Statement of Attainment in Advising at ASIC Level 1 –Superannuation
Resource 1
ASIC Superannuation Competency Units covered in this manual are:
FNSASIC503UB / Provide advice in SuperannuationTABLE OF CONTENTS
Contents
ASSESSMENT – Case Study 8
INTRODUCTION 10
LEARNING GUIDE 13
CHAPTER ONE: INTRODUCTION 15
CHAPTER TWO: TYPES OF FUNDS 21
CHAPTER THREE: CONTRIBUTIONS 34
CHAPTER FOUR: MORE ON SUPER 72
CHAPTER FIVE: INCOME STREAMS 63
CHAPTER SIX: CONDITIONS OF RELEASE & COMPLAINTS 108 CHAPTER SEVEN: sELF MANAGED SUPER FUNDS 130
FACILITATOR’S DETAILS
This document was written and collated by Michael Clay
The course facilitator for this course is: Michael Clay
Contact Details:
Address: TAFE NSW - Northern Sydney Institute
See Street, MEADOWBANK, NSW 2114, Australia
Email:
Additional References:
This guide should be read in conjunction with the following additional reference materials;
v Financial Planning in Australia current edition
v CCH Master Financial Planning Guide
v www.ato.gov.au
IMPORTANT PLEASE READ.
1. The following information within this document was updated in 2011. Due to changes that have occurred within the superannuation environment on an ongoing basis you may need updates within this document.
2. You are expected to read your text book and references to other resources as applicable and discussed.
3. To complete this course you must have access to the internet and be able to download the resources required.
CHAPTER ONE: INTRODUCTION
Introduction
Superannuation is a complex area of financial planning. This learner guide will provide you with an understanding of superannuation in Australia, how it works and who the key players are such as the Australian Taxation Office, the Australian Prudential Regulations Authority and Financial Advisers.
The process of keeping up to date in Financial Planning and specific areas of expertise is an ongoing one. This course will provide you with sufficient foundation on which to build your knowledge. There will be references and an attached appendix to aid your understanding of superannuation.
Superannuation itself is not an investment, just as a company is not in itself a business. It is what happens inside the superannuation fund and a company that is relevant.
Superannuation funds can invest in many assets and be used to pay for life insurance and some salary continuance insurance.
All of these issues will be covered in their respective chapters and in the final section of this manual will bring the pieces together to provide advice to a client in Superannuation.
What is superannuation?
(A definition of) A superannuation fund (may be expressed as) is: -
“(a superannuation fund is) an indefinitely continuing fund set up solely to provide benefits to its members on retirement or (death benefits) to members’ dependants on death of the member. A superannuation fund is established by governing rules (a trust deed for the private sector) and an Act of parliament or Ordinance for a public sector fund) and is managed by Trustees.”[1]
In other words superannuation is a tax advantaged trust enabling people to save to build up their financial assets to be used at retirement. Superannuation, as a consequence of compulsory employer contributions, is the most common way individuals will save for their retirement.
The contributions within the specified legislated limits and investment earnings of a complying superannuation fund are concessionally taxed at maximum 15%. The rationale for providing tax concession to superannuation funds is to encourage individuals to contribute to a superannuation fund creating a “nest egg” that they can draw on in retirement.
Why invest in superannuation?
Superannuation is a tax effective way of accumulating wealth for your retirement. The Government provides tax incentives to encourage you to utilise superannuation to provide for your retirement.
Because of the generous tax concessions, the Government places restrictions on how much can be contributed, how will it be taxed on contribution and how/if it will be taxed on withdrawal and when you can actually take your benefits out of superannuation?
Background to Superannuation and an Introduction
“Superannuation in Australia can probably be traced back to the mid 1800’s and has changed considerably since. At that time, superannuation was only provided to senior employees of banks and insurance companies. The benefits were mainly pensions paid for life and, later, some funds provided lump sums.[2]
Pension benefit would also have been provided to members of the defence forces and retired public servants.
