Australian SMSF

Why do we have Superannuation in Australia?

Superannuation is a structure created and supported by the Australian Government to encourage individuals to accumulate wealth to provide a sufficient income stream in retirement.

By encouraging individuals to accumulate sufficient wealth and self fund reduces the level of reliance on an Australian Government Pension during retirement. The social security system in Australia is already under huge pressure and this pressure is expected to grow as the largest proportion of Australia’s population are currently entering retirement phase.

To assist in reducing the reliance on the Government Pension, the Australian Government has put in place policies to assist and encourage individuals to contribute, and accumulate sufficient wealth in superannuation.

Key policies include:

  1. Compulsory superannuation guarantee (SG) paid by employers. The current amount payable by employers is 9.5% of an employee’s gross salary. This compulsory amount is mandated to grow to 12% by 2023.
  2. A concessional tax rate of 15% in accumulation where there is considerable incentive to salary sacrifice into superannuation where personal income tax thresholds are higher than 15% and cash flows allow for this strategy.
  3. A concessional tax rate of 15% in accumulation on income derived in superannuation as compared to a maximum 47% outside of the superannuation environment.
  4. Nil tax on income and capital gains within superannuation when the member is in pension phase and 55 years of age or older.

What’s Super all about?

Superannuation is predominantly about this one big question:

“What are you going to do for money once you retire?”

Your choices are generally going to be:

  • Earn income from investing the capital you have accumulated during your working life
  • Perhaps get a full or part Age pension from the Government
  • A combination of the above two (if eligible).

There are two major problems with reliance on the Age Pension. Firstly, it’s just not a lot of money. It’s only around 25% of the average wage. So right now, try living on about $15,000 a year, or $25,000 for a couple and see how you go. Secondly, with the Ageing population, the affordability for the nation in supplying these payments in the future will be very stretched due to a smaller number of people working, and hence less taxes available to pay for the higher number of people getting the Age pension. So the bottom line here is that it is going to be in everyone’s interest to make sure that everyone has as much of their own capital as possible to fund their income in retirement. And that’s where Superannuation comes in, through the range of incentives and concessions that the Government provide to super funds, and the compulsory contributions that your employer has to make each year to your fund.

So what is a Super fund?

A super fund is simply a long term savings vehicle which has a range of very generous tax concessions, including when money goes in, while it is invested, and when it comes out as an income stream. The flip side is that there are restrictions on when you can access your money, to ensure that it’s kept safe and sound until retirement (or in the event of death or disability). It is the Governments way of trying to get us to save as much as possible for retirement, and reduce the future strain on the Age pension system. Please note that for a super fund to receive the generous tax concessions available, it must be a complying super fund, which means that it strictly complies with all the relevant laws set down under the SIS act, and any prudential standards set by the regulators. For more information on the taxation of a super fund, please click here .

What types of Super funds are there?

So you’ve now got a handle on what Super is all about and why it’s important. The most obvious thing now is how to choose the right super fund for you. To do that, you’re first going to need to understand the different types of super funds that are available.

This has two layers:

Firstly, there are two major types of super funds. They are:

(a)  Accumulation funds where the final benefit is simply the final account balance. That is, the sum of all the contributions made, plus investment earnings, minus tax and fees over the years. This is the main type of Super fund in Australia.

(b)  Defined benefit funds where the final benefit is based on some sort of formulae, such as a multiple of final average salary. These are mainly found in the Government super funds for public servants etc. Note that the most common funds these days by far are Accumulation funds.

Next, there are the following sub-groups of super funds:

(a)  Corporate funds

(b)  Public sector funds

(c)   Industry funds

(d)  Retail funds

(e)  Wrap Super Platforms

(f)   Small APRA funds

(g) DIY / Self Managed Super Funds (also known as SMSFs)


Talk with an SMSF Expert

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