What is Superannuation?

What is Superannuation?

Superannuation is a long term savings vehicle that operates for the sole purpose of providing income for retirement. Superannuation generally involves employers, the self employed, nonworking individuals under the age of 65 and/or employees making contributions at least annually during their working careers to a specially set up retirement fund. The money in this fund is held in trust for the member and must not be confused with the member’s other ordinary savings.

The superannuation Fund invests the contributions with the aim of generating a long term investment return which exceeds inflation and increases the value held in the fund above the level of the original contributions made. Also, these investments and the revenue generated by these investments are taxed at a concessional rate provided the superannuation fund complies with the government rules. The combination of annual contributions from both employers and (optionally) employees, long term investment return which exceeds inflation and a concessional tax environment allow the assets within the superannuation fund to grow more rapidly than if the same assets were held by the individual directly.

Once the member wishes (and is permitted under the law) to start drawing on these assets they will provide income for; retirement, after suffering a serious disability, or for a member’s dependants in the event of the member’s death.

Self Managed Superannuation Funds

Self Managed Superannuation Funds (SMSFs) are now the largest and fastest growing segment of the superannuation industry. The Australian Taxation Office (ATO), as regulator of SMSFs, is responsible for helping to protect the retirement income system by ensuring that SMSFs follow the rules outlined in the superannuation and income tax legislation. In recognition of this, the ATO compliance programme around SMSFs has increased substantially over recent years and will be maintained and enhanced in the years ahead.

Setting up and operating an SMSF is a major financial decision. The responsibility for running the fund and complying with the law rests solely with the Trustee. While SMSFs are great for some people, they don’t suit everyone. The suggested minimum starting amount is $150,000, with additional contributions being made on a regular basis to the SMSF.

What is a Self Managed Superannuation Fund?

SMSFs have the following requirements:

• Funds can have a maximum of four members.
• Generally, all members of the Fund must be Trustees of the Fund or Directors of the Fund’s corporate trustee. No member of the fund can be an employee of another member of the fund unless those members are related, and no trustee of the fund can receive remuneration for his or her services as a trustee.
• The rules for the operation of every SMSF are set out in its trust deed, the operation of which is subject to Superannuation laws. Any breach of these laws may result in the SMSF ceasing to qualify as a Regulated superannuation fund and, as a minimum, it will then lose its concessional tax treatment.
• A SMSF can invest in a wide range of assets (subject to some restrictions and compliance with its documented Investment Strategy) including investment properties, shares and managed investments.
• The Australian Taxation Office (ATO) oversees the regulation of all SMSFs. The Superannuation Industry (Supervision) Act 1993 and Regulations (SIS) and related legislation govern Australian superannuation funds, including SMSFs. These laws set strict rules that apply to superannuation funds, over and above the rules in the Fund’s trust deed - the laws are intended to increase the security of member benefits.
• The ATO ensures that tax concessions are given only to funds (established for retirement income purposes) that continue to comply with Superannuation laws.