Tax Breaks A Factor in Australia’s Burgeoning Private Pension Fund Sector

Australia has had a compulsory superannuation system since the late 80’s. Employers are required to contribute an amount equivalent to 9% of gross pay for each employee earning over $450 a month. Most people can choose (nominate) which fund the contributions are paid into.

The contributions are tax deductible to the employer and investment income of the funds is taxed at the lo rate of 15%. At the moment, pensions and retirement benefits paid out to retirees 60 years old or more are tax free.

Self employed Australians have had their own private funds for around 50 years. However, since compulsory pension arrangements were introduced, many more self employed, professional and executive taxpayers have established their own self-managed superannuation fund (SMSF). More recently, even employees with relatively modest retirement nest eggs have moved into SMSFs.

A report recently released by the Australian Taxation Office reveals that “The number of self managed super funds (SMSF) has increased by 27 per cent to 509,000 in five years and have total assets of $506 billion” and that “The SMSF sector accounts for 99 per cent of the total number of superannuation funds and 31 per cent of the $1.6 trillion total super assets in Australia”.

Of course, it is not only the tax breaks that are attractive. A SMSF can be formed with between 1 and 4 members, so they are ideal for family businesses and estate planning. Members of funds can make “binding death benefit nominations” of beneficiaries to receive an interest in their nest egg and these payments will not form part of their estate.

They also allow individuals to take responsibility for planning and managing their own pension fund investment program. There are lots of rules, but for individuals expecting to retire with a $500,000 or higher nest egg, an SMSF may be most attractive.

In accordance with Circular 230 Disclosure

Director Principal of Rollo & Company Pty Ltd, a CPA practice that specialises in Australian & international tax, estate and succession planning, professional education, negotiation and mediation, mentoring – executive coaching, and higher education consulting. We also provide the Student Ombudsman Service at Macquarie University in Sydney.

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6 comments on “Tax Breaks A Factor in Australia’s Burgeoning Private Pension Fund Sector

  • But don’t participate in the Supra if you are an American abroad living in Australia. It is reportable under FBAR, FATCA, and taxable under citizenship taxation. If you are in Australian mutual funds, then you have the form 3520(A) to complete and pay up! Penalties for NON compliance even if it is unwittingly non willful are significant. SMFS might be great for Australians with no American taint, but terrible for those not aware of their U.S. Personhood, like the many dual U.S / Aussie citizens and accidental Americans living there.

  • Yes of course ‘Just Me’. However, a US citizen faces these issues whenever/wherever they decide to reside abroad. Australia’s residency based system means that a US citizen living here will have disclosure/reporting obligations for income/assets worldwide (including for those left in the US). Thus, deciding what assists to hold where will always be a case-by-case balancing act.

    • Fred…

      You say, “yes, of course” but sadly I keep running into Aussies and Kiwis with that American taint (Dual or accidental) to them that DON’T know that, so thought I would mention it…

      I really would NOT advise anyone with any U.S. Connection to invest in any retirement fund in the country they are living. It will just either be taxed away by the USA, or penalized away if they have NOT reported it correctly.

      Aussies are much more enlightened when it comes to residency based taxation!

    • @Fred.
      Curious. What do you hear on the street about the FATCA IGA that Australia said they were negotiating? Not that there is any negotiating really allowed. Try changing the IGA boiler plate and they will (should) clearly see this is an unilateral cram down, and not a bi-lateral negotiation. I keep waiting to hear that Australia has signed up. Will help pay for those Marines in Darwin, I guess. U.S. Treasury would immediately trumpet it, but there has been a long silence. In NZ, the provisions to allow IGA signing is in committee. Submissions due on February 5th. Any word on Australia? What is the hold up, or does anyone really know as these things seem to operate by stealth?

  • As part of the Treasurer’s 6 November 2013 Media Release concerning the backlog of some 92 tax & superannuation measures, it was indicated that the legislation necessary to enact a treaty status IGA with the US for FATCA would be proceeding. It will take effect upon Royal Assent – presumably, this is expected before the 1 July 2014 commencement date for FATCA.

    No bill seems to have been introduced into parliament as yet.

    • Thanks for that. If you hear of a bill being introduced, I hope you will blog about it. Australian Treasury is deluding themselves if they think this is a Treaty. Maybe they mis spoke. It is definitely NOT that. Even the U.S. Treasury calls it a Competent Authority Agreement, NOT a Treaty. If it were a Treaty it would require Senate Advice and Consent, but Treasury does not want to open up that can of worms!

      You might want to have a read of this….The Dubious Legal Pedigree of FATCA intergovernmental agreements (and why it matters)
      by: Allison Christians

      I argue that the IGAs have a dubious legal pedigree because they are not treaties, not congressionally-authorized executive agreements, and not interpretations of existing agreements; therefore they are sole executive agreements–entered into by the executive branch with no authorization or oversight from Congress. This puts them on very shaky ground in terms of the constitutional process for binding the US internationally, and I argue that this is both unhelpful to other governments as a practical matter (IGAs override the statute, so if they fail, then what) and an unnecessary muddling of the rule of law, which should make other governments wary (if you have a process in place to bind the US under international law, why aren’t you using it).

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