Superannuation And Retirement Planning

Defined benefit plans

1. Describe a market-linked fund.

Pooled investments fund a fund which is esteemed in accordance with the market movements that is linked.  A market-linked investment allocates investors to place their portfolios for unstable markets and offers variegation, which may be tough for the investors to attain with fixed investments (Fettes and Butler, 2017). They are specially implemented to meet particular objectives; they are a kind of debt securities which is inclusive of a few features of fixed bonds with a prospective of return identified by the assets performance. Some assets are lined in order to comprise interest rates, supplies, market index, foreign exchange and market index.

2. Describe a defined benefit.

Defined benefit plan refers to a plan for retirement which an employer guarantor for its employees. Profits of employee are computed with the help of a formula that is inclusive of some factors such as age or income history of the employee. A company manages portfolio and risk investment in favor of the plan (Bateman, 2015). It also includes several restrictions for the withdrawal of employee’s funds exclusive of penalties.

3. The bring-forward rule allows a fund member to bring forward two years of non-concessional contributions from the future if they under age 65. From 1 July 2017, for people under 65, what are the maximum bring forward limits based on their total superannuation account balance?Explain your answer.

After considering the effect from 1^st July, the annual non-concessional (after-tax) contribution cap drops to $100000; the specified limit is for year 2017-2018. Further, Australians who are under the age of 65 are still having a chance for bringing forward two- years of non-concessional contributions (Butler, 2015). For the year 2017-18 bring-forward rule means that the maximum limit for non-concessional superannuation contribution (after-tax) in a single financial year without exceeding the non-concessional contribution cap is $300000.

Further the provision of bring-forward rule allows an Australian who is within age of 65 years to make to the extent of 3 years worth of non-concessional in just one financial year through representing annual cap over a period of three year. The same can be understood with an example that if an employee contributes $240000 in the initiating year than he is allowed to contribute to the balance of $60000, over the remaining two period (Jacobs, 2014). As the bring forward is triggered more than $100000 than an individual can contribute the remaining amount to the  limit of $300000 over the period of three year in any financial combination.

Bring-forward rules for non-concessional contributions

4. Alice believes you may as well die when you retire, so she chooses to continue to work on a casual basis at Bunnings.She is 68 years old and works exactly 30 hours each month of the year. She wants to contribute her own funds into superannuation, and seeks your advice as to whether she is able to contribute to super to top it up. Can she contribute into her super fund, based on her age? Why or why not?

Section 82 of Income tax Assessment Tax deals with provisions relating to voluntary employer contributions. In accordance with the specified provisions employees are allowed to enter into agreements with employer for reducing extra part from their salary and pay the same in superannuation accounts (Sekhar, 2017). Further, Superannuation Industry Regulation 1994, restrict the contribution to superannuation funds except contribution made by employer of mandatory basis and the same is done in accordance with age of the fund member. In accordance with above provisions the people who are of age between 65 to 75 years; contributions can be made only in case the member meets a work test in which they must be a ‘gainfully employed’ on a part time basis. Gainfully employed refers to a person should be employed at least for forty hours during a period of thirty days.

Thus in present scenario as Alice is of 68 years; thus the same provision will be applied. As per the facts available he works exactly thirty hours for each month, hence she cannot contribute for superannuation fund as she is not gainfully employed.

5. Using an example, explain how salary sacrificing can reduce a person’s marginal tax rate.

Tax bills of the investors can be reduced by salary sacrificing when they will place some of their pre-tax revenues so as to approach a specific benefit prior to be taxed. It is generally tax-efficient for the midsized or big investors (Long, Campbell and Kelshaw, 2016). For instance: an individual net income is $100,000 a year and is willing to purchase a car for the purpose of work, that worth $22,000. If they come into an agreement of salary sacrificing with their workforce, then the car worth $22,000 will be taken out of their taxable income. Further they turn out to be in the reduction of tax bracket with a $78,000 income and a tax free car.

6. Could all employees benefit from salary sacrificing some of their salary into superannuation? Explain your answer.

Can a 68-year-old casual worker contribute to super?

