Superannuation in Australia refers to the arrangements which people make in Australia to have funds available for them when they retirement. In Australia it is government-supported and encouraged and minimum provisions are compulsory for employees.
One can withdraw funds out of a superannuation fund when the person meets one of the conditions of release contained in Schedule 1 of the Superannuation Industry Regulations 1994.
Since its introduction, employers have been required to make compulsory contributions to superannuation on behalf of most of their employees. This contribution was originally set at 3% of the employees’ income, and has been gradually increased by the Australian government.
The compulsory superannuation combined with the resilient economic growth has turned Australia into a shareholder society, where most workers are now indirect investors in the stock market. Consequently, a lively personal investment marketplace has developed, and many Australians take an interest in investment topics.
Employers on the other hand are required by law to pay a superannuation guarantee contribution amounts to a designated superannuation fund for their employees at 9.5% of their wages and salaries. Employers are not required to make employer contributions for employees earning less than $450 per month not working more than 30 hours per week, or for employees aged under 18 or over 70. If however they are earning $450 per month before tax and working more than 30 hours per week full-time, part-time or casual, the employer is required to pay superannuation regardless of being under 18. They are also required to complete one per tax year. Employer contributions are required to be paid to a fund at least every three months. The superannuation contributions are invested over the period of the employees’ working life and the sum of compulsory and voluntary contributions, plus earnings, less taxes and fees is paid to the person when they choose to retire. The sum most people receive is predominantly made up of compulsory employer contributions.
There are special rules which apply in relation to employers providing defined benefit arrangements. Also there are less common traditional employer funds where benefits are determined by a formula usually based on final average salary and length of service.
The Self-managed superannuation funds work as trusts with trustees being responsible for the prudential operation of their funds and in formulating and implementing an investment strategy. Some specific duties and obligations are codified in the Superannuation Industry (Supervision) Act 1993. Trustees are liable under law for breaches of obligations. Superannuation trustees have, inter alia, an obligation to ensure that superannuation monies are invested prudently with consideration given to diversification and liquidity.
Funds are not subject to any asset requirements or investment exposure flaws. There are no minimum rate of return requirements. However, there are some minor restrictions on borrowing and the use of derivatives and investments in the shares and property of employer sponsors of funds. Therefore, superannuation funds invest in a wide variety of assets with a mix of duration and risk/return characteristics.
Types of superannuation funds
There are seven main types of superannuation funds:
- Industry Funds — they are multiemployer funds run by employer associations and/or unions. They are run solely for the benefit of members as there are no shareholders.
- Wholesale Master Trusts — they are multiemployer funds run by financial institutions for groups of employees. These are also classified as Retail funds by APRA.
- Retail Master Trusts/Wrap platforms — are funds run by financial institutions for individuals.
- Employer Stand-alone Funds — are funds established by employers for their employees. Each fund has its own trust structure that is not necessarily not shared by other employers.
- Self-Managed Superannuation Funds (SMSFs or Do-It-Yourself Funds) — are funds established for a small number of individuals (limited to 4) and regulated by the Australian Taxation Office. Generally the Trustees of the fund are the fund members (where there is a Corporate Trustee, the members are the directors of that company).
- Small APRA Funds (SAFs) — this are funds established for a small number of individuals (fewer than 5) but unlike SMSFs the Trustee is an Approved Trustee, not the member/s, and the funds are regulated by APRA. This structure is often used for members who want control of their superannuation investments but are unable or unwilling to meet the requirements of Trusteeship of an SMSF.
- Public Sector Employees Funds— are funds established by governments for their employees.
Read more: Taxation of Superannuation in Australia