction, the member’s preserved benefits and the restricted non-preserved benefits in the fund at that time become unrestrcited non-preserved benefits (i.e. accessible).
Conditions of Release
Retirement on or after preservation age
Attaining age 65
Termination of gainful employment (restricted non-preserved amounts)
Terminal medical condition
Termination of gainful employment with a standard employer-sponsor of the regulated super fund on or after 1 July 1997 where the member’s preserved amounts in the fund at the time of the termination are less than $200
Being a lost member who is found, and the value of whose benefit in the fund when released, is less than $200
As outlined above, preserved components of superannuation are not accessible until retirement from the workforce on or after Preservation Age. Until recently, this age was fixed at age 55, however, the applicable age is to increase to age 60, using a sliding scale based on the date of birth of investors. This scale is as follows:
Date of Birth
|Up to 30 June 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|
|1 July 1964 and thereafter||60|
Transition to Retirement
From 1 July 2005, a new condition of release was introduced, known as the ‘transition to retirement’ condition of release.
There are no work or retirement tests related to this condition of release. A person may or may not be working and still access super under this condition of release.
A transition to retirement income stream is an account based income stream or annuity. The total amount of payments in any year are limited to a maximum of 10% of the account balance at the start of each financial year.
The minimum income payments are shown in a table further on and are the same as other account based income streams. A transition to retirement income stream must meet the new account based pension and annuity standards.
Your Retirement Benefits
As a general ‘rule of thumb’, most retirees are reasonably comfortable with a retirement income of 60% of what they were earning at work. This income needs to keep pace with rises in the cost of living and it needs to be achieved without prematurely depleting your capital.
To build up the ‘nest egg’ required to produce that sort of income, you would need regular contributions of approximately 18% of your earnings over your full working lifetime if you were a male. In the case of a female, this rises to more like 20% given the longer life expectancy of women.
So the answer to the question ‘How much is enough?’ depends on assets you have accumulated to date, your age now, how you see your career developing, at what age you are likely to retire and the standard of living you will be comfortable with during retirement. It also highlights the need to plan and establish an effective strategy well before your actual retirement date.
To clarify any issues you may have, it is imperative to contact our office and speak to an Adviser fp Certified Financial Planner (click here). There are many potentially expensive pitfalls for the unwary. A professional adviser will be in a better position to help you to avoid them and put you on the right track by tailoring a retirement strategy to suit your circumstances and assist you to enjoy a more comfortable retirement.
In Australia, benefits can still be taken as either lump sums or income streams. This section looks at the taxation of these payments received.
Taxation of Super Lump Sums
Taxation of super lump sums – taxable component (2014/15)
Taxable Component Taxed Element
Max Tax Rate
Taxable Component Untaxed Element
Max Tax Rate
|60 and above||Not assessable income and not exempt income||0%||First $1.355 million (untaxed plan cap)||15%|
|Balance over $1.355 million (untaxed rate cap)||45%|
|Preservation age to 59||First $185,000 (low rate cap)||0%||First $185,000 (low rate cap)||15%|
|Balance over $185,000 (low rate cap)||15%||$185,000 (low rate cap) to $1.355 million (untaxed plan cap)||30%|
|Balance over $1.355 million (untaxed plan cap)||45%|
|Below Preservation Age||Whole Component||20%||First $1.355 million (untaxed plan cap)||30%|
|Balance over $1.355 million (untaxed plan cap)||45%|
In all cases, regardless of age, the tax-free component of a super lump sum is not assessable income and is not exempt income. No tax is paid on these amounts.
The taxable component of a super lump sum may be either a taxed element or an untaxed element.
The default position is that the taxable component is a wholly taxed element. A taxed Super fund will generally not have Super member benefits that have come from an untaxed source. The taxed element is that part of a lump sum which has been created by contributions made to your superannuation fund and the income earned on those contributions, both of which have been taxed at the 15% superannuation rate. Where an untaxed element is received by a taxed Super fund, the receiving fund will deduct 15% tax on receipt of the funds, converting the amount to a taxed element.
Specific provisions provide for limited situations where there is an untaxed element. Where a super benefit contains an untaxed element, that amount has not been subject to fund tax (up to 15%). For this reason, higher tax rates are applied to untaxed elements.
Situations where there is an untaxed element
- Super benefits paid from untaxed super schemes contain an untaxed element where no contributions and earnings tax have been paid. These schemes are generally run by the Australian Government and State and Territory governments. These generally apply to public servants, and fall into two broad categories, public sector super schemes and constitutionally protected funds.
- Where a super benefit is paid from a super fund that came into operation on or before 5th September 2006, the trustees of certain untaxed super schemes may give the recipient written notice specifying an amount as the untaxed element.
- Small super account payments.
- Superannuation holding account payments and SG Shortfall amounts paid by the Commissioner of Taxation to the individual.