Sacrificing the part of employee’s wage or salary into superannuation would be a tax effective way to create wealth for retirement. Before recommending an employee to enter into a salary sacrifice arrangement several issues should be considered. This plan provides benefits to all the employees (Butler and Chau, 2017).  Superannuation contributions are attractive to salary package they are not subject to FBT and are not reportable benefits. The amount which is sacrificed as the part of the salary or wage is taxable under superannuation fund at 15%. An employee for every dollar that is sacrificed into superannuation will save 15% tax when the marginal rate is 30%. The employee on higher marginal tax rates will have higher savings.

7. Complete the following table to show that you understand the way that fund earnings are taxed in the superannuation environment effective from 1 July 2017.

	Earnings tax on income returns	Earnings tax on capital returns
Accumulation phase	Earnings tax is payable at the rate of 15% on super fund earnings, During accumulation phase.	33% discount on tax payable on the capital gains by way of sale of a super fund asset that has been held for more than 12 months (Butler and Chau, 2017). Capital gains are effectively taxed at 10%.
Transition to retirement income stream phase	Transition-to-retirement pensions will also be treated as being in accumulation phase. With effect from 1 July 2017.	In the case of the TRIS reforms, relief under CGT provisions seek to preserve the exemption for the gains not realized and accrued during the period when, if the relevant assets had been disposed of, the gains would have been exempt in the fund.
Retirement income stream phase	Earnings from assets financing an income pension is exempted from the payment of tax; it means, no tax is payable on earnings of super account when a super account is in pension phase, with effect from 1 July 2017, it will be known as retirement phase (Raftery, 2015).	Any retirement phase income streams which commenced before 1 July 2017 will be considered towards the transfer balance cap on 1 July 2017. New pension accounts (commenced from 1 July 2017) will be considered towards the transfer balance cap when they commence.

8. Explains the ‘pension benefits cap’. What phase of superannuation does this cap apply to?

The limit on the total amount of certain benefits which we can get at the age of working is called benefit cap. A cap of $1.6 million will be imposed on the amount of super that can be transferred into retirement phase (Butler, 2016). This benefit is available for every Australian with effect from 1 July 2017. The new rules effectively force Australians to remove the excess super benefits from pension phase, For Australians before July 2017, who will have more than $1.6 million in super pension accounts as at 30 June 2017.

9. Your clients are Mr and Mrs Jones. They are in their mid-50’s and they are planning for their retirement in 10 years’ time. Mr Jones has a much higher superannuation balance than Mrs Jones and the pension benefits cap is a concern for him in the future.

Explain the concept of ‘contributions splitting’ and how it could help Mr and Mrs Jones plan for the future.

Concessional contributions (before – tax) can be split with the spouse which comprise the following:

• Superannuation Guarantee
• Salary sacrifice contributions
• Additional employer contributions
• Personal contributions that are claimed as tax deduction covered under a valid notice of intent that has been contributed by you to your superannuation fund.

The benefit of same can be attained by people having age till sixty years. Thus as Mr. and Mrs. . Jones are in mid of 50’s they can claim the advantage.  It will help them in equalizing the super benefit to get most out of their retirement and will also allow accessing to two- tax free thresholds.  

10. Nicholas pays tax at a marginal tax rate (MTR) of 37% plus the Medicare Levy of 2%. What is the benefit of receiving fully franked dividends in his SMSF compared with receiving fully franked dividends in his own personal name?

How salary sacrificing can reduce a person’s marginal tax rate

If   Nicholas goes for first option he   might be a SMSF in pension phase then he doesn’t have to pay tax at all and if he uses the franking credit refund to fund the pension payments he is required to make.   If   Nicholas goes for second option he might be a SMSF in accumulation phase and he uses the excess franking credit rebate to set off contributions tax and he can contribute slightly more than he was planning to given the benefit of the franking credits.

1. Lisa is 59 years old and has permanently retired from the workforce. She has come to your office to seek advice in regards to her superannuation.  Lisa has $350,000 in her superannuation accumulation fund which comprises $70,000 as a tax free component and $280,000 as a taxable component (from a taxed source).  Lisa is planning to go on an extended overseas holiday with her daughter and would like to spend a year in Paris.  She has a few questions she wants you to clarify.