Large industrial companies began providing superannuation to senior employees in the 1940’s. These funds in the main provided for lump sum benefits to be paid on retirement. Small and family run companies generally did not offer superannuation to their employees and in many cases did not have any for their managers and directors it was not until the 1980’s when industrial awards required employers to contribute a minimum amount of superannuation for employees that superannuation became universally provided.
Tax deductions for superannuation were available by 1915, when income tax legislation allowed tax deductions to employers who contributed to superannuation funds for their employees. However, it wasn’t until the late 1970’s that self-employed people could claim a tax deduction for superannuation contributions and even then there were restrictions.
Until the 1950’s there was little or no legislative control over the operation of superannuation funds, members did not even have to be advised that were in a superannuation fund. Members would have had to rely on trust law to enforce their rights. Lack of legislative and regulatory control led to widespread abuse, with small companies often using superannuation balances for business purposes and in some cases closing down the business with the directors retaining the superannuation fund for themselves.
Until the mid 1960s superannuation benefits were funded by use of endowment type insurance policies. Subsequently unitised investments through managed funds were available for funds to invest in various asset classes.
Lump sum benefits paid from superannuation funds were taxed at very low levels: 5% of the amount received was taxed at the recipient’s personal tax rate.
In July 1983 the then Labour Government made substantial changes to superannuation changing the tax regime for benefits accruing after that time.
At this time a new retirement vehicle was created called an Approved Deposit Fund (ADF). The role of an ADF was to be a holding account for superannuation and other retirement benefits while a member decided where to invest his or her superannuation. An ADF is a cash fund similar to an ordinary bank account.
Until the late 1980’s superannuation was controlled by the commissioner of taxation when the responsibility was transferred to the newly established Insurance and Superannuation Commission (ISC). The ISC’s role was to supervise the operation of superannuation funds.
In 1988 the government decided that the income of superannuation funds would be taxed at 15%.
Difficulties associated with enforcing award provisions in relation to superannuation and as not all employees were covered by awards the superannuation guarantee charge was introduced in 1992 requiring that employers make a minimum contribution each quarter to employee’s superannuation. Where an employer did not contribute at least the minimum amount it would be required to pay the Super Guarantee Charge (were paid) to the ATO and this would then be redistributed to a superannuation fund nominated by the employee.
On the 1st July 1994 the Superannuation Industry Supervision Act introduced operational standards for all superannuation funds and a number of changes were made to the income tax legislation. The changes related to tax deductions for superannuation contributions and limits to the amount of the benefit that could be received over a person’s lifetime from a superannuation fund and taxed at concessional rates.
From July 1994 the tax law changed so that a tax deduction was allowed for contributions up to a set amount, which depended on the person’s age.
In 1997 the Australian Prudential Regulatory Authority (APRA) was formed as a result of the Wallis inquiry to supervise banks, insurance companies and superannuation funds that had more than 5 members.
There has been a big change that was introduced to superannuation system during 2007 “Introduction of the Superannuation Simplification initiatives”. The key features of these changes include:
· RBLs have been abolished
· Employer termination payments (new ETPs) now sit outside the super system
· Forced payment of retirement benefits have been abolished
· Lump sums to have two components only:
§ Exempt component - tax free
§ Taxable component - age 55 threshold of $140,000
· Benefits paid from a taxed source are tax free for those aged 60 and over
· Benefits paid from a taxed source before age 60 will include a proportion of both exempt and taxable component
· Aged based contributions have been replaced with a fixed amount of $50,000, with transitional arrangement for those age 50 and over of $100,000. Indexing (AWOTE) with $5,000 multiples to apply.
· Employers can claim employee contribution deductions up to age 75
· Self-employed can claim a full deduction for allowable contributions up to age 75
· Cap to apply to post tax contributions of $150,000 -- with a three year average provision of $450,000.
· New TFN (tax file number) provisions:
§ Taxable contributions will be taxed at the top marginal rate plus Medicare levy where a TFN has not been supplied.
§ Post tax contributions can only be accepted with a TFN.
· Portability processes have been simplified with the introduction of a standard form, and a 30 day completion period.
