Regulation of state and supplementary pension schemes in Australia: overview
A Q&A guide to pensions law in Australia.
The Q&A gives a high level overview of the key practical issues including: state pensions; supplementary pensions; funding and solvency requirements; tax on pensions; business transfers; participation in pension schemes; and employer insolvency and overall scheme solvency.
To compare answers across multiple jurisdictions, visit the Pensions: Country Q&A tool.
The Q&A is part of the global guide to pensions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/pensions-guide.
Contributions paid to the government
The Australian federal government pays an age pension (subject to age and income and assets tests) out of consolidated government revenue. No direct employer contributions are made to fund this.
Taxation of contributions
The employer and employee are not required to contribute to the government pension.
Monthly amount of the government pension
The age pension is paid fortnightly and the amount varies according to whether the recipient is single or in a relationship. In 2015, payment for a single recipient is a maximum of A$860.20 per fortnight and couples receive a maximum of A$1,296.80 per fortnight.
Occupational (that is, linked to an employment or professional relationship between the plan member and the entity that establishes the plan)?
Personal (that is, not linked to an employment relationship, established and administered directly by a pension fund or a financial institution acting as pension provider, where individuals independently purchase and select material aspects of the arrangements, though the employer may make contributions)?
Broadly, there are three types of superannuation fund to which employers are required to contribute:
Defined contribution/accumulation funds, which are the most common.
Defined benefit funds, which are relatively rare and mostly closed to new members.
Self-managed superannuation funds (SMSF), which are funds regulated by the Australian Taxation Office with no more than four members.
Generally, an employee is eligible for "superannuation guarantee contributions" from an employer if they are aged 18 year old and over and paid more than A$450 or more before tax in a month. At least every three months their employer must pay into their account with a complying superannuation scheme a minimum of 9.5% of their "ordinary time earnings" up to the "maximum contribution base". Prior to 1 July 2013 the rate was 9% and during the 2013/14 financial years the rate was 9.25%. The maximum contribution base is an amount indexed pursuant to legislation and set as A$50,810 per quarter per employee in the 2015/2016 financial year). Ordinary time earnings are, generally, what employees earn for their ordinary hours of work, and include:
An employee's "ordinary hours of work" are the hours specified in his employment agreement or under their relevant award (or under a combination of such documents), which governs the employee's conditions of employment.
If the ordinary hours of work are not specified, the ordinary hours of work can be taken to be the normal, regular, usual or customary hours worked by the employee. This is not necessarily the minimum or maximum number of hours worked or required to be worked.
Payments for work performed outside an employee's ordinary hours (such as overtime payments) are not ordinary time earnings. This is the case whether the payments are calculated at an hourly rate, or the employee gets a specific loading, or an annualised or lump sum component of a total salary package, that is expressly referred to as overtime hours or as remuneration for overtime hours worked.
This applies to employees who are employed full time, part time or casual basis, and also applies to temporary residents of Australia.
Contractors paid wholly or principally for their labour are considered to be an employee for superannuation purposes and are entitled to superannuation guarantee contributions under the same rules as employees.
Subject to some restrictions relating to awards, most employees can choose the superannuation fund they want their employer contributions paid into. If an employee is eligible to choose a fund, their employer must give them a standard choice form so they can make that choice in writing.
If an employer does not pay an employee's superannuation guarantee contribution on time and to the right fund, the superannuation guarantee charge (SGC) is triggered, even if the employer pays the contribution later. The SGC involves paying the original superannuation guarantee contribution owed, plus an interest premium, plus an administration fee.
The SGC is not tax-deductible. A late payment may be able to be used to either offset the SGC or carry it forward as prepayment of a future contribution for the same employee.
Is linked to the employee's salary (defined benefit)?
Is linked to employer and/or employee contributions and investment return on those contributions (defined contribution)?
Linked to the employee's salary
Generally, superannuation in Australia is a defined contribution arrangement.
The most common form of pensions offered by Australian superannuation funds are account-based pensions, also known as superannuation income streams.
To establish a retirement income stream a member must be either 55 years or older, or their "preservation age" (an age set out in legislation) and be either permanently retired or still working and utilising a transition-to-retirement strategy.
The total entitlements available to members under these pensions will be the total of their superannuation account, including investment returns (if any) and minus fees. Once a superannuation income stream is started, the member cannot make further contributions to their account.
