Can Minors Have A Superannuation Fund?

You’re likely aware that people can put money into their super until they reach 67 years and probably already do so yourself.

But did you know you can put money into your underage children’s superannuation for them if they are under 18?

Superannuation For Minors

Some superannuation fund providers can have special accounts that can be opened for children under 18.

One of the advantages of doing this early on is that money will accrue in the fund until your child reaches their preservation age, which will help them with their retirement.

Additionally, the compound interest that superannuation funds with as little as $5,000, for example, accumulating at 7% per annum until the child reaches their preservation age, could increase exponentially.

Compound interest on these superannuation funds could assist them year after year with increased gains and profit.

With that previous example of a child’s superannuation fund of $5,000, if that amount of money accrued interest at the 7% per annum interest rate over 55 years, the result could be that that amount in the super fund may total over $200,000.

This idea is not always suited for everyone. The funds to start the super account need to be readily available, and for many people, that might not be an option. If the money is available through other investment opportunities (i.e. a grandparent wishing to leave their grandchildren money), this could be a means through which that money is tucked away, ready for their superannuation.

If you’re looking for a way for your children or grandchildren to be looked after when you are not around, investing in superannuation is an intelligent way to look towards the future.

What About Adult Children? 

After they commence work, adult children should have a superannuation fund established already (through which their employer contributions can be funnelled). However, you might consider adding them to your self-managed super fund as an additional member or trustee.

There are a variety of issues to think about before including adult children in a self-managed super fund.

There are financial benefits to including children in a super fund, such as the increased pool of assets created over time that can allow for greater diversification of assets. Many people may invite their children to join their super fund as it allows them to provide their children with a financial education on how to manage money and appreciate the benefits of super.

For example, adding adult children means the super fund must cater to a wider range of ages, which can present challenges for parties with different needs.

Also, all members of an SMSF fund with a corporate trustee are expected to be actively involved directors of the fund. This means that your children will also be expected to be directors of the fund and will, therefore, play an important role in the fund’s decision-making. Although the children may be happy to leave the fund’s investment arrangements as they are, will they be in the future when their circumstances may change?

The handling of situations listed above should be mapped out before children are invited to join the super fund to avoid arguments or confusion.

Seek further information and advice from your accountant about what we can do for you to get this started.

Receiving Income Through Your SMSF As A Pensioner

One of the best ways to ensure regular, flexible and tax-effective income as a pensioner is through an income stream from your SMSF.

As a member, you can receive an income stream in a reoccurring series of benefit payments from your SMSF.

Income streams from an SMSF are usually account-based, which means that the amount allocated to the pension comes directly from a member’s account. Once an account-based pension commences, there is an ongoing requirement for the trustees of the superannuation fund to ensure the pension standards and laws are met.

Standards that must be met for SMSFs to pay income stream pensions are that:

  • The minimum amount must be paid at least once a year.
  • Once the pension has started, the capital supporting the pension cannot be increased by using contributions or rollover amounts.
  • When a member dies, their pension can only be transferred to a dependent beneficiary if they have any.
  • The capital value of the pension or the income cannot be used as security for borrowing.
  • Before completely changing a pension, you must pay a minimum amount in certain circumstances.
  • Before you partially change a pension, you must ensure sufficient assets to pay the minimum amount.

Once they have satisfied these minimum standards, the pension will be treated as super income stream benefits for tax purposes. The funds may then be able to claim an exemption for the income earned on pension assets. This is known as an exempt current pension income (ECPI).

SMSF trustees may need to amend fund trust deeds to meet the minimum pension standards. You should consult a legal adviser for more information on how to do this.

Records must be kept of pension value at commencement, taxable elements of the pension at commencement, earnings from assets that support the pension and any pension payments made.

New Rate Of Tax Concession For Super Balances Over $3 Million.

Last week, the government announced a change to superannuation, introducing a new tax that will apply to member balances above $3 million.

From July 1, 2025, super earnings over $3 million will be taxed at 30 per cent, double the current rate of 15 per cent. According to the government, this change aims to ensure that sustainability and fairness remain central to the system.

To put it into perspective, the average Australian super fund contains an average balance of $150,000, and about two-thirds of Australians have less than $100,000.

This new tax concession increase will affect about 80,000 people, who will continue to have more generous tax breaks on earnings from the $3 million below the threshold (which will not rise over time). This will not be retrospectively applied and will only apply to future earnings.

A person with $3 million in super will likely receive a tax benefit at 30% still. However, serious thought could be given to leaving money in superannuation, where the tax rate is the same as putting it into a company.

Other considerations that may need to be thought through include

  • If you die and leave that super to non-death benefits dependent, they will pay 15% on the entire taxable component, leading to an effective tax rate of 45% on the earnings.
  • Taking money out of the company will come with franking credits but may put you in a position of paying top-up tax. Conversely, leaving it in the company and leaving the shares to a testamentary trust may allow you to pay dividends without further tax.
  • A company does not need to comply with any SIS rules so that you can have in-house assets, loans to members etc.

