Glossary

A

Accrued Benefits

These are the total amounts saved in your superannuation fund so far, it would be expected that every year your accrued benefits would increase as contributions and net income are added.

Accumulation Phase

While you continue to contribute into your superannuation fund towards retirement, you funds are held in what is known as accumulation phase. Then once you retire and are ready to draw a pension stream your benefits change from being in accumulation phase to being in pension phase. The benefits do not actually physically move anywhere; they just have a different status and taxation treatment within the fund.

Allocated Pension

This is a popular type of pension stream that can be drawn at regular intervals (but at least annually) from your self managed superannuation fund once you have satisfied a condition of release, usually retirement after age 55 or upon reaching age 65. Amounts allowed to be withdrawn each year must be between minimum and maximum amounts that are calculated (annually) based on your age and of course the amount of funds that you have in the fund. There is no guarantee with this form of pension that it will last for your entire life time. Upon your death, the balance may be paid to your spouse or other designated financial dependant, either by way of reversionary pension, a new pension stream or a lump sum.

Asset Class

Different assets fall into different categories or classes, with the major ones being cash, shares, fixed interest and property. These can be broken down further into sub categories such as listed or unlisted, Australian or international. As diversity is an important consideration when planning the investment strategy for your fund, trustees should give thought to each of these classes in order to arrive at the best investment portfolio for your current stage of life and eventual retirement needs.

Australian Prudential Regulation Authority (APRA)

APRA is a Federal Government body, established in 1998 to oversee and regulate the financial services industry, including banks, building societies, life insurance, credit unions and most members of the superannuation industry.
It gave over the regulation of self managed superannuation funds to the Australian Taxation Office in 1999.

Australian Securities and Investment Commission (ASIC)

Another Federal Government body, this one mainly deals with Corporation's Law and the Financial Services Reform Act. If your superannuation fund has a corporate trustee, we liaise with ASIC to ensure that the company is formed and maintained to ASIC requirements.

Australian Taxation Office

This Federal Government body probably needs no introduction; however it is important to note that self managed superannuation funds are regulated by the ATO. Complying superannuation funds are entitled to concessional tax rates of 15%, unless the ATO advises the trustees that the fund has become non-complying. If non-complying, the fund will be taxed at 47%. It is crucial therefore, that trustees ensure that their fund is complying at all times. As our current clients know, Premier offers various services to assist in your responsibilities and obligations, but if you are not a client please contact us for an obligation free quotation.

B

Beneficiary

Someone for whom assets are being held. Members and their dependents are beneficiaries of a superannuation fund.

Benefits

The amount of accrued entitlements in a superannuation fund that is held for the member.

C

Capital Gains Tax

The difference between the cost price of purchasing an asset and the sale price of disposing of the same asset will usually result in either a capital loss or capital gain. Wherever the difference is a gain, capital gains tax is payable in the income year the asset was disposed of. Self managed superannuation funds pay capital gains tax at a rate of 15% unless the asset has been held for more than 12 months. Where this is the case a Capital Gains discount is allowed by the ATO reducing the tax rate to 10%. It is crucial therefore that trustees retain all documentation pertaining to buying and selling of assets. Premier offers a service that includes the handling of this entire process for you, please feel free to call us or alternatively go to our services and packages page for more information.

Co-Contribution

If you have personal assessable income below the $60,342 threshold for the 2009 financial year you may be able to qualify for the government co-contribution scheme. You can receive the government co-contribution if you make personal (non-concessional) contributions up to $1,000 before 30 June to a complying superannuation fund and you are no more than 70 years of age as at the end of the financial year. Note that 10% of more of your total income must be derived as active income ie. income from running a business, eligible employment or a combination of both to qualify.

Commencing Pensions

If you are planning to commence a pension at the beginning of the 2009-10 financial year, pension minutes between the trustee and member should be documented and signed prior to 1 July 2009.

Complying Superannuation Funds

When a new self managed superannuation fund is established it must choose to be regulated under the Superannuation Industry (Supervision) Act 1993 (SIS) in order to become a complying fund. Only a complying fund is entitled to concessional tax rates.