The rules that apply to these pensions require members to withdraw a minimum amount each year, based on their age. Apart from members utilising a transition-to-retirement strategy, members are able to withdraw all their account balance as a lump sum.
Linked to employer and/or employee contributions
Is there a minimum period of service before workers are entitled to receive vested rights?
Are there any legal requirements for schemes or providers to index pensions in payment and/or revalue pension rights in deferment?
Minimum period of service
There is no minimum period of service required for defined contribution funds in Australia.
To access entitlements members of fund must satisfy a "condition of release". The most common conditions of release for accessing entitlements are that the member:
Has reached their preservation age (an age set by legislation) and retires.
Has reached their preservation age and begins a transition-to-retirement income stream.
Is 65 years of age (even if they have not retired).
However, there are also conditions of release that permit early access to super entitlements:
Terminating gainful employment.
Severe financial hardship.
Terminal medical condition.
Legal requirement to index
Generally, superannuation benefits are administered and calculated as a defined contribution arrangement. The benefit available to members of superannuation schemes will be the total of their superannuation "account", which is the sum of contributions received (employer or personal) plus or minus investment returns accrued, and less fees, tax and life insurance premiums (if any). There is no requirement for schemes or providers to index pensions against inflation and/or revalue deferred pension rights.
Funding and solvency requirements
Funded or unfunded?
Generally, Australia has a defined contribution system (see Question 3).
Solvency requirements for funded schemes
As Australia has a defined contribution system, there are no legal funding and solvency requirements. Defined benefit funds may have funding and solvency requirements established in their governing rules or in legislation.
To what extent can members transfer their funds to another pension scheme?
How do members normally take the benefit of their funds (for example, lump sums, income withdrawals (drawdown), life annuity arrangements)?
What are the legal restrictions upon access to the funds (for example, age)?
What are the common arrangements for early retirement and ill-health retirement?
Are dependants of deceased members entitled to receive benefits payable on the member's death? What form do these commonly take?
Member's transfer of funds
A member may transfer (or roll over) their superannuation entitlements to another complying superannuation fund at any time during the accumulation phase, with some limited exceptions.
Taking pension benefits
In defined contribution schemes superannuation entitlements may be withdrawn as lump sums in their entirety when a member reaches their preservation age.
However, many trustees offer account based pension products (also called superannuation income streams) (see Question 3).
Employees are generally able to access their superannuation entitlements when they satisfy one of the "conditions of release" set out in the superannuation legislation (see Question 4).
Early and ill-health retirement
Members may be able to access their superannuation entitlements before retirement for reasons of ill health. These reasons include where the member can satisfy the trustee that:
They are suffering permanent incapacity rendering them unlikely ever to be able to work in a job for which they are qualified by education, training or experience.
They are suffering a terminal medical condition.
They are suffering temporary incapacity.
Members may also be able to claim an insured benefit where the trustee arranged disability or income protection insurance on behalf of members.
Members may also be able to access superannuation entitlements before retirement on the grounds of severe financial hardship or compassionate grounds.
When a member of a superannuation fund dies the trustees of the fund must pay a death benefit in accordance with the rules of fund.
Most superannuation fund rules allow the fund trustees to decide how the death benefit should be divided among a number of potential beneficiaries.
Superannuation legislation sets out the classes of person who can be paid a death benefit, but the legislation does not determine which particular beneficiary should receive all or some of a death benefit, or set a priority ranking of beneficiaries. The fund rules may require payment under a binding death benefit nomination made by the member, or require death benefits to be paid to a deceased member's estate.
Broadly, superannuation legislation requires a death benefit be paid to either the member's legal personal representative or one or more of the member's dependants. A dependant of a deceased fund member would include:
The spouse of the member (including a de facto or same-sex spouse).
Any child of the member.
Any person with whom the member had an interdependency relationship.
Any person who was wholly or partially financially dependent on the member.
Members may also be able to claim an insured benefit where the trustee arranged death insurance on behalf of members.
The Australian Prudential Regulation Authority supervises regulated superannuation funds, other than Self Managed Superannuation funds (these are supervised by the Australian Taxation Office), Approved Deposit Funds and Pooled Superannuation Trusts,
The Australian Taxation Office seeks to ensure that self-managed superannuation funds adhere to the rules and regulations. It also makes sure that the right amount of tax is taken from the superannuation savings of all Australians.
The Australian Securities and Investments Commission seeks to ensure that trustees of superannuation funds comply with their obligations regarding the provision of information to fund members during their membership. It is also responsible for consumer protection in the financial services area (including superannuation).