 Provide a clear explanation to Lisa for each of the following.

a. Can Lisa access her tax free component first as she wishes to use the $70,000 towards her trip and would rather keep the remaining $280,000 invested?

In present situation Lisa can access $70000 which is tax free component towards her trip and can keep the remaining amount invested. The amount of tax to be paid while withdraw depends on the age and whether super fund paid tax on it. As the $70000 amount relates tax free component thus, no tax will be paid while withdrawing the amount.

b. How much of the total $350,000 can Lisa access as a lump sum withdrawal from her superannuation accumulation fund, without having to pay any tax at all on that withdrawal?

Lisa can access lump sum withdrawal of $70000 from the superannuation account as the same amount relates to tax-free component (Cummings, 2016). Hence no tax would be required to be paid till $70000.

c. At what age can Lisa access all her funds tax free?

At the age of 60 or above, Lisa will be access to all her funds without paying any tax.

2. Lisa’s friend Sophie is 61 years old and she is considering meeting up with Lisa and her daughter for a few months in Italy. Sophie is also retired and she has a superannuation balance of $500,000 in an account-based pension which comprises $100,000 as a tax free component and $400,000 as a taxable component (from a taxed source).

Can all employees benefit from salary sacrificing some of their salary into superannuation?

 Provide a clear explanation to Sophie for each of the following.

 a. Both Lisa’s fund and Sophie’s fund are producing investment returns of 5% per annum. Are the investment returns treated any different for tax purposes in Sophie’s fund compared with Lisa’s fund?

No, the return on investment of both will be treated in same manner in case of Lisa’s fund and in comparison to Sophie’s fund. Income will be taxed at a maximum rate of 15% and capital asset in case retained for a period more than 12 months will be taxed at a rate of 10% in both the cases.

The difference will be in case the amount is withdrawn from the account by them i.e. as Lisa is having age more than 60 years thus no tax will be paid on withdrawal from account.

b. What are the minimum and maximum amounts that Sophie must withdraw annually from her account-based pension?

The minimum amount is calculated on 1^st July of each year and is determined in accordance with the age on the commencement date of year. In present case as Lisa is presently 61 years old, thus she would require withdrawing 4% of the amount available in account (Basu and Andrews, 2014). Generally no, maximum limit of withdrawing pension has been specified but it depends on the type of superannuation income stream.

c. If Sophie withdraws a total of $100,000 in the current financial year, will it come from the tax-free component or the taxable component?

In present case $100000 will be treated as tax – free component.

d. How will the $100,000 withdrawal be taxed?

As Sophie, is 61 years old, thus the withdrawals from tax super fund are tax-free in case the age of person is 60 or more. Hence no taxation is made in general case but different rates might apply to untaxed funds such as government super funds.

3. Sophie’s friend Bethany is 59 years old and continues to work. Bethany’s superannuation balance of $400,000 is in a transition to retirement pension account and comprises $100,000 tax- free component and $300,000 taxable component (from a taxed source).

Provide a clear explanation to Bethany for each of the following.

a. Assuming that Bethany’s fund produces an investment income return of 6% for the 2017-2018 financial year, explain the tax treatment of the return.

Tax on super fund earnings

The investment income for the financial year 2017-18 will be taxed at the maximum rate of 15%.

b. If Bethany withdraws pension payments totaling $20,000 for the year, how will this be treated for tax purposes?

As Bethany has withdrawn the amount before attaining the age of year 60 the same is taxable at the rate of 17% comprising Medicare levy. But a tax threshold limit of $200000 is available, thus the same will be availed and accordingly the remaining amount of $40000 ($240000 – $200000) will be taxed at the rate of 17%.

c. When Bethany turns 60 and continues to withdraw $20,000 for the year, how will the withdrawal be treated for tax purposes?

When Bethany turns 60 and continues to withdraw $ 20000 for the year; the same will be tax free if relating to taxed super fund. Though, different rate might be applied in case the amount relates to untaxed funds.