Concessional Contributions

If you are salary sacrificing, self employed, or running your own business you may consider making before tax contributions of up to $50,000 a year into your superannuation fund prior to 30 June or if over age 50 you can take advantage of the transitional before-tax contribution limit of up to $100,000 per annum.

Contribution

A contribution is money paid into the superannuation fund either by a member, the employer of the member or some other person or entity on behalf of the member. All contributions are preserved until a condition of release is satisfied by the member, usually retirement after age 55 or reaching age 65.

Corporate Trustee

A self managed fund may either have individual trustees, or alternatively choose to use a company. When a corporate trustee is chosen, all directors of that company must be members of the fund. Please see our FAQ page for more information on corporate trustees.

D

Dependant

A dependant for superannuation purposes includes:

The deceased member's spouse, including de facto partner; and The deceased member's children, whether from former relationships, adoption or step-children.

From July 1 2004, the law was amended to include people with interdependent relationships. An interdependent relationship between two people means:

They live together;
They share a close personal relationship;
One (or each) provides the other with financial support; and
One (or each) provides the other with domestic support and personal care.

This change in definition means that now, for example, live-in housekeepers for the infirm or elderly, people caring for physically, intellectually and psychiatrically disable people, and also same sex couples should be able to qualify as dependants for superannuation purposes. However, they will need to be able to prove that they satisfy ALL the above conditions to show that the relationship is not just an employer/employee one.

Dividend

This is a common form of income earned in a self managed superannuation fund. Many superannuation funds buy shares in companies with the expectation of receiving dividends at regular intervals.

The beauty of this kind of income is that most (though not all) dividends have already had the tax paid for by the company that issued the dividend. This kind of dividend is called a franked dividend and tax has been paid at the current company tax rate of 30%.

As complying superannuation funds only pay a tax rate of 15% this means that the remaining 15% can be used towards paying tax on other income, contributions into the fund for example. Where there is no tax payable, then a refund of remaining franking credits is paid back to the fund by the tax office.

Unfranked dividends have no tax paid on them by the company and the superannuation fund must therefore pay tax on this income at 15%.

Diversification

One of the considerations trustees must make when formulating their investment strategy is diversification. This basically means that the trustees should not put all their eggs in one basket (one asset class) when investing. Should the particular asset class suffer a downturn, the fund will loose more than if the fund is spread over several asset classes.

E

Eligible Termination Payment (ETP)

For superannuation purposes, ETP's are used to roll money out of one fund and into another. ETP's are also required when making payments to its members. ETP's are an important document as they specify the various components of the member's money and how it is to be treated for tax purposes. It is essential that trustees keep these documents secure for at least 5 years.

Employee Contributions

These are superannuation amounts paid into the fund by the member out of his after- tax money, that is, from his pay packet. Because the contribution is coming from the member after he has paid tax, then the contribution is not taxed again when it goes into the fund.

These contributions are kept as a distinct and separate component within the fund and are generally known as undeducted contributions. As these amounts do not count towards Reasonable Benefit Limits (RBL), it is vital that the records of these amounts are kept accurately and securely. These amounts are also shown separately on ETP's (see above definition) so the information is not lost when rolling money between funds.

Even though these contributions are made by the member, they are preserved (since July 1 1999) and once they go into the fund, they may not be drawn out again until a condition of release is met, generally retirement after age 55, or upon reaching age 65.

F

Franking credits

When income is paid by way of a franked dividend, the franking credits represent the amount of tax the issuing company has paid on that income. This means that in effect the amount received is only 70% of the actual amount earned.

For example a fund receives a dividend payment of $70 with franking credits of $30. The actual income earned is $100. Tax payable by the (complying) fund on $100 income ($70 + $30) is $15. This leaves $15 of excess tax credits that can either be used to pay tax on other income, or if no other tax is payable, it will be refunded.

G

H

I

Imputation Credits

See franking credits (above).

Investment Choice

Self managed superannuation funds are the perfect choice for people who want to have control over their investments in their fund. Investment choice
means trustees have complete power to invest the fund's money however they choose provided it is done in accordance with the investment strategy and also within the rules and regulations in the SIS Act 1993.

