COVID-19: Early release of superannuation stirs debate as fraudsters strike

COVID-19: Early release of superannuation stirs debate as fraudsters strike

Some of the money lost from dipping into superannuation early as a response to COVID-19 will be offset by higher pension payments, research by a non-partisan think tank suggests.

One of the economic bandaids 3 million people tapped into in the midst of the coronavirus pandemic is to withdraw $10,000 from their superannuation if they suffered a loss of income, according to the Australian Prudential Regulation Authority. In 1.1 million of those cases, they’ve done so twice.

And in more than half a million cases, superannuation funds have been cleared out altogether.

But the Federal Government’s decision to allow people to withdraw funds from their retirement nest egg has drawn ire from the opposition party, who allege the coming generation has carried the burden of dealing with the government’s coronavirus response.

Pensions will offset superannuation withdrawals: Grattan

New modelling from the Grattan Institute acknowledges younger people will be out of pocket by dipping into their superannuation early, but suggests that some of these losses will be offset by being eligible for higher pension rates. 

The non-partisan think tank published their findings on The Conversation, after studying 80,000 federal enterprise agreements made between 1991 and 2018 for its recent report, No free lunch: Higher superannuation means lower wages.

They cited a 35 year old earning the median income as an example. Were they to withdraw $20,000 from their superannuation, their balance would be $58,000 less.

But the lower superannuation would be offset by higher pension repayments, due to the government’s pension means test, resulting in their retirement income falling by $24,000 -- a loss of $4000.

This would equate to them earning 88 per cent of their income before retiring, as opposed to 89 per cent, the modelling showed.

Grattan acknowledged the example was a generality that is not necessarily applicable to everyone.

The “very lowest income earners will receive less extra pension to compensate, and will have less of a cushion”, the authors wrote.

The findings of the report precedes a mandatory rise in superannuation under legislation supported by both sides of Federal Parliament, which will see contributions increase from 9.5 per cent of wages to 12 per cent by July 2025.

‘Young Australians have borne the brunt of the crisis’

The Labor Party, which has referred the Federal Government’s early release superannuation scheme to the Auditor General citing the plundering of fraudsters, said the government’s coronavirus response had been paid for by people between 20 to 35 years of age.

“Instead of receiving timely government support, young Australians have borne the brunt of this crisis and will be forced to continue to pay the cost in years to come,” Stephen Jones said, the shadow assistant treasurer and shadow minister for financial services.

Mr Jones said a 25 year old who withdraws $20,000 from their superannuation will be $80,000 to $100,000 worse off in retirement, after taking into account the cost of inflation and living expenses.

He said a 35 year old would be $65,000 worse off, a figure slightly above the Grattan Institute’s estimate of $58,000. 

“Collectively under 35s, will be at least $51 billion worse off at retirement,” Mr Jones said.

“So far, more than 606,000 Australians have emptied their superannuation accounts. 494,000 of those are under 35 years of age.”
Fraudsters pillage superannuation

Labor referred the scheme to the Auditor General on Sunday

The superannuation scheme, announced in March as the first wave of COVID-19 plummeted cities across the country into lockdowns, is alleged to have been targeted by fraudsters who plundered the retirement savings of unsuspected victims.

“Government ministers are … yet to reveal how many fraudulent claims have been made, or what the government is doing to compensate victims after the ATO directed their super fund to make a payment to a fraudulent account,” Mr Jones said.

That same morning, the Australian Federal Police charged three people with allegedly submitting false claims to gain early access to superannuation under the Government's early release of superannuation measure.

An ATO-led task force alleges they submitted several fraudulent applications -- claiming to be other superannuation fund-holders -- to attempt to access early release of superannuation payments totaling $113,500.

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Learn more about superannuation

Is superannuation included in taxable income?

Superannuation is not included when calculating your income tax. So if you have a salary of $50,000, your assessable income would be $50,000, not $50,000 plus superannuation.

That said, superannuation itself is taxed. It is generally taxed at 15 per cent, although if you earn less than $37,000, you will be reimbursed up to $500 of the tax you paid.

How does superannuation work?

Superannuation is paid by employers to employees, at least once every three months. The ‘superannuation guarantee’ is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary. The guarantee is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

Superannuation is generally taxed at 15 per cent. However, if you earn less than $37,000, you will be automatically reimbursed up to $500 of the tax you paid. Also, if your income plus concessional superannuation contributions exceed $250,000, you will also be charged Division 293 tax. This is an extra 15 per cent tax on your concessional contributions or the amount above $250,000 – whichever is lesser.