- Certain death benefit super lump sums that include insurance benefits paid from a taxed super scheme.
Tax offset if under age 60
For people under the age of 60, the entire taxable component is assessable income. However, a tax offset is available to ensure that the maximum rate of tax paid does not exceed the rates in the table above.
A super provider withholds tax at the maximum tax rates in the table above. Tax withheld is credited against tax debts, so if a person is on a lower marginal tax rate than the rates at which tax is withheld, they may be entitled to a refund when they lodge their tax return.
Low rate cap
The low rate cap for 2014/15 is $185,000, subject to indexation in later years and decreases according to individual circumstances.
The low rate cap applies to people age 55 to 59. It is the amount of taxable component that receives a rebate so that the taxed element is effectively taxed at 0%, and the untaxed element is effectively taxed at 15% (special rules apply if both taxed and untaxed elements are received within the same financial year).
A person’s low rate cap for a financial year is reduced (but not below zero) by:-
- the taxable component of super lump sum benefits received in previous financial years, that received the low rate cap offset in those years, and
- taxable components of super lump sum benefits received in the same financial year, with the taxed element taking priority for the rebate.
The low rate cap is indexed annually to AWOTE, in $5,000 increments. That is, the indexation has to be at least $5,000 before the low rate cap will rise.
Taxation of Super Income Stream Benefits
Taxable Component Taxed Element
Taxable Component Untaxed Element
|60 and above||0%. Not assessable income, not exempt (NANE).||MTR less a 10% tax offset|
|Preservation age to 59||MTR less a 15% tax offset||MTR (no tax offset)|
|Below preservation age||MTR (no tax offset)||MTR (no tax offset)|
15% tax offset
A 15% offset applies where:
- the taxable component forms part of the recipient’s assessable income, and
- the recipient is aged preservation age (currently 55) to age 59, or
- the income stream is a death benefit, or
- the income stream is a disability super benefit.
Tax offset = 15% x taxable component (taxed element)
Retirement Income Streams
What Happens When You Retire?
The first consideration should be whether to take your retirement benefits as a lump sum or a retirement income stream. This will depend on many factors at the time of your retirement. You should seek qualified assistance to make this important decision.
Retirement income streams can take the form of pensions or annuities. Whilst there are generally a number of differences between a pension and an annuity, they both provide a form of income stream and are paid from different providers. Super funds generally provide pensions and an annuity is paid under a contract with a life company or registered organisation.
Introduction to Super Income Streams
A super income stream refers to those income streams that may be commenced using accrued super benefits, whether during the lifetime of the fund member or to one or more of their dependants following the member’s death. A super income stream cannot be paid to an Estate.
A super income stream may be commenced within the same fund in which those benefits accrued, or it may be purchased with a super rollover benefit.
In order to receive concessional taxation treatment, an income stream must meet the relevant Superannuation standards. New minimum standards apply from 1 July 2007. Pensions that commenced before 20 September 2007 and meet the previous regulations are deemed to meet the new minimum standards.
Pro-rata rule and ‘1 June rule’
Where an income stream commences part way through the financial year, the minimum income payment is pro-rated based on the days remaining in the year. The 1 June rule may also apply, which means that no payments are reauired to be made until the following financial year for an account based pension or annuity commenced after 1 June in a financial year.
Account-based income stream – minimum annual income payments
In order to meet the payment standards, the terms of an account-based income stream must ensure that a minimum income payment is made at least annually. There is no maximum income payment that must be paid (unless it is a transition to retirement income stream where the maximum annual income payment is capped at 10% of the account balance). A fund may choose to impose a maximum payment under its own rules or it may permit any level of income payment in excess of the minimum to be drawn at the choice of the member.
Minimum income percentage factors (2014/15)
Age of Recipient
|Under age 65||4%|
|65 to 74||5%|
|75 to 79||6%|
|80 to 84||7%|
|85 to 89||9%|
|90 to 94||11%|
|95 and older||14%|
Account-based income streams must generally be commenced with unrestricted non-preserved benefits and may be commuted at any time. However, prior to either a full or partial commutation, either a pro-rated minimum income payment must have already been paid during the financial year or the remaining account balance is sufficient to ensure that at least the minimum annual payment could be paid.
Commutations may also be made, regardless of the level of income payments made, to pay:
- Death benefit;
- Surcharge liability;
- Family law payment splitting amount;
- Cooling-off amount; or
- Release authority amount.
One needs to be aware of the fact that effective retirement planning is a potential minefield and a complex one at that. It will be foolhardy indeed for anyone to venture into this area without being armed with appropriate professional advice. Early attention to these issues will alleviate the need to act under pressure at a later stage. Now may be the ideal time to contact Adviser fp and speak to one of our Cerified Financial Planners (click here).