Saving money on your self-managed super fun is a smart move. Letting it rot in the hard drives of the Australian Taxation Office: not so much. This should be pretty obvious. However, according to a report by the Taxation Office, over $730 million of lost super are wasting away while those who could benefit from it are non the wiser.

The Australian Taxation Office has introduced new rules that regulate the way lost super funds are handled. The new rules allow the Taxation Office to take control of any account with a balance larger than $200, if there has not been any contact with the owner for five years or more.

The worrying thing is the amount of super funds lost to the Australian Taxation Office is increasing. According to the same report mentioned above, the amount of super money lost in 2010 was $393 million, while in 2011 it was $730 million.

Why are so many super contributions lost? The answer lies in small super accounts which super investors have failed to rollover on to their main super fund. Maybe they had a short term job or their previous employer failed to make the necessary arrangements to transfer the money in the company’s super account.

The good news is that tracing your lost super contributions and bringing them back to the fold is fast and easy. Visit www.ato.gov.au/superseeker or call 13 28 65 and start the process to recover your lost super. Check now; It’s free. You may be one of the millions of Australians with lost super accounts waiting to return home.

Superannuation is a trillion dollar industry in Australia. It is an industry nearly all of us invest in. For this reason we should all be interested in how Superannuation works and how to make the most of it.

However, despite the importance Supers hold in our lives, many of us do not understand the basics of superannuation, such as how superannuation works or even who pays for it.

This article explains the processes you can use to contribute to your super fund and who can help you contribute toward it.

The Benefits of Superannuation

The main benefit of super money over other forms of investment is its tax efficiency. While other investments receive a tax deduction of up to 50 percent, the earnings of money invested in a super fund is taxed at a maximum of 15%. On top of that, the money you invest in your super fund—up to a certain amount—is not considered part of your taxable income which provides additional savings. Of course, the only catch is you cannot withdraw money invested in your super until you reach your preservation age, which if you were born after 1964 is 60 years of age.

Who Pays for It?

The two main contributors to your super fund are you and your employer. If you earn more than $450 a month, your employer is required to pay the superannuation guarantee rate set by the taxation office. Currently (2012), the superannuation guarantee employers must pay toward your super fund is 9%, but this amount is expected to rise to 12% by 2020. The increase in the superannuation guarantee rate will start phasing in by 2014.

However, employers are welcome to pay more if they want to. Often higher super payments are offered to sweeten the salary package of job offers.

You can, and should, contribute toward your super fund from your own income, as it provides a lucrative and efficient method to save for retirement. As well as regular contributions to your super you can also arrange with your employer to sacrifice a chunk of your salary and dedicate it to your super. This option provides benefits both to you and your employer. Click here for a discussion on the benefits of a salary sacrifice agreement.

The National Australia Bank is licking its wounds after its first half net profit fell by 15 percent. The culprit of NAB’s underperformance is its UK operations, which are failing to meet profitability expectations. We haven’t had to wait long to see what NAB is planning to do to deal with this drop in profits. In fact NAB announced a huge restructure of its UK banks before the drop in profits was official.

Before you feel too bad for the Australian banking giant—you can save your tears for the British workers losing their jobs—let us clarify that they are still reporting a $2.05 billion profit. On the other hand, compare that with the recent $2 billion loss in trades made by JPMorgan Chase—the largest US bank—and you may start to wonder what all the fuss is about. The problem is that this drop in profits comes after an encouraging increase of 6 percent in March ($2.83 billion) from the previous corresponding period ($2.67 billion). NAB thought the worst of the financial slump was behind the and they now have to work out how to stop their drop in profits. The UK market has now posted a large loss while in the previous corresponding period it reported a profit of $122 million.

NAB threatens to axe 1400 jobs in their British banks in an effort to increase their profitability. The strong areas for NAB, which have produced a cash profit of $2.83 billion during the six months leading up to March 2012 (despite UK losses of  $36 million) have been a result of NAB’s excellent performance in personal, business and wholesale banking operations in Australia.