Any actions taken should be done with consultation with a professional adviser to comply with legislation and regulations.

As these changes to super balances of over $3 million will not take effect until after the next election, there is plenty of time to plan and model out the best path for your situation (if you are one of the few who this will affect). You will need an actuarial certificate to determine what percentage of the fund’s income will be taxed at 0%, 15% and 30%.

While the average Australian super fund may be far below this threshold, that doesn’t mean a fund cannot be increased. Through voluntary contributions, including concessional and non-concessional contributions, you can help to boost your nest egg to a comfortable level.

Do you want to know more about tax breaks, concessions, or ways you could contribute to your superannuation? Speaking with a licensed professional is the best way to start.

Why Do People Salary-Sacrifice Into Super?

Salary sacrifice is one of the most effective ways to add to your super balance. Salary sacrifice involves the employee agreeing to exchange a portion of their salary (before tax) for an increase in superannuation contribution by their employer.

Contributions made through salary sacrifice are classified as employer contributions, no employee contributions.

These are taxed at a maximum of 15% (if you earn under $250,000 per year) which is lower than the marginal tax rate most employees are charged. The amount you ‘sacrifice’ cannot be assessed for taxation purposes, i.e. it is not subject to PAYG.

Employees should ensure that their contributions per year are not above $25,000 as this is the cap on concessional contributions and will require additional tax to be paid if surpassed.

Salary sacrifice is an effective way to minimise tax liability and increase super contributions if individuals earn more than they require for annual expenses.

After beginning the salary-sacrificing process, employees should look for two important matters. First, the calculation of ordinary time earnings by your employer that super applies to, does not change. Second, the amount paid to your super through the salary sacrifice agreement does not contribute towards any super guarantee contributions that are required of your employer. Employees should verify that neither occurs and verify any confusion with their employer.

Salary sacrifice is a trade-off between income earned in the present, and contributions made for the future. Employees may experience difficulty finding a balance that suits them or considering different aspects of their finances for the agreement with their employer. Asking for professional assistance to determine specifications for the agreement could help simplify this procedure.

Are You Paying For Super Fund Fees You Don’t Need To?

No matter the kind of super fund you opt for, or how it has been performing, you will be subject to super fees. Understanding how these fees work and the difference they can make to your nest egg is vital.

When it comes to super fund fees, there are two factors you need to get your head around; the kinds of fees you are being charged and the rate of fees you pay. Opting for a super fund based on these two factors can see you retire with hundreds of thousands of more money.

You should be aware of the various types of fees you are being charged. If you would like to find out the fees you are being charged, you should do two things.

Firstly, Google your fund’s product disclosure statement and scroll through to the fees section. You should see a list of different types of fees, explaining what they are, how they are applied, and how often they will be incurred. Secondly, you should log in to your super fund account and note all the fees being charged to you. Investigate how closely these correspond and correlate with the product disclosure statement.

If you feel there are discrepancies, do not hesitate to contact your super fund or financial advisor and ask for clarification. It is worthwhile researching and comparing the fees you are being charged against other super funds and what they charge. Being complacent and not paying attention to your super is extremely irresponsible; the dividends you will receive later in life for being diligent now outweigh the burden of taking time to be informed today.

Some standard fees across the board include:

–        Administration fees: fees covering the costs of operating and managing your super fund account.

–        Exit fees: fees incurred for leaving or switching super funds. While this is a common fee, not all funds charge it.

–        Investment fees: fees incurred due to the cost of managing where your money is invested. These fees can fluctuate, depending on where your money is invested.

–        Activity-based fees: fees incurred for any activity you require your super fund to perform outside of the ordinary management of your account, such as a family law split fee.

Another major factor contributing to how much you accumulate in your super account throughout your working life is the rate of fees you pay. Plain and simple, some funds offer much lower fees than others, creating a difference of hundreds of thousands of dollars when it comes time to retire.

Generally, funds are categorised into three groups; low super fees, medium super fees and high super fees. You will need to weigh up your options and decide whether you want a fund that charges low, medium or high super fees. While it seems like the best option to choose a fund with low super fees, these funds do not necessarily perform as well as medium or high-fee super funds, meaning you will not get as good of a return on your investment.

When Can I Access Superannuation Early?

Accessing your superannuation early is a short-term strategy Australians facing financial troubles can use to buy temporary financial protection.

However, there are limited circumstances when individuals can access their super savings early, and in most cases, individuals cannot withdraw their superannuation until they reach their preservation age and retire.

