Superannuation and Taxation

A Practical Guide to Saving Money on Your Super or SMSF

Jimmy B. Prince

• Publisher: Wiley
• Year: 2011
• ISBN:
  9780730376774
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

Superannuation is the cornerstone of every Australian?s financial future and retirement plan. Making the most of all the tax advantages that superannuation offers is essential to building your wealth. However, complying with and taking advantage of the superannuation and tax rules and regulations is mind-boggling. Fortunately, help is at hand.

In plain English, Superannuation & Taxation explains just what your tax obligations are. Inside you?ll learn:

? about the Australian superannuation system and how it works
? what the rules for making a superannuation contribution are
? how to set up, run and maintain a compliant self managed superannuation fund
? how superannuation funds, pensions and death benefi ts are taxed.

Packed with tax tips, tax traps to avoid and practical case studies, this comprehensive guide will give you the know-how to legally reduce your tax liability? and build your wealth.

Chapter 1: The superannuation scheme: removing the mystique

Superannuation is an investment vehicle that you can use to help you save for your retirement. The federal government has introduced a number of tax incentives to encourage you to do so. The sole purpose of having a superannuation fund must be to provide benefits to members upon retirement, and benefits to dependants in the event of a member’s death. The amount you accumulate in your super fund will ultimately determine the standard of living you can expect to have in your old age. So it’s best that you understand how the system works. In this chapter, I provide an overview of the Australian superannuation scheme and the various tax benefits you can gain.

How you’re taxed in Australia

Under Australian tax law, tax is levied on your taxable income — ‘total assessable income less allowable deductions equals taxable income’. At the end of the financial year — which commences on 1 July and ends on 30 June — an Australian resident is statutorily obliged to lodge a tax return disclosing the taxable income they derive from all sources, whether within or outside of Australia. If you’re running a self managed superannuation fund (SMSF), you need to lodge a Self managed superannuation fund annual return disclosing the taxable income your super fund derived during the financial year (see chapter ;6).

Coming to terms with self-assessment

The Australian tax system operates on a self-assessment basis (or honour system). This means that, when you lodge your annual tax return, the Australian Taxation Office or ATO (the federal government authority responsible for administering Australia’s tax laws) will ordinarily accept its contents as being true and correct. Apart from correcting any noticeable errors (for instance, mistakes in adding up) no further action is taken. However, to keep you honest, the Tax Office conducts routine tax audits and data-matching checks, through which information disclosed in your tax return is matched with information from various external sources (such as records supplied by the banks of interest earned). This is to check whether you’re complying with the Income Tax Assessment Act. Stiff penalties may apply if you’re found to have understated your assessable income or overstated your allowable deductions. The onus is on you to comply.

If you plan to run an SMSF, each year you must appoint an independent auditor (at your own expense!) before you can lodge your super fund’s annual tax return. This is to check that you’re not cooking the books and that you’re complying with the Superannuation Industry (Supervision) Act 1993 (SIS Act). The auditor must report any significant contraventions to the Tax Office. So it’s important that you understand your legal obligations and responsibilities (see chapter 4).

Under self-assessment, if you’re not sure about a particular tax issue you can seek a private ruling from the Tax Office. This is a free service to taxpayers, where the Tax Office will give you a written response as to how they would interpret the tax law in respect of the tax matter you raised. For more details see the Tax Office publication How to apply for a private ruling.

Tax tip

The Tax Office regularly issues income tax rulings, tax determinations, ATO interpretative decisions and educational fact sheets to explain various tax matters (particularly superannuation). These publications are all free of charge and you can find them on the ATO website <www.ato.gov.au>. See also the ‘Useful references’ at the end of each chapter.

Tax tip

The trustee of an SMSF must lodge a Self managed superannuation fund annual return by 31 October. You may be charged a late lodgement penalty if you fail to comply. You can avoid this penalty if a registered tax agent prepares your return. This is because tax agents are given a general extension of time to lodge tax returns on behalf of their clients.

Four types of super funds

The sole purpose of having a superannuation fund must be to provide benefits to members upon retirement (or permanent disability), and benefits to dependants in the event of a member’s death. There are four different types of super funds that you can make super contributions to in order to achieve this objective. They are referred to as:

• Public sector funds. These are super funds that have been set up specifically for public servants who work for the federal or state and territory governments of Australia. You may be ineligible to become a member of some of these funds unless you’re a government employee. AGEST Super, for instance, is a major super fund for members who work for the Commonwealth government.

• Retail super funds. These are super funds that have been specifically set up by Australia’s leading financial institutions, such as banks and life insurance companies. Anyone can become a member of a retail super fund. Retail funds ordinarily provide a wide choice of investment options (in various asset classes) to their members to help maximise benefits. In return, they will charge you management and administration fees for looking after your money. If you want more information about retail super funds, visit the Association of Superannuation Funds of Australia (ASFA) website <www.superannuation.asn.au>.

• Industry super funds. These super funds were originally set up for employees of specific industries. They are not-for-profit super funds and now anyone can become a member of most industry funds. The management and administration fees they charge to look after your benefits are ordinarily lower than those charged by retail funds, and their policy is not to pay commissions to financial advisers. For more information you can visit the Industry Super Funds website <www.industrysuper.com>. The major industry super funds you can choose from include:

• Accountants Super (accounting profession)

• Cbus (construction industry)

• Hesta Super Fund (health and community services sector)

• Host Plus (hospitality, tourism, recreation and sport sector)

• MTAA Super Fund (motor trade industry)

• Media Super (print, media, entertainment and arts sector)

• NGS Super (non-government education sector)

• Legal Super (legal sector)

• REI Super (property sector).

• Self managed superannuation funds (SMSFs). These are super funds that are set up by individuals who would prefer to manage their own super fund. It’s generally considered you need to have about $250 000 in super to make this a viable option. You need to comply with stringent rules if you want to set up and run your own super fund. And if you don’t agree to be regulated or you fail to meet these stringent rules, there’s a risk your fund could become a non-complying super fund. If this happened, you will not qualify for certain tax concessions, and your fund is liable to pay tax at the rate of 45 per cent (rather than 15 per cent if your fund is a complying super fund). (For more details, see chapters 3 and 4.)

Tax tip

You can also make a superannuation contribution to a retirement savings account (RSA). RSAs are government-guaranteed savings accounts that are offered by Australia’s leading financial institutions, such as banks, credit unions and life assurance companies. An RSA earns interest, and the management and administration fees to manage your money are minimal. An RSA account can be used to pay you a pension on retirement. You need to supply your tax file number (TFN) when you open an RSA.

Reading the fine print: what you need to do

As there are numerous super funds eager to get hold of your money, it’s best that you check out the super fund’s product disclosure statement (PDS) before you choose a particular fund. This is a legal document that will set out relevant information, such as:

• the different types of fees and charges the fund will charge to ma...

Table of contents

• Cover
• Table of Contents
• Title Page
• Foreword
• Chapter 1: The superannuation scheme: removing the mystique
• Chapter 2: Long-term commitment: how much you need to accumulate
• Chapter 3: Setting up a self managed super fund: the good, the bad and the ugly
• Chapter 4: Running a self managed super fund: the rules you have to follow
• Chapter 5: Building the nest egg: making a super contribution
• Chapter 6: Sharing your wealth: taxing your accumulated benefits
• Chapter 7: Building wealth: accumulating retirement benefits
• Chapter 8: Accessing your super fund benefits: enjoying the spoils
• Chapter 9: Death and taxes: superannuation death benefits
• Appendix A: Key tax and superannuation rates
• Appendix B: Key tax cases relating to superannuation