J

K

L

Low Rate Threshold

Once a member reaches the age of 55 he or she is entitled to receive the 'low rate threshold' amount of their tax assessable amount of a lump sum withdrawal at a nil tax rate. This is a once only allowance and is indexed annually. For the 2005 year this amount is $123,808. This means, for example, that if you are over 55, and you have a lump sum payment with an assessable amount of $150,000, you would end up paying tax only on $26,192 ($150,000 - $123,808).

Lump Sum

A payment to a member (who has satisfied a condition of release) as one single payment rather than as a pension stream. These payments do not qualify for the pension rebate and are subject to tax depending on various components. When lump sum payments are made to a member they are accompanied by an ETP (see above) that will give details of these components, as each could be subject to different tax rates.

Lump Sum Tax

Depending on the components of the ETP in question, tax will be payable at differing rates. For example, excessive components are taxed at 47%, pre 1 July 1983 components only have 5% of the value assessable for tax at the member's marginal rate, and undeducted contributions (your personal contributions) are not subject to tax. There are eight potential components of an ETP, so depending on how any particular lump sum payment is made up, is how the lump sum tax is calculated.

M

Market Value

Assets held in a self managed superannuation fund must be held at current market value, so the true value of the fund can be easily calculated on any given day.

This is easy to do in relation to shares, units in trusts and managed funds. For property it is advisable to have a valuation done at the end of each income year, but every three years at a minimum. This is important particularly in current times, as declining property values may mean the property in your fund may be over stated.

Member

A person is considered a member of a superannuation fund in which he/she holds superannuation benefits. Specifically with self managed superannuation, all members of such funds MUST also be trustees of that fund. This is required under superannuation law and ensures that all members have control over the decisions of the fund.

N

Non-complying Superannuation Fund

When a self managed superannuation fund applies to be regulated within 60 days of establishment, a fund becomes a complying superannuation fund. Once complying, the fund is entitled to receive concessional tax rates as an incentive to save for retirement.

In order to continue to attract the concessional rates, the trustees are responsible for ensuring that the fund is maintained within the rules and regulations set down in the Superannuation Industry (Supervision) Act 1993 (SIS).

If the trustees do not manage their fund in accordance with SIS, then chances are high that the ATO will penalise the fund, and in severe cases, it will deem the fund to be non-complying. This results in the removal of the concessionary tax status, and means the tax rate for the fund becomes 47%. Other penalties can also apply if trustees do not abide by the rules, so it is imperative that trustees have a complying fund.

Non-Concessional Contributions

If you have surplus funds outside of superannuation you may consider making after tax contributions to your superannuation fund prior to 30 June. If you are under age 65 you can make non-concessional contributions to your fund up to $150,000 per year or bring forward the following two financial periods and make a one of $450,000 contribution ensuring that no further after tax contributions are made for the next two financial years. If you are limited by these caps you may consider making a $150,000 contribution before 30 June and further $450,000 contribution early July 2009. If you are aged between 65 and 74 years of age you are limited to the $150,000 per annum non-concessional contribution only and note that you must meet the work test of being gainfully employed for at least 40 hours within 30 consecutive days in the financial year to make a contribution.

O

P

PAYG Withholding Obligations

For members who received pension payments whilst under 60 years of age in the 2009 financial year, your fund will have an obligation to withhold any pension tax liability and make payment to the ATO with the June Quarter Activity Statement. Any tax withheld by the fund will count towards the pension member's 2009 annual pension

Pension

This is a regular periodic payment to a member of a fund who has met a condition of release, usually retirement after reaching age 55, or upon reaching age 65. Self managed superannuation funds can offer various types of pensions depending on what the governing rules (Trust Deed) of the fund allow.

Pension Payment Obligations

Trustees should ensure that any members in pension phase throughout the 2009 financial year have infact met there pension payment obligations for the financial year. Clients with Account Based Pensions must meet their minimum obligation whilst allocated and transition to retirement pensions must fall between their minimum and maximum pension range. Failure to do so is a breach of the SIS Act and may see your fund being non compliant with the Act.

Preservation

Since July 1999, all money (with some exceptions) held in superannuation funds is preserved. Preservation means that the benefits must stay in your superannuation fund until a condition of release is met. This is extremely important to ensure the fund stays a complying fund and is therefore entitled to the 15% tax rate.

