Prince - Superannuation and taxation: a practical guide to saving money on your super or SMSF

Jimmy B. Prince

First published 2011 by Wrightbooks

an imprint of John Wiley & Sons Australia, Ltd

42 McDougall Street, Milton Qld 4064

Office also in Melbourne

Typeset in Adobe Garamond 12.5/15.5pt

Jimmy B. Prince 2011

The moral rights of the author have been asserted

National Library of Australia Cataloguing-in-Publication entry

Author: Prince, Jimmy B.

Title: Superannuation and taxation: a practical guide to saving tax on your super or SMSF / Jimmy B. Prince.

ISBN: 9780730376750 (pbk.)

Notes: Includes index.

Subjects: Pensions Taxation Australia.

Pension trusts Taxation Australia.

Saving and investment Australia.

Dewey Number: 331.2520994

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above.

Cover image ($100 note) iStockphoto.com/robynmac

Tables 8.1 and 8.2 Australian Taxation Office. The ATO material included in this publication was current at the time of publishing. Readers should refer to the ATO website for up-to-date ATO information. All extracts taken from Australian Acts of Law Commonwealth of Australia 2011. All legislation herein is reproduced by permission but does not purport to be the official or authorised version. It is subject to Commonwealth of Australia copyright. The Copyright Act 1968 permits certain reproduction and publication of Commonwealth legislation and judgements. In particular, section 182A of the Act enables a complete copy to be made by or on behalf of a particular person. For reproduction or publication beyond that permitted by the Act, permission should be sought in writing. Requests should be addressed to Commonwealth Copyright Administration, Attorney-Generals Department, Robert Garran Offices, National Circuit, Bardon, ACT 2600, or posted at http://www.ag.gov.au/cca.

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Disclaimer

The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based upon the information in this publication.

About the author

Jim Prince is a fellow of CPA Australia and a tax specialist. He is a former lecturer and tutor in income tax law at LaTrobe University and teaches a number of wealth- creation courses for the Centre for Adult Education in Melbourne. He has authored several investment books, including Tax for Australians for Dummies, Shares & Taxation and Property & Taxation, and has written articles for Your Mortgage magazine and . In 2000 Jim was nominated for an Adult Learners Week 2000 outstanding tutor award.

In his earlier years Jim worked for the Australian Taxation Office and also consulted to CPA Australia TechniCALL.

Preface

When compulsory superannuation was introduced in Australia in the 1990s, the federal government was sending a clear message to everyone that they had to fund their own retirement. To encourage you to participate in super, the government has introduced a number of tax concessions that may interest you. One such benefit comes when you reach 60 years of age and retire: you pay no tax then on all pensions and lump sum withdrawals, and they are both excluded from your assessable income. The amount you accumulate in your superannuation fund will ultimately determine the quality of your lifestyle in your old age. So its prudent that you make a contribution each financial year while youre still gainfully employed.

Relying on the old age pension to subsidise your lifestyle in retirement is no longer a viable option, unless you can convince Centrelink that youre destitute. To qualify for the old age pension you need to satisfy a strict income test and asset test. These tests check whether the total income you derive each financial year and the amount of assets you currently own fall within acceptable statutory limits. To make reliance on the age pension more difficult, the federal government plans to progressively increase the age for eligibility for the old age pension to 67 years by 2023.

The Income Tax Assessment Act 1997 permits individuals to set up and manage their own superannuation fund. Although you can gain significant tax benefits from managing your own super fund, like all good things in life it comes at a cost. There are strict rules and regulations you need to comply with, and there are stiff financial and criminal penalties in place if you contravene them. You also need to determine at the outset whether you can outperform the professionally managed funds to make your own super fund a viable and worthwhile exercise. So its important that you understand your duties and responsibilities and know that youre capable of investing your money wisely.

The purpose of writing this book is to explain how the Australian superannuation system works, and more particularly the various statutory provisions you need to comply with if you want to set up and run a self managed superannuation fund (SMSF). The book explains in simple terms the core tax principles relating to superannuation funds, and offers numerous tax tips, points out potential tax traps and includes practical case studies to help you to save paying tax. Youll also find a comprehensive list of legal citations to all the major tax cases relating to superannuation transactions. Much emphasis is placed on the following points:

how the Australian superannuation system works and the benefits you can gain

how much you need to accumulate to fund your own retirement

how to set up an SMSF

the rules and regulations you need to comply with if you want to manage your own super fund

the rules associated with making a superannuation contribution

how superannuation funds are taxed

how to invest your money wisely

the rules you need to satisfy to access your preserved benefits

how superannuation pensions and death benefits are taxed.

Throughout the book youll have at your fingertips instant, at a glance, information about core tax principles, plus references to tax publications, tax rulings and tax determinations that tax professionals use to solve specific problems. You can quickly find these Tax Office publications and rulings on the Australian Taxation Office website . You can refer to this practical guide at any time to find a particular publication or ruling to help you save tax on your super or SMSF.

Chapter 1: The superannuation scheme: removing the mystique

Superannuation is an investment vehicle that you can use to help you save for your retirement. The federal government has introduced a number of tax incentives to encourage you to do so. The sole purpose of having a superannuation fund must be to provide benefits to members upon retirement, and benefits to dependants in the event of a members death. The amount you accumulate in your super fund will ultimately determine the standard of living you can expect to have in your old age. So its best that you understand how the system works. In this chapter, I provide an overview of the Australian superannuation scheme and the various tax benefits you can gain.