Understanding Superannuation

 Superannuation is an investment vehicle designed to assist Australians save for retirement. The federal government encourages saving through superannuation by providing generous tax incentives for contributions, during investment, and in retirement.

How much is enough to retire

According to the March 2013 Westpac ASFA retirement standard, a couple needs at least $32,603 per annum (p.a) in order to maintain a ‘modest’ retirement while a single person needs at least $22,641p.a.  By contrast, for a couple to maintain a ‘comfortable’ retirement, they need at least $56,317p.a  while a single person needs at least $41,169p.a. It’s worth noting too, that these figures do not include the cost of renting a home or paying a mortgage.  These expenses would be on top of this amount.

A modest retirement essentially means that a retiree can expect to live a little more comfortably than someone on the age pension alone, though they will still only be able to afford the most basic of leisure and recreational activities. A comfortable retirement, on the other hand, means that a retiree can enjoy a broader range of activities and will generally have a good standard of living, including the ability to travel, buy goods and services, and maintain private health insurance.  

Currently the maximum age pension for couples is $33,982p.a (or $1,307 per fortnight). The maximum age pension for singles is $22,542p.a. (or $867.00 per fortnight). As a result, those retirees depending on the age pension alone will have a less-than- modest retirement in terms of spending power.

According to the association of superannuation funds of Australia (ASFA), the average Australian male currently retires with $155,000 while the average Australian woman retires with $73,000.

Source: ASFA retirement standard, March quarter 2013.

The next tables provides an indication of just how much superannuation we would need in order to provide different levels of retirement income to life expectancy.



Income in retirement

Required retirement savings (Approx)







































Understanding Self Managed Super Funds

Self-Managed Superannuation Funds (SMSFs) are a highly personalised and flexible superannuation savings vehicle. Members of the fund are also the trustees, and are therefore able to determine the investment strategy and select specific investments of the fund. This provides an investor with a high degree of control over the investment portfolio, including member-directed investments.

What is an SMSF?

 An SMSF, (sometimes referred to as a DIY fund) is a superannuation fund with fewer than five members, all of whom are usually family or business related. 

All trustees must be members and vice versa up to a maximum of 4 with the exception of a single member fund. A single member fund must have a second trustee (all funds must have a minimum of 2 trustees), or a corporation may operate as the trustee.

Only resident funds will be complying funds for the purposes of the Income Tax Assessment Act (“ITAA”) and Superannuation industry (Supervision) (“SIS”) legislation. If a fund has elected to become regulated under SIS (a regulated fund) and the fund is a resident fund, then the fund will be classified as a complying fund, and be entitled to tax concessions.

Trustee responsibilities

Initially the fund must be established under a comprehensive and well – drafted trust deed. The fund must also have, and follow, a detailed investment strategy, which is discussed below.

In addition, trustees of SMSFs are required to:

  • Keep accurate and accessible accounting records that explain the transactions and financial position of the fund for a minimum of 5 years;
  • Prepare an annual operating statement and an annual statement of the fund’s financial position and keep these records for a minimum of 5 years;
  • Prepare minutes of trustee meetings (where matters affecting the fund were discussed) and prepare records of all changes of trustees and members written consent to be appointed as trustees. Each of these documents must be kept for a minimum of 10 years;
  • Keep copies of all annual returns lodged for a minimum of 5 years;
  • Have the fund audited annually by an independent auditor;
  • Keep copies of all reports given to members for a minimum of 10 years.

Trustees cannot be paid with respect to their obligations or responsibilities in running the fund.

Poor and inadequate record keeping has been identified as a major problem for SMSFs. Trustees need to give this area detailed attention, as this can pose a compliance risk for funds. The Australian Taxation Office (ATO) is responsible for the regulation of SMSFs and has the power to remove the tax concessions afforded to superannuation funds, among other penalties, where a fund is found to breach the appropriate legislation and reporting requirements.

In cases where members no longer wish to undertake the trustee responsibilities, they can instead choose to appoint an approved trustee. This is an independent trustee, approved by the Australian Prudential Regulation Authority (APRA) under part 2 of SIS, who meets the relevant solvency, capital adequacy and operational capacity requirements. The fund will become a small APRA fund and be regulated by APRA instead of the ATO.

Investment Strategy


It is essential that the trustee establishes and documents a sound investment strategy that takes into account:

  • The fund’s liquidity requirements, and
  • The goals and objectives of the members of the fund, and
  • The members’ risk tolerance and circumstances, and
  • Members’ ages and investment time frame, and
  • Investment powers of the trustee (as detailed in the trust deed).

 Trustees of SMSFs can be penalised if they fail to put an investment strategy in place. A member who suffers loss as a result of a breach of this requirement can sue the trustees to recover the loss. To ensure the trustee is protected from legal action by a member suffering any loss as a   result of this breach, the underlying investments of the fund need to be considered in light of the investment strategy.

The investment/assets also need to be appropriate to meet the sole purpose test.