Access to funds by a member before a condition of release is met, can result in penalties such as fines, loss of complying status, and in severe cases, even jail for the trustees.

Q

R

Reasonable Benefit Limit (RBL)

Each person has a limit to how much they can receive in their lifetime by way of concessionally taxed superannuation benefits. RBL limits are indexed each year and the current limits are:

Lump Sum RBL - $ 619,223; and
Pension RBL - $1,238,440

The pension RBL is much higher than the Lump Sum RBL and is to encourage retirees to take pension streams rather than cash. Pensions that do not allow for lump sum withdrawals qualify for the Pension RBL. As allocated pensions do allow lump sum withdrawals at any time, they do not qualify and are therefore subject to the Lump Sum RBL amount.

If you are looking to retire in the next year or so and your benefits are close to the Lump Sum RBL, it is important that you start considering your retirement options and also seek advice on the available strategies that are open to you. Please contact us if you would like more advice on this complex area of superannuation.

Regulated Superannuation Fund

Only a self managed superannuation fund that has elected to comply with Superannuation Industry (Supervision) Act 1993 (SIS) legislation, and has either a corporate trustee or its purpose is to provide age pensions to its members (individual trustees), is a regulated Superannuation Fund. Only a regulated superannuation fund is entitled to receive concessional taxation rights.

Retirement

Currently, anyone who retires from employment after age 55 and never intends to be employed or self employed again for gain or reward*, may commence an income stream from their self managed superannuation fund (as opposed to waiting until age 65 for a Centrelink pension). However, this retirement age will change depending on when the person is born; gradually increasing to 60 years, as shown in this preservation table below:

If the person was born: then he/she can retire at age:

Before 1 July 1960 55
1 July 1960 - 30 June 1961 56
1 July 1961 - 30 June 1962 57
1 July 1962 - 30 June 1963 58
1 July 1963 - 30 June 1964 59
After 30 June 1964 60

*for more than 10 hours per week in any business, trade, profession, vocation, calling, occupation or employment.

Rollover

Any amounts transferred into a superannuation fund by way of benefits from another superannuation fund or an Eligible Termination Payment (ETP) is called a rollover.

S

Salary Sacrificed Superannuation

This is an arrangement between an employer and employee that an agreed amount of the employee's income (for example some or all of their next pay rise or bonus) can be deducted from their pay before it is taxed. The employee pays tax on the remaining salary and does not pay tax on the amount sacrificed. Fringe Benefits Tax (FBT) does not apply as superannuation is specifically exempt from FBT.

The agreed amount goes into your superannuation fund as an employer contribution and is taxed at 15%. The result is that more money goes into the fund than if the contribution went in out of your after tax dollars.

Be aware that not all employers provide the opportunity for salary sacrificing arrangements, nor do they all allow you to direct them as to which super fund the money goes into. Choice of superannuation rules come into force from July 1 2005, however not all employers will be covered by this new regime and you may still not be given a choice as to where your superannuation is to go.

Self Managed Superannuation Fund

A Self Managed Superannuation Fund (SMSF) is one where all the investments of the fund, management, administration and compliance responsibilities are looked after by the members themselves in their capacity as trustee.

A SMSF can only have 4 or less members, all members must be also be trustees (or directors of a trustee company), and to receive taxation concessions, it must be a complying fund at all times. Trustees are allowed to appoint external administrators and advisors to assist in the running of their fund. Should you require any assistance in the running of your fund, please do not hesitate to contact Premier, we offer tailored service packages according to your needs.

Sole Purpose Test

For a superannuation fund to qualify as a regulated superannuation fund and thereby be granted concessional tax status, the fund must comply with the Sole Purpose Test.

The Sole Purpose Test requires that the fund be maintained in order to provide benefits upon retirement or reaching age 65. Broadly, this means that money in the fund is ONLY to be used for retirement. If you need further advice on this vital area, please do not hesitate to contact us at Premier.

Superannuation Guarantee

Employers are required to contribute a minimum percentage of earnings to superannuation on behalf of all qualifying employees. Currently the minimum requirement is 9% of the gross wage. If employers fail to contribute in accordance with the Superannuation Guarantee Act (1992), then they will incur a non-deductible penalty ,and may also be charged interest on the outstanding amount.