· Pensions will not be able to revert to a non-dependant on death, - requiring the payment of a lump sum.
· Change of description for a resident, and no-resident superannuation fund:
§ Resident Superannuation Fund is a Australian superannuation fund, and
§ Non-resident superannuation is a 'Foreign Superannuation Fund'.
· Changes to SMSF:
§ Consolidation of regulatory returns.
§ Fringe benefits tax has been removed from in specie employer contributions
§ Supervisory levy increased from $45 to $150
§ New trustees to sign a declaration acknowledging responsibilities.
Expanded income definition for superannuation co-contribution and other government benefits
From 1 July 2009, there is a broadening of the various definitions of income that are used when determining eligibility for certain types of government support.
A. The definition of income for the superannuation co-contribution, income support payments for people below Age Pension age, family assistance, child support, and financial and retirement savings assistance delivered through the tax system will include certain 'salary sacrificed' contributions to superannuation.
B. The adjusted taxable income definitions used for the purposes of family assistance programs, some parental income tests, the Commonwealth Seniors Health Card, child support and loan repayment obligations under the Higher Education Loan Program will be expanded to include net financial investment losses and net rental property losses.
C. The definition of income used for the Senior Australians Tax Offset, Medicare levy surcharge and dependency tax offsets will also be expanded to include net financial investment losses and net rental property losses.
D. The income definitions used for the Senior Australians tax offset, pensioner tax offset, and dependency tax offsets will be expanded to include reportable fringe benefits.
E. The Commonwealth Seniors Health Card income test will be expanded to include in the income assessment the gross income from superannuation income streams from a taxed source as well as income that is salary sacrificed to superannuation.
Superannuation Framework
A superannuation fund does not just come in to being. Whether it is a small 4 member family superannuation fund or a large corporate superannuation fund such as HESTA or AMP, there are certain procedures and legal requirements that must be met to become a regulated superannuation fund.
To be entitled to receive the tax concessions, the trustee of a superannuation fund must make an election to become a regulated fund 3 The trustee in running that fund will have to adhere to the rules as set down in the Superannuation Industry (Supervision Act) (commonly known as SIS), the Regulations and the rules in the trust deed.
A trust deed sets out the governing rules of the fund such as to who is to receive the benefits of the fund and in what circumstances benefits are to be paid. Benefits paid from a superannuation fund may take the form of a “lump sum” usually paid on retirement or a pension which is an income stream paid over time such as an allocated pension – discussed further in the retirement incomes section.
A fund may be an accumulation fund or a defined benefit.
An accumulation fund provides a benefit consisting of contributions and earnings less expenses and is not known until a person retires.
A benefit promise fund provides benefits based on a multiple of a persons final average salary over the last three years prior to retirement at age 65.
· Concessional Tax Treatment applies to a superannuation fund (i.e. a superannuation fund whose trustee has elected that the Superannuation Industry (Supervision) Act 1993 (SISA) apply to the fund.
· Is a resident regulated fund (resident and controlled in Australia)
A regulated fund must have either
· a corporate trustee; or
· Individual Trustees and a trust deed which specifies that the sole or primary purpose of the fund is to provide age pensions. This does not, however, prevent members from being given the options to commute benefits to a lump sum.
The election to be a regulated superannuation fund cannot be revoked.
It is necessary for funds to comply with this legislation to be eligible for the concessional tax rate of 15% afforded to superannuation funds.
The SIS Act provides greater security through legislation that
· Requires superannuation funds to have a “prudential framework”.
· Places investment restrictions on the trustees.
· Ensures members are notified about their benefits.
· Requires trustees to ensure the security of the members’ funds.
Until 1998 the administration of the Act was the responsibility of the Insurance & Superannuation Commission (ISC).
In 1998, after the Wallis Enquiry, the responsibility for the SIS Act administration was split between Australian Prudential Authority (APRA), the Australian Securities and Investment Commission (ASIC) and the Australian Taxation Office (ATO). Each of these bodies had a different role to play in the administration of the SIS Act.