NATURE OF A SUPERANNUATION FUND

A ''superannuation fund'' is: (a) an indefinitely continuing fund that is a provident, benefit, superannuation or retirement fund; or (b) a public sector superannuation scheme, ie a scheme for the payment of superannuation, retirement or death benefits established by a Commonwealth, State or Territory law, or under the authority of the Commonwealth, State or Territory governments or a municipal corporation, local government or public authority.

A superannuation fund is established by governing rules which usually take the form of a trust deed for a private sector fund or an Act of Parliament for a public sector fund (for convenience, all governing rules will be referred to as a trust deed). A superannuation fund is administered by trustees appointed under the deed. The trust deed specifies who is to make contributions to the fund and defines how those contributions are to be determined. It also specifies who is to receive benefits from the fund, the circumstances in which benefits are to be paid and how benefits are to be calculated. Benefits may take the form of a lump sum, usually paid on or after retirement, or a pension, usually payable from the time of retirement.

The trust deed provides for the investment of moneys held in the fund so as to generate returns which are added to the fund. Benefits are generally paid from the accumulated contributions and returns to the fund. In many cases, benefits payable to a member's dependants on the death of the member are covered by an insurance policy arranged by the trustees with a life insurance company, with the policy premiums paid from fund moneys.

There are three main types of private sector superannuation funds:

An employer-sponsored fund is one which is established by an employer (or a number of employers) for the benefit of employees. The employer makes contributions to the fund for the benefit of the employee members and is generally allowed an income tax deduction for those contributions. In many cases the employee members themselves also make contributions to the fund in respect of which a tax rebate is allowable in certain limited circumstances.

Benefits are usually payable from the fund when an employee member leaves the employment of the employer-sponsor. SISR imposes preservation requirements which limit the circumstances in which benefits can actually be paid to a member.

With a defined benefit fund, a member's retirement benefit is either a predetermined amount or is based on his/her salary at the time of retirement, or on salary averaged over some period (often three years) prior to retirement. The employer's contributions to the fund vary periodically, depending on actuarial advice, so as to ensure that there will be sufficient money in the fund to meet expected liabilities for benefits. Members' contribution rates (if any) do not usually vary. Where a member withdraws from the fund prior to retirement age, the withdrawal benefit may be based on the salary (or average salary) at the time of withdrawal. More usually, however, the benefit on early withdrawal is based on the member's own contributions (if any), some amount representing accumulated earnings on those contributions plus a portion of employer-financed benefits.

A productivity fund is one which is established in accordance with an agreement or award (including a consent award) that is certified or made by the Commonwealth Industrial Relations Commission or by a State industrial authority on or after 1 July 1986.

Generally, personal superannuation funds cater for the self-employed, and for employees who do not have employer superannuation support in an employer-sponsored scheme or who wish to have additional superannuation of their own.

Employer-sponsored funds or personal superannuation funds may sometimes come under a master fund or trust arrangement which is offered by bank subsidiaries, life offices or specialist companies. Such an arrangement basically groups several funds under a single master trust deed and provides professional administration for all the funds under the deed, with each fund having its own investment, benefit design and insurance options according to its particular needs.

There are three aspects to the concessional tax treatment of superannuation. These relate to:

A concessional tax regime also applies to ADFs, PSTs  and RSAs.

Contributions to a superannuation fund (or an RSA) may be tax deductible or, in some cases, may give rise to a tax rebate.

Generally, an employer is allowed a deduction for contributions made to one or more superannuation funds for the benefit of eligible employees. The amount of deductible contributions is subject to limits (based on the employees' ages) if the contributions are paid to a complying superannuation fund or a non-complying fund which the employer reasonably believes to be a complying fund. An employer is also allowed a deduction (with no limit) for contributions made for employees to non-complying funds, but is liable to FBT on those contributions .

In addition, employers are entitled to a deduction (within limits) for contributions made to the Superannuation Holding Accounts Reserve (SHAR) for the benefit of their employees. The SHAR is not a superannuation fund.

Self-employed persons, substantially self-employed persons and employees who do not receive any employer superannuation support are allowed a deduction (within limits based on age) for their personal contributions to complying superannuation funds or RSAs.

An employee receiving employer superannuation support (eg productivity contributions or superannuation guarantee contributions) is generally not entitled to a tax deduction for personal superannuation contributions but, in certain circumstances, may be eligible for a tax rebate for contributions made to a complying superannuation fund, whether an employer-sponsored fund, a productivity or personal superannuation fund, or an RSA.

A person is also entitled to an income tax rebate for contributions made to a complying superannuation fund or RSA for the benefit of a low-income or non-working spouse.

A superannuation fund which satisfies SISA conditions for concessional tax treatment, and has been issued with a notice of compliance from APRA (or the ISC before 1 July 1998), qualifies as a complying superannuation fund under ITAA36. Such a fund is taxed at the concessional rate of 15% on its income, including taxable contributions, investment income and realised capital gains. Complying funds can take full advantage of any franking credits in respect of Australian company dividends received even though they do not pay tax at the full rate. However, a complying fund is taxed at 47% on certain types of non-arm's length income and private company dividends.