Superannuation Surcharge

The superannuation surcharge applies to people whose assessable income and superannuation exceeds certain limits. For the 2004/05 year the lower limit is $99,710 and the upper limit is $121,075.

For people whose adjusted taxable income is higher than the lower limit, then surcharge will apply. Between the two limits the surcharge is increased until the maximum percentage is payable. The maximum surcharge percentage payable for the 2004/05 year is 12.5% (down from 14.5% in 2003/04 and 15% in 2002/03).

T

Trust Deed

This legal document sets out the rules for the establishment and ongoing operations of the fund. It should have provisions in it that cover such things as membership rules, contributions, trustee obligations, pensions and record keeping.

It is imperative that the Trust Deed is reviewed regularly and kept up-to-date. Superannuation law changes constantly and some of the changes over the past 5 years have been major. The problem is that if the law allows something and the deed doesn't, then the trustees are bound by the deed, and on the other hand if the deed allows something and the law doesn't then the trustees are bound by the law.

For example, the changes in the law regarding contributions are much more relaxed now for people under age 65. However, if the deed stipulates contributions can only be made under the old rules, then the trustees are bound by the Trust Deed, and may still need to satisfy the working tests in order to make contributions.

Trustee

A person/company who has been appointed under the Trust Deed to operate the fund on behalf of the fund's members. A trustee for a self managed superannuation fund can either be an individual trustee or a corporate trustee. In the case of a corporate trustee, all directors of the company must be members of the fund. Where there is only one member of a self managed fund, there must still be either two individual trustees or a sole director company as trustee.

The Trustee has to ensure the fund runs within legislative requirements and also within the governing rules of the trust deed. Trustees must always act in good faith and in the best interests of the members. For example, trustees must make investment decisions in accordance with a formulated investment strategy and should monitor the investments to ensure they are performing as expected.

U

Undeducted Contributions

This is the name given to contributions made by members to their fund that have already had tax paid on them. For example, when you receive your salary, you may wish to make extra payments to build up your superannuation nest egg. As your salary has already been taxed, the contribution you make will not be taxed again when it goes into your fund. Government co-contributions will also go into your fund as an undeducted contribution.

Undeducted contributions are not counted towards your RBL or superannuation surcharge limits either. Furthermore, when you finally commence a pension income stream upon retirement, the portion of the pension that is made up of undeducted contributions will not form part of your assessable income.

Unfranked dividends.

This is income paid to shareholders by a company that has not yet paid tax on that income. The amount you receive is 100% taxable and has no franking credits attached. In a superannuation fund, this income would be taxed at 15%.

V

W

X

Y

Z

Choice of Super Fund:

From July 1 2005 it is possible that you will be entitled to direct your employer as to which superannuation fund your 9% superannuation guarantee contributions are to go in to.

Generally speaking, you will be entitled to this provided your employer does not make superannuation guarantee payments under the following:

* an Australian Workplace agreement (AWA) or certified agreement under the Workplace Relations Act 1996 or the Industrial Relations Act 1988; or
* a state industrial award or state industrial agreement.

If you are not sure what award or industrial agreement, if any, you are covered by, your employer should be able to advise you, but if not, there is a website at http://www.wagenet.gov.au that you can check. Another website is http://www.industrialrelations.gov.au

It is important that you receive advice regarding both the superannuation fund you are currently with and also the fund you are thinking of moving your funds to. At a minimum, you should seek information on any charges or costs that may be imposed on leaving one fund and starting with another. Another important consideration is whether or not you will be giving up any benefits (even if only temporarily), for example death cover, when you leave your current fund.

If you are currently a member of a defined benefit fund, there are some extra considerations that your employer will take into account when deciding whether or not it has to act on your choice.

Your employer will have received a package from the ATO advising them of their obligations, and it also includes a comprehensive guide to assist them in this area.

The new legislation only requires your employer to transfer the statutory 9% superannuation guarantee contributions, this means you may have to negotiate with your employer in relation to other contributions, for example salary sacrifice or voluntary contributions.

Your employer is not obliged to act on any further choice you may make if it is made within 12 months of the initial choice.

Further inforamtion on chice can be found at http://www.superchoice.gov.au