Australian Superannuation - An Introduction for Expatriates

Australian Retirement System : A General Overview

Superannuation is a tax effective form of long term saving and investment which is intended to provide an individual with a pension or lump sum on retirement. By sheltering investment returns within a superannuation vehicle the Australian Government is seeking to defray future retirement costs by having individuals make their own retirement provisions rather than relying upon social welfare.  Australia’s superannuation rules are complex and the summary below is not intended to be complete, or relied upon; we strenuously suggest that you see professional advice in this area.

The Australian retirement system is relatively unusual in that members of retirement funds have far greater access to lump sums than in most countries.  Hence, they have been referred to as superannuation funds rather than pension funds.  Recent legislative changes are now encouraging benefits to be taken in the form of an income stream – but by providing incentives rather than legislation.

All Australian employers are currently required to contribute a minimum 9% of salary into a complying retirement fund for each of their employees.  This is called the Superannuation Guarantee.  The exceptions to this requirement are persons outside of the 18 to 70 age range, those currently earning less than $450 per month and those who have “fully funded the maximum allowable non excessive benefits.

Major changes were announced in May 2006, and are planned to take effect from 1 July 2007.  They are summarised below, and expanded on later:

• Superannuation benefits paid from a taxed fund either as a lump sum or as an income stream such as a pension, will be tax free for people aged 60 and over
• Reasonable benefit limits (RBLs) are abolished
• Individuals will have greater flexibility as to how and when to draw down their superannuation in retirement - there would be no forced payment of superannuation benefits
• The concessional tax treatment of superannuation contributions and earnings will remain
• Age-based restrictions limiting tax deductible superannuation contributions are replaced with a streamlined set of rules
• The self-employed will be able to claim a full deduction for their superannuation contributions as well as being eligible for the Government co-contribution for their personal post-tax contributions
• The ability to make deductible superannuation contributions would be extended up to age 75, subject to a work test

The Australian Government has produced a website, SimplerSuper, which summarises the new changes very clearly.

Contributions

Individuals can make personal contributions from after tax dollars or via a salary sacrifice arrangement with their employer.  Personal contributions are permitted up to age 65 irrespective of whether the individual is working or not.  Between the ages of 65 and 75 contributions are allowed if the person works at least 40 hours in a period of no more than 30 consecutive days in the tax year.  The contribution rules are:

Transitional rules for those aged 50 and over during the transitional period.

The consultation process since the May 2006 Budget also led the Government to announce some transitional changes - probably the most important of which was to allow people to make up to $AUD1 million of post-tax (non-concessional) contributions between 10 May 2006 and 30 June 2007. Thereafter, the above restrictions on contributions apply. Expatriates planning on making substantial contributions to their superannuation in the next few years should discuss their position with advisors and whether it is in their interest to bring forward their contributions to meet this timeframe. See the Treasurer's Press Statement for more details.

Benefits as lump sum, pension or combinations.

Pensions can be in various types of draw down arrangements, From 1 July 2005 once a person has reached their preservation age, they will be able to access their  superannuation through an income stream without having to retire permanently from the workforce.  The preservation ages are:

Once a person retires or reaches age 65 they have the option to commute and access the benefit as a lump sum.

From 1 July 2007 the payment rules are:

• Preservation rules not changed.
  
• Compulsory withdrawals abolished, but if not in pension format – subject to 15% tax on assessable income.
  
• Minimum standards for pensions:

• subject to a minimum annual amount
• no residual capital values
• on death only transferred to one of their dependants or cashed as a lump sum.
• Pension meeting existing rules and commenced before 01/07/2007 will be regarded as meeting requirements.

The Taxation of Benefits

After Age 60

• All lump sum benefits paid from a taxed source to an individual aged 60 or over will be tax free.
  
• All pension payments from a taxed source paid to an individual aged 60 or over will be tax free – including pensions commenced before 01/07/2007.
  
• No Reasonable Benefit Limits.
  
• No need for individuals to report benefits in tax returns, nor would funds need to report to the ATO for RBL purposes.

Before Age 60

• Simplified to two components – exempt and a taxable component.
  
• Pensions for individuals under 60 generally continued to be taxed as under current arrangements.
  
• The undeducted purchase price of a pension commenced on or after 01/07/2007 includes all new exempt components.
  
• For current pensions, current deductible amount remains.
  
• The 15% rebate applies if the individual is aged 55 to 59 years.
• Once the individual turns age 60, the pension becomes tax free.

 

Complete the Superannuation Inquiry form