Because superannuation has become such an integral part of our lives, it is easy to fall in the trap that anybody with a financial background, such as an accountant or financial analyst, is qualified to provide advice on self managed superannuation funds. Although accountants and financial analysts do generally have a deep understanding of the intricacies of self managed super fund guidelines, any professional who wishes to provide services in relation to Self Managed Superannuation Funds must first obtain an Australian Financial Services, or AFS, license.

The penalties for accountants who work with SMSFs without an ASF license are steep. For example, the maximum penalty for an accountant found guilty of providing financial services related to SMSFs without a license is $22,000, a two-year imprisonment, or both.

Why the strict regulations? Because of the special rules that regulate Self Managed Superannuation Funds, accountants needs specialized training in order to provide accurate and reliable advice to investors.

Notice however that accountants without an ASF license can provide advice on the setting up of an SMSF, just not on the particular assets or investments strategy of the SMSF. You could, therefore, use a non-licensed accountant to work out all the details of opening an SMSF, a good idea if you have an in-house accountant, and resort to a licensed accountant or financial advisor once you start using your SMSF to invest.

It is important to understand that if you do choose to use the services of an accountant without an AFS license, there are certain SMSF functions the unlicensed accountant will not be able to fulfill. For instance, if you are the trustee of an SMSF you cannot, according to regulation 7.1.29 of the Corporations Regulations for financial services providers, use the financial advice of an unlicensed accountant as part of your SMSF’s investment strategy.

A closely related area which is also restricted by these limitations on unlicensed accountants is taxation advice related to SMSFs. Specific advice on the taxation benefits of a certain SMSF investment product.

However, the simple presentation of options and their possible consequences does not always equate to giving advice. An accountant may in good faith explain the different types of investment an SMSF trustee can enter in without providing specific advice on which investment the trustee should choose.

Wayne Swan seems set on creating the Australian version of the Buffet Rule by increasing the taxes on the self-managed superannuation funds of people with a pre-tax income of $300,000 or more.

Detractors of the new tax on SMSFs point out that the increase in revenue it may provide the Treasury would be less than the cost of implementing it. It would be, some experts claim, like paying $400 a week for childcare when your weekly wage is only $390.

What does the new tax target? How much would it cost to implement it and what revenue do projections estimate it will raise? Let’s take a closer look at his controversial tax proposal that could seriously affect the tax cost of SMSFs of high net worth individuals.

The new tax rule would target people with a gross income—or income before taxes are calculated—of $300,000 or more. Taxpayers who fall into this category would pay a higher tax rate on concessional contributions to their superannuation. The tax rate on concessional contributions would rise from 15% to 30%.

Given the current financial mood, this measure has few critics as the comments of Pauline Vamos, the Chief Executive Officer of the Association of Superannuation Funds of Australia clearly demonstrate: “Obviously it’s hard to argue that we shouldn’t do this. Three hundred thousand dollars is a high salary.” However, most of those who oppose this new tax rule are not necessarily against increasing taxes on the rich. Their qualm with the law is that it is too costly considering the revenue it is likely to claim. As Vamos said in a recent interview: “Our concern is how much it’s going to cost to implement the new change.”

According to Pauline Vamos, the tax change may appear simple to implement but it’s not. Administering the change from 15% to 30% is easy to administer, she said. However, the problem lies in determining which funds of the SMSFs would belong in the 30% bracket and which would belong in the 15% bracket.

Estimates provided by critics of the tax rule claim the cost of implementing this new rule would be higher than the $1 billion revenue increase it would generate over the next four years.

This article will analyze how this procedure words and the benefits it can bring. However, please note the following disclaimer. Salary sacrificing is only tax-efficient if certain requirements are met, so consider talking to a qualified financial adviser before making a decision.

The official term used by the Australian Taxation Office is salary sacrifice arrangement. It is an arrangement that is included in your contract that alters your salary by swapping part of your wages for the salary sacrifice arrangement.