1. Matthew is currently married to Susan and they have one child together, Annie, who is just 5 years old. Matthew also has 2 children, Zac and Toby, from his previous marriage with Penelope. Zac is 20 years old, attends university and is financially dependent on Matthew. Toby is 26 years old, works full-time as an electrician and lives with Amy. Matthew has a superannuation balance of $300,000 which is 100% taxable component (from a taxed source).

Complete the following table in respect of Matthew’s superannuation if it were to be paid out as a death benefit to each of these individuals.

	SIS Dependent Yes or No	Tax Dependent Yes or No	Tax Treatment of Lump Sum Death Benefit
Susan	Yes	Yes	As she is dependent the available amount will be tax free.
Annie	Yes	Yes	As she is dependent the available amount will be tax free.
Zac	No	Yes	As he is not dependent, the amount received will be taxed at the rate of 15% plus Medicare levy (Veerman, 2016).
Toby	No	Yes	As he is not dependent, the amount received will be taxed at the rate of 15% plus Medicare levy.
Penelope	No	No	–
Amy	No	No	–

2. What is the difference between a binding death benefit nomination (BDBN) and a non-binding death benefit nomination?

Non-binding (standard) Death Benefit Nomination

Nomination is provided by the members to the trustee, which shows the distribution of their death benefits. Finally, the trustee manages the control of the allocation of the death benefits (Harley, 2014). This process is implemented during the distribution of a member’s death benefits to a single receiver, such as a partner, main trustee of the fund. This nomination is generally referred as a non-binding standard or discretionary nomination.

Binding Death Benefit Nomination

Binding nomination is trending among retailers and industry based superannuation funds. These nominations permits a member to covey the trustee, by what percentage superannuation funds will be paid during the occurrence of their death (Butler, 2014). During the member’s death the trustee must stand for by the way given by the Member’s Binding Nomination but only if the death benefit is applicable and current. Some specific necessities are mentioned in the Super Laws regarding a binding DBN to be applicable. The pro for binding nomination is that it gives assurance to the Member by how they must pay their Death benefits.

Contributions splitting for retirement planning

1. How many members can a Self Managed Superannuation Fund (SMSF) have?

A self-managed super fund must be inclusive of 4 or less members. Each member can become a trustee or a corporate trustee, plus each of the members can also be a director of the enterprise (Sanderson, 2014). Therefore, trustee must regularly look upon regulatory and reporting needs of the company.

2. Your client, Jane, has an existing balance of $500,000 in a retail superannuation fund and is considering establishing an SMSF where she will be the only member of the fund.

What options does Jane have in terms of who can be the trustees of her SMSF?

By considering the aspect, ATO requirement must contain maximum 2 individual trustees or corporate trustee for a self-managed super fund. The reason behind this is that SMSF represent a trust structure and is exclusive of legal parts. Further Jane decided not to include a Corporate Trustee (Raftery, 2015). SMSF must be consisted of two individual Trustees. One Trustee can become the Member and the other one must be an individual who is either   linked to the Member or no relation with the member.

3. Susan has an SMSF with a total fund value of $800,000. She owns her own home which is valued at $425,000 and also owns a beach house worth $310,000 which she only uses during the very warm months of summer.  Susan wants her SMSF to purchase the beach house. Is Susan’s SMSF permitted to purchase the beach house from Susan? Explain why/or why not?

In accordance with the provisions of section 66, of SIS Act a prohibition regarding acquisition of asset from related party has been provided.  Though, an exception to same is available that SMSS can acquire asset from related party but only at market value (Butler, 2015). Thus in present case Susan’s SMSF can purchase the beach house at market value.

4. Your clients, Sam and TerryBanks, have an SMSF and have just purchased a residential property at auction, using the cash that they had in their SMSF. The property will make up about 95% of the total assets of the fund. They are both in pension phase and ask you whether there are any issues they should know about.

a. Explain two risks of having one asset comprising such a big portion of the fund.

The two risks are:

Liquidity of fund:  The specified property can be difficult to sell off in case you need to ensure that you are not locking it away for the purpose of entirety of fund.

