Superannuation is an arrangement which people in Australia make to enable them to have funds in retirement. These arrangements are government supported and encouraged and minimum provisions are compulsory for employees.

In 1992, the Government developed a scheme to address Australia’s ageing population issue and introduced superannuation guarantee - essentially forced retirement savings to assist with the strain of paying pensions to the ageing generation.

Superannuation is essentially long term savings for retirement and it is generally linked with an individual’s employment. The government make it compulsory that employers make a contribution on their employees’ behalf if they earn more than $450 per month. 

This contribution is calculated on your gross salary and is currently 9.25 per cent (which is set to increase to 12 per cent by 2020). These amounts cannot go into your ordinary bank account and MUST go into an approved and regulated superannuation fund. 

There are two types of contributions to superannuation:

1. Concessional Contributions, which includes:

  • Employer contributions – 9.25 per cent of employees gross salary
  • Salary Sacrifice contributions from before tax earnings

Personal contributions made by a self-employed person for which they are entitled to a tax deduction.

2. Non-concessional contributions – personal contributions made with after tax earnings that do not attract a personal tax deduction

Superannuation funds offer significant tax concessions, and for this reason the amount an individual can contribute to their super is capped each financial year. The maximum tax rate payable in a complying superannuation fund is 15 per cent on income and net capital gains.

In July 2002, the government introduced ‘co-contribution’ measures. The measures encourage individuals within a certain taxable income bracket to make non concessional contributions to their super fund, as the government would then also contribute to their fund on their behalf on a sliding scale based on the amount contributed and taxable income of the individual.

There are very specific rules which govern the operation of a superannuation fund and they are highly regulated by ATO, ASIC or APRA depending on the super product.

The tight regulation surrounding superannuation fund operation is to protect the individual’s savings for retirement. The maximum tax rate payable in a complying superannuation fund is 15 per cent. A complying superannuation fund is one which abides by the relevant laws set out in the SIS Legislation.

The rules regarding access to superannuation monies is the same no matter what super vehicle you use. A condition of release must be met (such as retirement), or you must have reached preservation age to be able to commence a transition to retirement pension.

Types of Super Funds

There are a number of different options available when it comes to choosing a type of superannuation fund and not all of them suit everyone so special care should be taken to ensure you have one that fulfils your superannuation needs. Each one has its advantages and disadvantages so it is important to understand these when making a final decision.  

There are seven main types of superannuation funds:

  • Industry Funds are multi-employer funds run by employer associations and/or unions. Unlike Retail/Wholesale funds they are run solely for the benefit of members as there are no shareholders.
  • Wholesale Master Trusts are multi-employer funds run by financial institutions for groups of employees. These are also classified as Retail funds by APRA.
  • Retail Master Trusts/Wrap platforms are funds run by financial institutions for individuals.
  • Employer Stand-alone Funds are funds established by employers for their employees. Each fund has its own trust structure that is not necessarily shared by other employers.
  • Self Managed Superannuation Funds (SMSFs or Do-It-Yourself Funds) are funds established for a small number of individuals (up to 4 members) and regulated by the Australian Taxation Office. Generally the Trustees of the fund are the fund members (where there is a Corporate Trustee, the members are the directors of that company).  This is now the largest segment of the superannuation industry by value.
  • Small APRA Funds (SAFs) are funds established for a small number of individuals (fewer than 5) but unlike SMSFs the Trustee is an Approved Trustee, not the member/s, and the funds are regulated by APRA. This structure is often used for members who want control of their superannuation investments but are unable or unwilling to meet the requirements of Trusteeship of an SMSF.
  • Public Sector Employees Funds are funds established by governments for their employees.

It’s fair to say a significant number of Australians don’t know much about superannuation, nor do they consider their superannuation as an asset. With superannuation being the second largest asset for many (next to the family home), it’s time people consider understanding this investment vehicle and the ways to maximise it. 

Olivia Long