Eligible Benefits

Although we are highlighting superannuation funds as the benefit you can channel your salary sacrifice arrangement funds, there are other benefits you can choose from. For instance, you could choose to use the money from your salary sacrifice arrangement toward car fringe benefits and other expense payment fringe benefits, such as school fees, loan repayments and child care costs. Note that not all of these benefits provide the tax benefits we discuss in the main section of this article.

Benefits of Salary Sacrificing

The beauty of salary sacrificing super contributions is that it provides benefits to both employers and employees, which creates a strong incentive to implement it for both parties. Let’s look at a few of those benefits.

- Benefits to you

• Salary sacrifice will reduce your assessable income. The amount of salary you sacrifice will not count toward your pay as you go, also known as PAYG, withholding tax.
• Reduced tax rate. As well as reducing your taxable income, salary sacrifice is taxed at the rate of your super fund: a maximum of 15%. In the vast majority of cases this will mean your salary sacrifice will be taxed at a much lower rate than if you had not made the arrangement.

- Benefits to your employer

• Super contributions deduction. If you use our salary sacrifice towards your super fund, your employer can claim a deduction on the amount they deposit in your super fund.
• They are not a fringe benefit. If your salary sacrifice is allocated to a complying super fund, it is not considered a fringe benefit as far as taxes go. This means your employer will not have to pay fringe benefits tax on it or include the super contributions as a reportable fringe benefit on your payment summary.

Are you taking advantage of what for all intents and purposes is a tax break? If not, why not talk to your employer about creating a salary sacrifice agreement.

This is due to economic conditions being weaker than expected, whilst inflation has moderated in recent months.

This is good news for home loan borrowers, who should see a similar reduction in their interest rates.

If you have any questions about this change and what it could mean for you, please get in touch.

The Full Statement

The full statement by Glenn Stevens, Governor of the RBA, is reproduced below.

“At its meeting today, the Board decided to lower the cash rate by 50 basis points to 3.75 per cent, effective 2 May 2012. This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated.

Growth in the world economy slowed in the second half of 2011, and is likely to continue at a below-trend pace this year. A deep downturn is not occurring at this stage, however, and in fact some forecasters have recently revised upwards their global growth outlook. Growth in China has moderated, as was intended, and is likely to remain at a more measured and sustainable pace in the future. Conditions in other parts of Asia softened in 2011, partly due to natural disasters, but have recently shown some tentative signs of improving. Among the major countries, conditions in Europe remain very difficult, while the United States continues to grow at a moderate pace. Commodity prices have been little changed, at levels below recent peaks but which are nonetheless still quite high. Australia’s terms of trade similarly peaked about six months ago, though they too remain high.

Financial market sentiment has generally improved this year, and capital markets are supplying funding to corporations and well-rated banks. At the margin, wholesale funding costs have declined over recent months, though they remain higher, relative to benchmark rates, than in mid 2011. Market sentiment remains skittish, however, and the tasks of putting European banks and sovereigns onto a sound footing for the longer term, and of improving Europe’s growth prospects, remain large. Hence Europe will remain a potential source of adverse shocks for some time yet.

In Australia, output growth was somewhat below trend over the past year, notwithstanding that growth in domestic demand ran at its fastest pace for four years. Output growth was affected in part by temporary factors, but also by the persistently high exchange rate. Considerable structural change is also occurring in the economy. Labour market conditions softened during 2011, though the rate of unemployment has so far remained little changed at a low level.

Recent data for inflation show that after a pick up in the first half of last year, underlying inflation has declined again, and was a little over 2 per cent over the latest four quarters. CPI inflation has also declined, from about 3½ per cent to a little over 1½ per cent at the latest reading, as the weather-driven rises in food prices in the first half of last year have, as expected, now been fully reversed. Over the coming one to two years, and abstracting from the effects of the carbon price, inflation will probably be lower than earlier expected, but still in the 2–3 per cent range.

As a result of changes to monetary policy late last year, interest rates for borrowers have been close to their medium-term averages over recent months, albeit tending to increase a little as lenders passed on the higher costs of funding their books. Credit growth remains modest overall. Housing prices have shown some signs of stabilising recently, after having declined for most of 2011, but generally the housing market remains subdued. The exchange rate remains high even though the terms of trade have declined somewhat.

