Hey, I want you to solve this question based on my lecture notes please.
Here is the question:
1-Despite increases in longevity, there is a trend towards earlier retirement than that which has traditionally occurred. Given the adverse financial consequences for government that this is likely to produce, what changes has the government made in recent times in order to encourage people to continue accumulating retirement savings, particularly from continuing to work, for periods longer than otherwise?
I have attached you the lecture notes. And I want the work to be done within the next 12 hours
Thanks
Slide 1 Chapter 11 Superannuation PowerPoint presentation by Lindsay Cowling Holmesglen Institute ©2011 John Wiley & Sons Australia, Ltd Introduction Superannuation is the accumulation of a sum of money to fund retirement income Superannuation has changed markedly over last 20-25 years as result of: Compulsory contributions Taxation concessions on contributions Taxation benefits on withdrawals Superannuation issues and self-managed superannuation funds have become prominent in recent times Why the Need for Superannuation? We are living longer Aging population In 1970 there was 7.5 people in the workforce for each person aged over 65 – in 2050 it is predicted the ratio will have fallen to only 2.7 – the tax base will therefore be smaller, individuals will have to fund their own retirement The Three Pillars of Superannuation Policy Tier 1 – a taxpayer funded social security pension (a safety net) which is means tested Tier 2 – compulsory employer contributions to superannuation for employees Tier 3 – tax incentives for voluntary contributions to superannuation The Legislative Context for Superannuation Superannuation Industry (Supervision) Act 1993 (SIS Act) is the cornerstone legislation Complying fund… meets the conditions for compliance as outlined in the SIS Act A superannuation fund is a form of trust and is administered by trustees who have common law fiduciary responsibilities to act in good faith – these are largely codified in the SIS Act The Legislative Context for Superannuation continued A complying fund enjoys tax concessions The income of a non-complying fund is taxed at the highest marginal tax rate What is a Complying Fund? Only funds complying with the SIS Act qualify for taxation concessions A complying fund holds a ‘notice of compliance’ from APRA or ATO A superannuation fund must meet the definition as per the SIS Act Must have a trustee – responsible and accountable to regulator and members Must be established and controlled in Australia Framework of Regulation Australian Prudential Regulation Authority – the prudential regulator for ADI’s and superannuation funds Australian Securities and Investment Commission – regulates market conduct and disclosure Australian Taxation Office – regulator of SMSF’s in addition to tax collection and audit role Superannuation Complaints Tribunal – deals with complaints by members against the decisions of trustees Types of Superannuation Funds Accumulation accounts – balances increase with positive investment returns as well as contributions – investment risk is borne by the individual Defined benefit funds – contributions are made by an employer into a pooled fund designed to meet the benefits accruing to members – ultimate benefit is defined by a formula – risk is usually borne by the provider Major Providers of Superannuation Funds Over the last decade retail and small superannuation funds have significantly increased FUM whilst FUM in corporate funds has declined perhaps fuelled by some companies not wanting investment risk associated with defined benefit schemes Not all defined benefit funds are fully funded - Future Fund established as a savings plan designed to accumulate wealth over time to offset unfunded schemes Major Providers of Superannuation Funds continued Source: June 2009 APRA Annual superannuation Bulletin (Table 9) History of Superannuation in Australia From white collar to blue collar to no collar Superannuation now available to most employees The need to stay at work longer Policy initiatives are aimed at encouraging us to work longer to lower the social security burden Taking lump sums from superannuation The tax-concessional environment Getting the balance right… Is everybody treated equally? Does the system favour higher income earners? Superannuation Contributions People aged <65 can="" contribute="" without="" restriction="" between="" ages="" 65="" and="" 75="" the="" member="" must="" be="" gainfully="" employed="" at="" least="" on="" a="" part="" time="" basis="">75 the only contributions allowed are employer mandated contributions under an award Contributions are preserved until the member satisfies a condition of release Superannuation is therefore a very long term investment Circumstances in which Money can be Released from Superannuation Permanent incapacity Permanent departure from Australia Severe financial hardship Compassionate grounds Concessional and Non – concessional Contributions A non-concessional contribution is one for which a tax deduction has not been claimed -i.e. the contribution has been made with after-tax dollars Non-concessional contributions are not subject to contributions tax Non-concessional contributions are limited to 6 times the concessional contribution limit or $150,000 (this may be calculated on a 3 year rolling basis) Concessional and Non – concessional Contributions continued A concessional contributions are a contribution for which a tax deduction has been claimed Concessional contributions are taxed at 15% Limited to an indexed amount of $25,000 per year (age >50 $50,000 per year until 2012) Excess contributions taxed at 46.5% If a person is self employed the process now works the same way… The Superannuation Guarantee Scheme Employers must contribute 9% of employee’s salary to a superannuation fund In 2010 the federal Labor Govt. proposed that this limit be increased to 12% by 2019-20 Contributions must be made quarterly ATO administers the scheme ATO imposes a Superannuation Guarantee Charge if contributions are not made Superannuation Guarantee Charge If a shortfall of SG contributions occurs then employer is liable to pay: The shortfall amount per employee Interest (interest @ nominal 10% pa for first 5 months (0.83%) but after 5 months interest rises to 4.17% per quarter!) An administration charge of $20 per employee The SGC is not tax deductible to employer Definition of an “employee” “Employee” defined within its ordinary common law meaning Includes