To access super early, Australians must first satisfy a condition of release, which allows immediate access to an individual’s preserved benefits, provided the rules of their fund allows early super withdrawals. Some conditions of release include, but are not limited to:

Retirement

This is the most common condition of release. Super funds usually require a retirement declaration verifying that an individual has retired.

Reaching Preservation Age

As soon as an individual reaches their preservation age they can withdraw their entire superannuation benefit, even if they haven’t retired (and don’t plan to retire) from the workforce.

Starting A Transition-to-retirement Pension

Individuals can access a portion of their benefits each year by starting a super pension without retiring. This only works, however, if an individual has reached their preservation age and withdraws less than 10 per cent of the account balance each year.

Severe Financial Hardship

Individuals can get some of their superannuation back if they satisfy the conditions that constitute the government’s view of ‘severe financial hardship’.

Compassionate grounds

If an individual suffers from a life-threatening illness or has fallen behind in overdue loan repayments before retiring, their super fund can release part or all of their preserved benefits. Individuals can also apply for early release of superannuation on compassionate grounds to pay for funeral or medical expenses, or palliative care.

Permanent Disability or Incapacity

If an individual suffers from a chronic illness or serious disability, they may be able to claim on a total and permanent disability insurance policy. Individuals should check with their super fund first for the terms and conditions of insurance policies. Individuals may also access super benefits early if they suffer ‘permanent incapacity’.

Temporary Incapacity

An individual’s super fund may automatically provide income protection insurance, or an individual may be able to apply for such insurance via the superannuation fund. Those who suffer from a prolonged illness or disability can access this insurance coverage and receive a regular income for up to two years.

Superannuation, Contributions & The New Year

Regarding retirement, you want to ensure that your super is performing at its most optimal level when accruing funds.

Your super is probably going to be a primary income source for you during your retirement – that’s why it’s something that you want to ensure is performing optimally and accruing funds regularly.

You can assist in this process by making voluntary contributions. Making an extra contribution of as little as $20 per week for over 30 years could end up doubling what might otherwise be a $30,000 contribution through compound interest.

If you choose to contribute voluntarily to your super, you need to be aware of the difference between non-concessional and concessional contributions. Non-concessional contributions cover the payments that your employer makes on your behalf from your after-tax income, whereas concessional contributions can include salary sacrificing and personal deductible contributions.

If you are looking for a way to increase your super, you can opt-in to sacrifice some of your salary (often recommended to those with high or stable income) to your super as a voluntary contribution. Essentially, you dedicate more of your pay to your super, reducing what you pocket from that time period.

You can speak with us to find out whether or not salary sacrificing could be helpful to or suit your situation specifically.

You can also make personal deductible contributions if you are self-employed or a retiree, of up to $27,500 per year in concessional super contributions.

Choosing to make voluntary contributions to your super can be the difference between having your super fund perform and having it perform well. If you’d like to know more about options for your superannuation, you can speak with us to find out what you can do for your particular situation.

How Does Superannuation & Contracting Work?

Contractors who run their own business and sell their services to others have different obligations to their super than what employees in a business may usually have.

A contractor (also known as an independent contractor, a subcontractor, or a subbie) who is paid wholly or principally for their labour is considered to be an employee for super purposes, and may be entitled to super guarantee contributions under the same rules as other employees.

A contract may be considered ‘wholly or principally for labour’ if:

  • You’re paid wholly or principally for your personal labour and skills
  • You perform the contract work personally
  • You’re paid for hours worked, rather than to achieve a result

If hiring a contractor to perform solely their labour for a fee, the employer may also have to pay super contributions on their behalf.

In this sense, if you are a contractor who is being contracted to an outside business than your own to perform your usual work or labour, your employer must contribute to your super the same way they would any other employee.

This could be seen in an example of an electrician who runs their own small business, or is employed by a small business who has been hired by another business to supplement their workforce and perform a specific role that they can fit to.

Take, for example, an electrician who runs their own business and has been subcontracted by a larger business.

They are performing labour but also providing materials (ie, themselves plus a toolbox plus a van full of powerpoints and wiring etc), they would be seen as a contractor and not an employee for super purposes. They must pay themselves super, in this case.

However if they are sub-contracted to perform labour only then the company that has sub contracted them may be liable to pay super on the amount that they pay to their contractor.  This would be the case where the electrician just turns up with their tool box and everything else is provided by the “employer”.

If they are in an employment-like relationship with the person that they entered their contract into, they may need to have their super paid to them by their contract employer. In order for super to be applied from what you earn, the contract must be directly between you and your employer. It cannot be through another person or through a company, trust or partnership.

It is important that both parties in the process are aware of their super obligations during the contracted period. There can be significant penalties for employers who use contractors if they fail to correctly pay super. Each case regarding contractors and super needs to be assessed independently to ensure that you are doing the right thing. There is no definitive black and white line between a contractor and a contractor in an employment-like relationship that can be obviously seen after all.