The Australian Transaction Reports and Analysis Centre is Australia's anti-money laundering and counter-terrorism financing regulator. It seeks to ensure Australia's financial system does not enable money laundering or terrorism financing.
Regulated superannuation funds are regulated under the Superannuation Industry (Supervision) Act 1993.
Other key governance requirements
Employers may be required to make superannuation contributions under labour union-negotiated industrial awards. Such awards may require contributions be made to specific funds.
Penalties for non-compliance
Failing to meet employer obligations can mean severe financial penalties. In addition to paying the 9% superannuation guarantee to the correct fund, employers can be charged superannuation guarantee penalty interest rates, or be liable for financial penalties. Employers can be ordered to remedy the default, either by paying money into a nominated fund or by compensating the employee for the superannuation benefits they have lost as a result of the breach.
Tax on pensions
Superannuation contributions can be divided into two types:
Each type of superannuation contribution is subject to a contributions cap. A contributions cap sets a limit on the amount of contributions that can be made without incurring tax penalties in any one year.
Tax relief on employer contributions
Concessional contributions, also known as before-tax contributions, include compulsory employer contributions, additional employer contributions, and any salary sacrificed contributions that employees arrange to deduct from their before-tax salary.
For most Australians, concessional (before-tax) contributions are subject to a contributions tax of 15%.
An individual can choose to use a salary sacrificing arrangement as a way to pay less tax by reducing the amount of personal income that is taxable (although the concessional contributions are subject to at least 15% tax within the fund).
The concessional contribution caps for 2014/2015 are as follows:
Employees aged under 50: A$30,000.
Employees aged 50 years to 59 years: A$35,000.
Employees aged 60 years and over: A$35,000.
If the concessional cap is exceeded, these excess concessional contributions are then taxed at the actual marginal tax rate of the employee, plus an interest charge.
If the employee is already on the top marginal rate, then the contributions in excess of the concessional cap is subject to an interest charge only.
The federal government allows the withdrawal of any excess concessional contributions made from 1 July 2013 from the superannuation fund. If the excess concessional contributions are not withdrawn, those contributions then count towards that employees non-concessional (after-tax) contributions cap.
Tax relief on employee contributions
Non-concessional contributions are voluntary after-tax contributions that are not claimed as an income tax deduction by employees or employers.
The non-concessional cap is indexed in A$30,000 increments in line with any A$5,000 increase in the concessional contributions cap.
The non-concessional contributions cap is A$180,000 for 2014/2015.
There is also a "bring forward" rule where three years' worth of non-concessional contributions can be made in a single year. Under this rule, an employee can contribute A$540,000 for 2014/2015 without penalty.
Any contributions over non-concessional cap may attract a penalty tax of 47% (plus Medicare levy).
If the excess non-concessional contributions in the superannuation fund, then the penalty tax of 47% (plus Medicare levy) is imposed.
A "work test" applies to contributions made by employees aged between 65 and 75 years old. In short, to be eligible to make contributions an employee must work for at least 40 hours in a period of not more than 30 consecutive days in the financial year in which they plan to make a superannuation contribution.
Superannuation income streams
Where an employee is aged 60 or over their income is usually tax-free if taken as a superannuation income stream.
If employees are aged under 60 they may pay tax on their superannuation income stream.
Lump sum withdrawals
If the employee is aged 60 or over, any withdrawals from a taxed superannuation fund are tax-free.
Different rates may apply to untaxed funds, such as government superannuation funds.
If they access their superannuation before 60 years of age, they may pay tax on withdrawals.
There are no further tax charges other than those listed in Question 11.
Transfer of accrued pension rights
In a defined contribution fund, accrued rights should be unaffected by a sale of business. Entitlements already existing in a superannuation fund remain subject to the preservation rules. The new employer is required to make contributions that comply with the superannuation guarantee contributions regime (see Question 2).
Members in a defined benefit scheme may be affected by a sale of business, depending on the governing rules of the particular defined benefit fund.
Other protection for pension rights
Participation in pension schemes
Employees who are working abroad?
Employees of a foreign subsidiary company?
Employees working abroad
If an Australian employer sends an employee to work in another country, they are generally still required to make superannuation guarantee payments into their employee's superannuation account.
Australia has bilateral social security agreements with a number of countries that remove the issue of double superannuation coverage that might occur if the employer was required to make superannuation (or equivalent) contributions under the legislation of both countries for the same work.