Tax benefits of receiving fully franked dividends in an SMSF

Complexity: Purchasing through SMSF is comparatively more complex in term of structure and in case any thing gets wrong that you need to resolve severe consequences (Broderick, 2014).

b. Sam heard a friend talk about the “sole purpose test”. Explain to him what that test means.

Sole Purpose Test is referred as a test which ensures that superannuation fund is maintained for the purpose of providing benefits to its member in case of retirement and to beneficiaries in case of death (Echevarria, 2014).

c. What happens if the residential property couldn’t be tenanted for a significant period of time? Could your client move into it and pay rent to themselves?  Explain.

No, the client can move but cannot pay rent to a property it owns itself.

d. Explain the In-house asset rule? What percentage of In-house assets could your client have within their fund?

In-house asset rule states that the amount of fund’s in house assets should not be more that 5% of total market value of its total assets. The same is ascertained at the end of each financial year as well as at the time when an in- house asset is acquired.

An in-house asset comprises the following:

• Investment in related party of the fund
• Investment in related trust of the fund
• Any other asset which is specifically excluded from being an in-house asset.

e.  Would your answer to question (c) above differ if the property was business real property and your client leased the property for their own business? Explain.

The answer will be yes, the client can move if he needs it for running business premises or any other purpose. It is better of owning a required property and paying themselves instead of paying rent to someone else (Butler & James, 2016).

References

Basu, A. and Andrews, S., 2014. Asset allocation policy, returns and expenses of superannuation funds: recent evidence based on default options. Australian Economic Review, 47(1), pp.63-77.

Bateman, H., 2015. 4 Structuring the payout phase in a defined contribution scheme in high income countries. Strengthening Social Protection in East Asia, 5, p.73.

Broderick, P. 2014.  SMSFs, trusts and property development: Part 1. Taxation in Australia, 49(6), 340.

Butler, D. 2016. Superannuation: Managing tax losses in an SMSF. Taxation in Australia, 49(11), 699.

Butler, D. and Chau, G., 2017. TRIS strategies after 1 July 2017. Taxation in Australia, 51(8), p.443.

Butler, D., 2014. SMSF succession strategies. Taxation in Australia, 49(6), p.344.

Butler, D., 2015. Paying a pension in kind using the partial commutation strategy. Taxation in Australia, 49(8), p.480.

Butler, D., 2016. Superanuation: $1.6 m balance cap examined-more tax on death benefits. Taxation in Australia, 51(1), p.41.

Butler, D., and James, R. 2016.  Superanuation: Accountants and the new AFSL regime. Taxation in Australia, 51(4), 214.

Cummings, J.R., 2016. Effect of fund size on the performance of Australian superannuation funds. Accounting & Finance, 56(3), pp.695-725.

Echevarria, J. 2014. New regulations, rules and guidance. Superfunds Magazine, (389), 10.

Fettes, W. and Butler, D., 2017. Superanuation: Understanding ECPI in view of super reforms. Taxation in Australia, 51(11), p.626.

Harley, C., 2014. Superannuation: Supercharging battles over superannuation death benefits. LSJ: Law Society of NSW Journal, (3), p.68.

Jacobs, K.A., Flanagan, K.M., Hulse, K. and Stone, W., 2014. Individualised forms of welfare provision and reform of Australia’s housing assistance system.

Long, B., Campbell, J. and Kelshaw, C., 2016. The justice lens on taxation policy in Australia. St Mark’s Review, (235), p.94.

Raftery, A., 2015. 101 Ways To Save Money On Your Tax-Legally! 2015-2016. John Wiley & Sons.

Sanderson, J., 2014. Superannuation and estate planning. SMSF Guide: Current Issues and Strategies for the Self-Managed Superannuation Funds Adviser, p.311.

Sekhar, G.S., 2017. The Management of Mutual Funds. Springer International Publishing.

Taylor, S.M., Juchau, R.H. and Houterman, B., 2010. Financial planning in Australia. LexisNexis Butterworths.

Veerman, J.L., Sacks, G., Antonopoulos, N. and Martin, J., 2016. The impact of a tax on sugar-sweetened beverages on health and health care costs: a modelling study. PloS one, 11(4), p.e0151460.

Worthington, A.C., 2006. Predicting financial literacy in Australia.