If you’re unsure about whether or not you’re meeting your obligations as an employer, or are a contractor looking to make sure their super is being correctly paid into, speak with us.

Compensation, Disability & Life Payments – This Super Contribution Could Make A Difference.

Disasters, be they natural or man-made, can happen to anyone. It could be a car accident, a tree crashing through the roof, or a bushfire hitting your residence. In any case, an event that causes significant harm or impact that affects someone’s everyday life in an adverse way is never pleasant.

Thankfully, in Australian society, there are laws that provide compensation to people who experience these accidents as a result of someone else’s actions and are significantly impacted. If someone were to be (potentially) disabled for life due to such an incident, there may be a substantial compensation payout.

The idea of this compensation is not only to compensate for economic loss, but to also provide a capital amount for the person’s living costs for the rest of their lives. Often that compensation will run to millions of dollars. Sounds like a lot, right?

If you receive compensation for becoming totally and permanently disabled, investing this lump sum should make it last far longer. This action will require careful planning and professional advice. Consulting with a professional on this financial decision may be in your best interest.

One effective strategy that can be used here is to make what is known as a Structured Settlement Contribution to superannuation.  You can then use your superannuation to pay you a pension.  If done correctly, all the money that your investment earns in super should be tax-free and all of the money that you draw out of super should also be tax-free. Removing tax from the equation when it comes to the money that you can draw out of your super will have a massive impact on your ability to have that money last your lifetime.

However, you need to make sure you comply with all of the rules around making a structured settlement superannuation contribution. These rules include:

  1. You will usually have to be under 67 at the time of making the contribution
  2. The contribution needs to be made within 90 days of getting the money
  3. Two doctors need to certify that you are totally and permanently disabled
  4. The payment must be compensation for personal injury where someone else was at fault or for workers compensation
  5. You must notify your super fund that it is a structured settlement contribution

The contribution will also have no impact on your pension transfer balance limit.  This means that if you make a structured settlement contribution of $2 million then you will now be able to transfer $3.7 million into a pension instead of the usual $1.7 million.

The payments are usually received after a lengthy legal process and it is probably not something that will be top of mind for the 90 days following receipt of the funds but the decision to contribute the amount to superannuation can have a lasting positive impact on your after tax income.

Consulting with a registered professional about your options regarding contributions, withdrawals and general options can give a better understanding of what you might be in a position to do.

Funding The Retirement Adventure By Downsizing Your Property

Downsizing during retirement can help you reduce costs and put some more money in your pocket so that you feel more secure about your finances during retirement.

Downsizing by selling your property has advantages and disadvantages, which you should evaluate before making this decision.

Advantages

  • Increased cash flow: Downsizing should reduce your mortgage payments and free up extra money to invest or spend. This will give you more flexibility with your money in your retirement years.
  • Easier to maintain: A smaller house takes less effort and is easier to clean and maintain.  Approaching retirement, you may want to reduce the amount of time you have to spend cleaning your house so that you can participate in other activities.
  • More convenient: A new house will mean that you can choose a layout, fittings, locations and services that are more suited to your updated needs. While your old house might be close to schools, you may want to opt for a house that is closer to a recreational centre or the city centre (for accessibility to shops and services.
  • Lower insurance and utility bills: A smaller home generally costs less. Both in terms of insurance and also in terms of upkeep and maintenance (such as heating and cooling).

Disadvantages

  • Less space: A small house means that you have less storage for things. You might have to make some difficult decisions about letting go of your possessions. Alternatively, you could consider leasing a storage space – although this would cost extra money.
  • Less flexibility: There may be less privacy due to fewer or no guest rooms or less space for entertainment. If you regularly have many guests coming over, this might make downsizing unideal.
  • New neighbourhood: Getting comfortable in your new suburb might be difficult. You might have to check out your neighbourhood before and after moving into the new place.
  • Emotional connection: A family home is full of memories, and there is a strong connection with it. This can make it difficult to let go.

Eligibility 

From 1 July 2022, eligible individuals aged 60 years or older can choose to make a downsizer contribution into their superannuation of up to $300,000 per person ($600,000 per couple) from the proceeds of selling their home.

For downsizer contributions made before 1 July 2022, eligible individuals must still be aged 65 years or older at the time of making their contribution

On 3 August 2022, the Treasury Laws Amendment (2022 Measures No. 2) Bill 2022 was introduced into Parliament. In this, the Government has proposed that the downsizer eligibility age be further reduced to 55 years. This measure is not yet law.

Downsizing has financial benefits, but it does come with emotional costs and is a fairly significant decision to make. It may not be a solution for everyone, but it is one that you should consider carefully.

It is important to discuss the implications with your advisor and, perhaps also, your family members before determining how you will proceed.