 Sole purpose test

The sole purpose test requires that the fund be maintained for the sole purpose of providing its members with retirement benefits or providing its members’ beneficiaries or dependants with benefits in the event that the member dies before retirement. Certain other “ancillary” purposes are permitted within the sole purpose test, including payment of disability benefits for a member’s retirement due to ill health or in other circumstances approved by APRA. It is absolutely imperative that SMSF monies are kept separate from monies for other purposes (such as living expenses). This will include keeping an entirely separate set of bank accounts, investments and accounts.

Contravention of the sole purpose test may arise where there is no retirement purpose behind the investment decision, or where funds are used for non-investment purposes. It is not the type of investment which is relevant for the sole purpose test but rather it is the intention for which the investment is made and maintained that determines its appropriateness.

An investment which is undertaken as part of a properly considered and formulated strategy, and which complies with the arm’s length rule and other SIS investment restrictions, is unlikely to cause the fund to fail the sole purpose test unless exceptional circumstances exist. Failure to comply with the sole purpose test may also result in the fund becoming a non-complying superannuation fund for taxation and superannuation guarantee purposes. Employer contributions to a non-complying fund do not satisfy the employer’s obligations under the superannuation guarantee scheme.

Given the significant penalties for trustees of SMSF for breaches of legislation, it is essential that the trustee has the structure and compliance of the SMSF reviewed on a regular basis by a qualified professional. Specialised SMSF administration services may also be of assistance.

Other obligations

Trustees must also:

  • Conduct an investment review on a regular basis
  • Consider insurance for fund members as part of their strategy
  • Value the fund’s assets at market value, and
  • Keep assets/money of the fund separate from personal assets/money

Legislation is currently passing through parliament that requires acquisition and disposals of assets between related parties and SMSF must be conducted through an underlying market, if one exists. If it doesn’t, the asset value must be supported by a qualified independent valuer.

Accessing your Super

While superannuation is extremely important in your overall retirement planning, you must remember government legislation preserves superannuation and restrict your excess to superannuation (including non-concessional contributions) until you meet one of the conditions of release. These conditions include:

  • Age 65
  • Retirement from the workforce after reaching preservation age
  • Transition to retirement after reaching preservative age
  • Ceasing an employment arrangement after age 60
  • Death
  • Total and permanent disablement
  • Terminal medical condition
  • Permanent departure from Australia for eligible temporary residents
  • Severe financial hardship
  • Compassionate grounds.

Preservation is designed to ensure that superannuation benefits are used only for retirement.

Preservation age

Date of birth

Preservation age

Before 1 July 1960

55 years

1 July 1960 – 30 June 1961

56 years

1 July 1961 – 30 June 1962

57 years

1 July 1962 – 30 June 1963

58 years

1 July 1963 – 30 June 1964

59 years

After 30 June 1964

60 years

Accessing your superannuation benefits

Once you have met a condition of release, you may retain your funds in superannuation, withdraw them from the superannuation environment, or commence a retirement income stream. The tax and social security implications of these options differ significantly.


Advantages of superannuation

Superannuation has many tax advantages making it a preferred investment strategy.

  • Superannuation fund earnings are taxed at a maximum rate of 15% (10% for crystallised capital gains on assets held for at least 12 months). Additionally income tax of 15% may be offset by imputation credits derived from Australian equity-based investments within the fund. You can also reduce the tax payable by paying insurance premiums from superannuation money.
  • You may be able to claim a tax deduction for contributions, a tax offset or co-contribution.
  • There are no personal income tax implications from the returns earned by superannuation funds as no income is distributed.
  • By rolling over superannuation funds rather than cashing out, the payment of lump sum tax can be deferred and possibly eliminated.
  • If you are age 60 or over, you can withdraw from superannuation, either as income or lump sum tax free.
  • If you are under age 60, you can receive income from a superannuation retirement income stream and receive concessional tax treatment possibly including a tax-free amount and a 15% tax offset on the taxable income.
  • Superannuation in the accumulation phase does not count under the Centrelink assets test or income test for persons under age pension age.


Taking your super as lump sum

The tax-free component of a superannuation benefit is generally made up of your non-concessional contributions. The taxable component of a superannuation benefit is the total value of the superannuation benefit less the tax-free component. The taxable component is generally made up of your concessional contributions as well as earnings.

When you withdraw your funds, the following taxation implications will apply for 2016/17


Below preservation age

Preservation age too age 59

Age 60 and over

Tax free component

Tax free

Tax free

Tax free

Taxable component

20% Plus Medicare

First $205,000 Tax free

>$205,000 17% including Medicare

Tax free

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About RSA

At Retirement Services Australia, we give our customers all the tools and guidance they need to create an effective retirement planning solution, and we help you every step of the way. We employ retirement planning specialists who offer to help create financial strategies that will suit you for life. We work with you to solve the matters we have touched on in this article. Our traditional clients are delegators who want to know what, why and when things need to happen but prefer to engage experts to do this work on their behalf.