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Superannuation

What is Superannuation (Super)?

Superannuation, commonly referred to as "super," is a compulsory system in Australia designed to provide employees with income during retirement. For an employer, understanding super is crucial. It is a legal obligation for businesses employing individuals in Australia to contribute a percentage of an employee's earnings into a dedicated superannuation fund. This fund is then invested, with the aim of growing the savings over time to provide the employee with a source of income when they retire.

Why does Superannuation exist?

The primary objective of super is to ensure Australians have adequate funds to support themselves in retirement, reducing reliance on the government-funded Age Pension. The system promotes financial independence and security for individuals in later life. The Australian Government encourages this by offering tax concessions on super contributions and earnings within the super fund, making it a tax-effective savings vehicle. This benefits the economy as a whole, and compliance is not just a legal requirement but also a matter of corporate social responsibility.

How does Superannuation work?

Here's a breakdown of the key components of how superannuation works from an employer's perspective:

Employer contributions

A business owner is legally obligated to pay a percentage of each eligible employee's earnings into their nominated super fund. This is the Superannuation Guarantee (SG). As of July 2023, the minimum SG rate is 11% of an employee's Ordinary Time Earnings (OTE). This rate is scheduled to increase incrementally to 12% by July 2025. It's essential to note that OTE may not include all forms of an employee's income. Accurate calculation of OTE is an employer's responsibility.

Employee contributions

While employer contributions form the foundation, employees can choose to make additional personal contributions to their super. An employer may be asked to facilitate salary sacrifice arrangements, where an employee elects to have a portion of their pre-tax salary paid directly into their super fund.

Super fund

Super contributions are paid into a superannuation fund. These funds are managed by professional investment managers who invest the money on behalf of all members. There are many different types of super funds, including industry funds, retail funds, corporate funds, and self-managed super funds (SMSFs). An employer is typically required to offer a default fund for employees who do not nominate their own.

Investment returns

The fund's objective is to invest the collected money wisely to generate returns. These returns, along with the contributions, contribute to the growth of each employee's super balance over time.

Accessing Super

Generally, employees can't access their super until they reach their "preservation age" and meet a "condition of release," such as retirement. The preservation age depends on the employee's date of birth and ranges from 55 to 60. There are limited circumstances where early access to super may be possible, such as severe financial hardship or on compassionate grounds.

Understanding Ordinary Time Earnings (OTE)

OTE is a fundamental concept in super. It's the base on which a business calculates its compulsory super contributions for each employee. OTE typically includes:

  • An employee's regular wage or salary
  • Allowances
  • Shift loadings
  • Commissions
  • Bonuses (generally, but specifics should be checked)

OTE generally doesn't include:

  • Overtime payments (unless it's considered part of the employee's regular working arrangement)
  • Reimbursements for expenses
  • Lump sum payments on termination (e.g., redundancy payments)

It's a crucial responsibility for any business to understand what's included and excluded from OTE to ensure correct super contributions are made.

Types of Super contributions

There are two main types of contributions:

  1. Concessional contributions: These are contributions made before tax, including employer contributions and salary sacrifice contributions. These contributions are taxed at a concessional rate of 15% within the fund. There's a cap on the amount of concessional contributions that can be made each year. As of the 2023-2024 financial year, the cap is $27,500, but it is indexed annually.
  2. Non-concessional contributions: These are contributions made from an employee's after-tax income. Tax is not paid on these contributions when they go into the fund. There's also a cap on non-concessional contributions, which is currently $110,000 per year or $330,000 under the bring-forward rule (subject to eligibility). The bring-forward rule allows an individual to bring forward two additional years of non-concessional contributions into the current financial year.

Choosing a default Super fund

Selecting a suitable default super fund is a significant responsibility for businesses. Here are some factors that should be considered when choosing a default fund:

  1. Investment options: Different funds offer different investment options, ranging from conservative to high-growth. The default fund should offer a balanced investment option suitable for a wide range of employees.
  2. Fees: Super funds charge fees for managing the money. These fees can vary significantly and impact long-term returns. A business should compare fees and understand what services are provided in return.
  3. Performance: While past performance isn't a guarantee of future results, it's worth considering a fund's historical investment performance.
  4. Insurance: Many super funds offer life, total and permanent disability (TPD), and income protection insurance. The default fund should offer a reasonable level of default insurance cover.
  5. Member services: A fund that provides good customer service, clear communication, and helpful tools and resources is beneficial for employees.

Salary sacrifice

Salary sacrifice is a common arrangement where an employee agrees to contribute some of their pre-tax salary directly into their super fund. This reduces the employee's taxable income and increases their super contributions. A business needs to have systems in place to correctly administer salary sacrifice arrangements and ensure accurate reporting.

Self-Managed Super Funds (SMSFs)

SMSFs are a type of super fund that individuals manage themselves. The members become the trustees of their own fund, giving them complete control over investment decisions. SMSFs are complex and require significant time and effort to manage. An employer's obligations regarding contributions remain the same whether an employee has an SMSF or a regular fund.

Super and employer obligations

When a new employee starts, a business is required to provide them with a Standard Choice Form, allowing them to nominate their preferred super fund. If the employee doesn't choose a fund, contributions must be made to the employer's default fund.

Accurate records of super contributions must be kept, and contributions must be paid on time, at least quarterly. There are penalties for late or incorrect payments. A business should be familiar with SuperStream, the electronic system used for paying super contributions and providing associated data.

Staying compliant in Australia

Understanding, managing, and staying up-to-date with superannuation can be particularly challenging for many businesses, especially those expanding into Australia from overseas. As a global Employer of Record, we offer a solution to simplify this process. As your EOR in Australia, we handle the entire employment lifecycle, including all aspects of superannuation. We ensure your contributions are calculated accurately, paid on time, and comply with all relevant legislation. Our team keeps a constant pulse on any regulatory changes, giving you the freedom to focus on your core business, knowing your Australian employment obligations, from super to payroll and tax, are fully managed.

Get in touch with our team today to learn more.

The making available of information to you on this site by Boundless shall not create a legal, confidential or other relationship between you and Boundless and does not constitute the provision of legal, tax, commercial or other professional advice by Boundless. You acknowledge and agree that any information on this site has not been prepared with your specific circumstances in mind, may not be suitable for use in your business, and does not constitute advice intended for reliance. You assume all risk and liability that may result from any such reliance on the information and you should seek independent advice from a lawyer or tax professional in the relevant jurisdiction(s) before doing so.

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