Employees of a foreign subsidiary company
Generally, employers must make super guarantee contributions on behalf of temporary residents working in Australia.
Employees with entitlements in an Australian superannuation fund accumulated while working in Australia can claim those entitlements as a "departing Australia superannuation payment" if all of the following apply:
They visited on a temporary visa.
Their visa has ceased to be in effect.
They have left Australia.
Where the above conditions apply and employees do not seek entitlements to a departing Australia superannuation payment after a minimum period of six months after leaving Australia, their superannuation fund will be requested to transfer their account balance to the Australian Taxation Office.
Employer insolvency and overall scheme solvency
If an employer becomes insolvent, employee wages and superannuation contributions are paid in accordance with insolvency law. Generally, any superannuation guarantee charge applicable to an insolvent employer must be paid before payments to ordinary unsecured creditors.
Directors of companies can become personally liable for their company's unpaid superannuation guarantee charge in some circumstances. To recover a director penalty from a director, the Commissioner must issue a director penalty notice either to the director or the director's registered tax agent, and wait until the end of 21 days after issuing that notice before commencing proceedings. This gives the director the opportunity to extinguish their personal liability by, within the 21-day notice period, either:
Arranging for payment of the superannuation guarantee charge liability.
Appointing an administrator.
Commencing the winding up of the company;
If one of these steps is not taken within 21 days, the unpaid amount may be recovered from the director as a director penalty equal to the amount of the unpaid superannuation guarantee charge.
Description. ComLaw has the most complete and up-to-date collection of Australian Commonwealth legislation
Australian Prudential Regulation Authority (APRA)
Description. The website of the Australian prudential regulator.
Australian Securities and Investments Commission (ASIC)
Description. Australia's corporate, markets and financial services regulator.
Australian Tax Office (ATO)
Description. The principal revenue collection agency of the Australian government.
The Australian Transaction Reports and Analysis Centre (AUSTRAC)
Description. Australia's anti-money laundering and counter-terrorism financing regulator.
The Superannuation Complaints Tribunal
Description. The Tribunal deals with complaints relating to decisions and conduct of trustees, insurers, and other decision-makers in relation to regulated superannuation funds, approved deposit funds, annuities, life policy funds and retirement savings accounts.
Scott Charaneka, Partner
Thomson Geer Lawyers
Professional qualifications. Solicitor, Australia
Areas of practice. Superannuation; wealth management; funds management; financial services
- Acted on the creation of AustralianSuper (the merger of STA and ARF).
- Acted on the successor fund transfer of the A$1.6B IBM staff fund to AustralianSuper (the largest corporate fund transfer in Australian history) as well as 25 other significant (A$100M+) fund mergers.
- Advised a range of major corporate entities on their superannuation arrangements including Alcoa, Caltex, Qantas and Rio Tinto.
- Advised on the A$1.4B successor fund transfer of the CSR staff superannuation fund.
- Acted on the A$1.9B transfer of the MetLife superannuation and pension business to Challenger.
- Acting for AustralianSuper on the current project to transfer defined benefit schemes to EquipSuper.
- Advising QSuper on a range of initiatives regarding its products, investments and potential mergers.
- Advising WA Local Government Super on a range of issues including investment and custody arrangements.
Member, Law Council of Australia Superannuation Lawyers Committee.
Member, Association of Superannuation Funds of Australia.
NSW State Executive, Association of Superannuation Funds of Australia.
Former Chair Finsia Financial Advising Committee.
- CCH Guide to Estate Planning (first and second edition).
- CCH Guide to Super Choice, Establishing a Funds Management Business in Australia (first and second edition).
- CCH Guide to MySuper, SuperChoice and SuperStream.
Ben Grant, Senior Associate
Thomson Geer Lawyers
Professional qualifications. Solicitor, Australia
Areas of practice. Superannuation; funds management; financial services; financial services litigation
- Has acted for trustees in numerous fund mergers.
- Represented superannuation trustees in litigation in every state of Australia.
- Advised on pooled and discrete investment opportunities for Australian superannuation trustees, both within Australia and overseas.
- Advised on the drafting of governing documents including trust deeds and constitutions.
- Has provided advice on the creation and ongoing compliance of a IDPS-like scheme.
- Drafted and reviewed material commercial contracts, including administration and custodian agreements, for many superannuation trustees.