You can withdraw your superannuation when you meet the ‘conditions of release’. The conditions of release say you can claim your super when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

 

How is superannuation calculated?

Superannuation is calculated at the rate of 9.5 per cent of your gross salary and wages. So if you had a salary of $50,000, your superannuation would be 9.5 per cent of that, or $4,750. This would be paid on top of your salary.

The ‘superannuation guarantee’, as it is known, has been at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

What is the superannuation rate?

The superannuation rate, or guarantee rate, is the percentage of your salary that your employer must pay into your superannuation fund. The superannuation guarantee has been set at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

What is superannuation?

Superannuation is money set aside for your retirement. This money is automatically paid into your superannuation fund by your employer.

Can I carry on a business in an SMSF?

SMSFs are allowed to carry on a business under two conditions.

First, this must be permitted under the trust deed.

Second, the sole purpose of the business must be to earn retirement benefits.

What superannuation details do I give to my employer?

When you start a job, your employer will give you what’s called a ‘superannuation standard choice form’. Here’s what you need to complete the form:

  • The name of your preferred superannuation fund
  • The fund’s address
  • The fund’s Australian business number (ABN)
  • The fund’s superannuation product identification number (SPIN)
  • The fund’s phone number
  • A letter from the fund trustee confirming that the fund is a complying fund; or written evidence from the fund stating it will accept contributions from your new employer; or details about how your employer can make contributions to the fund

You should also provide your tax file number – while it’s not a legal obligation, it will ensure your contributions will be taxed at the (lower) superannuation rate.

What will the superannuation fund do with my money?

Your money will be invested in an investment option of your choosing.

How do you pay superannuation?

Superannuation is paid by employers to employees. Employers are required to pay superannuation to all their staff if the staff are:

  • Over 18 and earn more than $450 before tax in a calendar month
  • Under 18, work more than 30 hours per week and earn more than $450 before tax in a calendar month

This applies even if the staff are casual employees, part-time employees, contractors (provided the contract is mainly for their labour) or temporary residents.

Currently, the superannuation rate is currently 9.5 per cent of an employee’s ordinary time earnings. This is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

Employers must pay superannuation at least four times per year. The due dates are 28 January, 28 April, 28 July and 28 October.

What happens to my insurance cover if I change superannuation funds?

Some superannuation funds will allow you to transfer your insurance cover, without interruption, if you switch. However, others won’t. So it’s important you check before changing funds.

How does the age pension work?

Most Australians who are of retirement age can qualify for the age pension. However, depending on the size of your assets and post-retirement income, you might be entitled to only a reduced pension. In some instances, you might not be entitled to any pension payments.

How do I set up an SMSF?

Setting up an SMSF takes more work than registering with an ordinary superannuation fund. 

An SMSF is a type of trust, so if you want to create an SMSF, you first have to create a trust.

To create a trust, you will need trustees, who must sign a trustee declaration. You will also need identifiable beneficiaries and assets for the fund – although these can be as little as a few dollars.

You will also need to create a trust deed, which is a document that lays out the rules of your SMSF. The trust deed must be prepared by a qualified professional and signed by all trustees.

To qualify as an Australian superannuation fund, the SMSF must meet these three criteria:

  • The fund must be established in Australia – or at least one of its assets must be located in Australia
  • The central management and control of the fund must ordinarily be in Australia
  • The fund must have active members who are Australian residents and who hold at least 50 per cent of the fund’s assets – or it must have no active members

Once your SMSF is established and all trustees have signed a trustee declaration, you have 60 days to apply for an Australian Business Number (ABN).

When completing the ABN application, you should ask for a tax file number for your fund. You should also ask for the fund to be regulated by the Australian Taxation Office – otherwise it won’t receive tax concessions.

Your next step is to open a bank account in your fund’s name. This account must be kept separated from the accounts held by the trustees and any related employers.

Your SMSF will also need an electronic service address, so it can receive contributions.

Finally, you will need to create an investment strategy, which explains how your fund will invest its money, and an exit strategy, which explains how and why it would ever close.

Please note that you can pay an adviser to set up your SMSF. You might also want to take the Self-Managed Superannuation Fund Trustee Education Program, which is a free program that has been created by CPA Australia and Chartered Accountants Australia & New Zealand.

What are reportable superannuation contributions?

For employees, there are two types of reportable superannuation contributions:

  • Reportable employer super contributions your employer makes for you
  • Personal deductible contributions you make for yourself

How many superannuation funds are there?

There are more than 200 different superannuation funds.