directors, MPs, entertainers Independent contractors are deemed to be an employee SGR 2005/1 provides guidance Not an employee if ‘bona fide’ independent contractor or domestic not more than 30 hours a week. Local government councilors may elect to be an employee Excluded Salaries and Wages Some employees are outside scope of SG scheme. Examples: Employees aged over 70 years Non-residents paid for work outside Australia Resident employees employed by non-resident employers for work outside Australia Employees earning less than $450 per month Part-time (less than 30 hours per week) employees under age 18 years Notional Earnings Base Generally based on the Ordinary Times Earnings (OTE) OTE - total earnings for ordinary hours of work plus some extra payments such as shift loadings, commissions. OTE includes allowances, annual leave and LSL OTE does not include: general bonuses, overtime pay, leave loadings, etc. Maximum amount for SG (2010-11) is $42,220 per quarter or $168,880 per annum. Salary Sacrifice An employee may decide to sacrifice some of their pre-tax salary as a contribution to superannuation – not subject to FBT and usually in addition to the SG contribution Contribution is a tax deduction for the employer hence it is a concessional contribution – the employee must ensure they stay within their contribution limit Subject to contributions tax of 15% Salary Sacrifice continued Income tax saving from salary sacrifice of $10,000 at various MTR’s Marginal tax rateCash in pocketMoney invested in superannuation @ 15% taxSaving 15%$8,500$8,500$0 30%$7,000$8,500$1,500 37%$6,300$8,500$2,200 45%$5,500$8,500$3,000 Contributions Government co-contributions: Personal contributions of up to $1,000 attract a government co-contribution of up to $1,000 – Members must earn at least 10% of their income from employment or a business Full co-contribution paid if income less than $31,920 (2010-11) Part co-contribution paid up to income of $61,920 (2010-11) – (reduction 3.333 cents for every $1 above threshold) Contributions are non-concessional Contributions continued Spouse contributions: A spouse can make contributions to superannuation for a low income spouse and obtain a tax offset 18% tax offset for contributions of $3,000 (maximum offset $540 @income of $10,800 or less) Tax offset for contributing spouse if income of other spouse less than $13,800 Contributions are not tax deductible Contributions counted in non-concessional cap of receiving spouse The amount of the offset depends on how much the receiving spouse earns. Income: Offset available: Contributions continued Capital proceeds from the sale of a small business may be used for retirement Where the individual is under age 55, the CGT exempt component must be rolled over into a complying superannuation fund and retained until the person reaches their preservation age Classified as a rollover, not a contribution and consequently is not subject to the superannuation contribution limits The retirement exemption is calculated after the application of any other CGT discounts. Contributions continued In-specie contributions to a SMSF …a contribution in kind rather than cash e.g. $100,000 in NAB shares Note that the contribution is a disposal of an asset and therefore the member needs to be mindful of CGT consequences Contributions continued Contribution Splitting An individual may split concessional contributions with their spouse A concessional contribution will be received by the individual’s superannuation fund and the 15% contributions tax deducted The balance will be split with the spouse Choice of Fund Provisions Most employees have a choice of superannuation fund Choice of fund fosters competition between funds to encourage fee reduction Employees to advise choice of fund in writing Employees may be limited to change funds to once per annum Employers may initiate process with a standard choice form (within 28 days of commencing employment) Default fund if no choice made by employee Investment and Superannuation Investment objectives and strategies would include: Risk and return Diversification Short-term liquidity Long-term liquidity Investment Choices Investment choice may include single sector and multi sector options: Cash Conservative Balanced – often a default choice for members who do not make a selection Diversified Shares Local / international Property High Growth Investment Restrictions Individual setting up a SMSF must balance these restrictions against the tax advantages on offer… Sole purpose test In house assets rule Borrowings loans and financial assistance to members and The need for transactions to be conducted on an arm’s length basis Taxation of Superannuation Funds Framework basically similar to the taxation of individuals: Assessable income Includes ordinary income and statutory income (or contributions) and capital gains (2/3 of any gain is assessable where the asset is held > 12 months) but not non concessional contributions or income from investments dedicated to paying current pensions Less allowable deductions = Taxable Income Taxation of Superannuation Funds continued The income of a complying superannuation funds is taxed at 15% Less any tax credits The two most important tax credits are: Dividend imputation credits and Foreign tax credits Additional tax may be due where: A TFN has not been supplied Where an individual has made excess contributions or where a fund has become non-complying Self-managed Superannuation Funds - Features A self-managed superannuation fund (SMSF) has: Less than 5 members Trustee can be individuals or company Members must all be trustees of the fund – either as individuals or as directors No member can be an employee of another member unless related No payment permitted to trustees Single member funds are permitted (special rules) Self-managed Superannuation Funds – Drivers & Disadvantages Drivers Control Flexibility Cost Disadvantages: Investment restrictions Complexity of legislation Insurance Lack of diversification Personal liability Lack of access to the SCT and APRA fraud fund Summary Superannuation marked by frequent changes and policy shifts by government Many taxation and supervision rules have impacted on superannuation Superannuation Guarantee is fundamental to wide reaching superannuation benefits for employees Choice of fund encourages employees to take interest in superannuation Summary continued Contributions tax imposed Tax concessions on contributions Non-concessional contributions encourage extra amounts to go to superannuation Benefits are tax