Since it last changed the cash rate in December, the Board has maintained the view that the setting of policy was appropriate for the time being, but that the inflation outlook would provide scope for easier monetary policy, if needed, to support demand. The accretion of evidence over recent months suggests that it is now appropriate for a further step in that direction.

In considering the appropriate size of adjustment to the cash rate at today’s meeting, the Board judged it desirable that financial conditions now be easier than those which had prevailed in December. A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates.”

“Safety in the Market” is a financial education service offered by the The Hubb Organisation Pty Ltd that provides training courses and trading software to people who want to learn how to invest in the market. It advertised itself as a safe way to invest in the stock market and other financial instruments. As part of their marketing material they used statements like this: ‘Safety in the Market offers an effective, easy to follow trading system that has been proven to work in markets across the globe’ and ‘Our FREE 2-hour Trading with Safety Seminar will introduce you to a proven approach to profitable trading that works in up or down markets’.

ASIC, the Australian Securities & Investments Commission took issue with these statements and started court proceedings against the operations of Safety in the Marketplace. What was the problem with Safety in the Marketplace’s statements?

The Australian Securities & Investment Commission claims these statements portrayed Safety in the Market’s Smarter Starter Pack as a ‘proven system’ and a ‘proven methodology’ to profitable trading. In other words they were selling their program as a safe bet, a sure way to make money based on a proven method. Of course, when ASIC researched the Smarter Starter Program offered by Safety in the Market it found no evidence that the training program provided any type of proven methodology of safe trading.

But why all the fuss? Everyday we see and hear wild claims on the TV, internet and radio and few of us believe them to be true. The difference is that Safety in Market is a licensed financial advisor and it is their responsibility to provide clear and accurate information; certainly not to make statements about the performance of financial products that could mislead or deceive financial consumers. The court case continued for two years until last Tuesday the Hubb Organisation Pty came to an agreement with ASIC and consented to the charges of misleading and deceptive advertising. The agreement requires Safety in the Market to send notices to all those who purchased its Active Trader Program and what options they had available if they felt they had suffered any type of loss as a result of the company’s misleading advertising; and include a disclaimer on their website warning that their methodology is not a proven method for investing profitably in financial products.

This story provides a good lesson for those trying to oversell their financial products and for those looking for “too good to be true” financial instruments to buy. Although training and expert advice from an experienced financial advisor can help you increase your potential for investment success, there is no hiding from the fact the stock market is full of uncertainties and no place for investors with a zero risk tolerance. It is the job of financial advisors to highlight the potential for profit of financial products without sugarcoating the inherent risks that go with them.

If you are close to retirement wage, you may start to worry about how the worldwide financial instability will affect your super. Let’s check that. If you are close to retirement and you have been following your super balance for the last few years, you are probably panicking. What can you do to ensure your super gets back and remains on track if your fund savings have dropped?

1) Don’t Panic (you are not alone)

No, seriously this is good advice. Although worrying is natural, it won’t help you reach your goals. You need to be calm, rational and employ a methodical approach to maximise your super’s performance. That is extremely difficult if you are panicking. Remember you are not alone. In the last few years many super fund members have seen the value of their savings drop. According to report by Chant West, in 2009 super funds suffered an average loss of 8.4% and in 2007 it was 6.9%.

2) Remember the good news

Yes, there is good news about your super fund and this may help you calm down enough to start making the smart choices. For instance, consider this:

- Despite the losses super funds have suffered in the last few years, they have still performed better than the share market as a whole.

- The Australian super fund system is well regulated and robust.

- The chances of having two years in a row with negative returns on your super fund is very low (once in every 25 years according to Chant West).

- Markets run on cycles, which means there is always a recovery to look forward to after a downturn.

3) Re-think your financial plan

This will allow you to get down to basics and revisit the goals for your super fund. They may have changed so do not jump this step. Ask yourself what income you estimate you will need after you retire. This will help you workout how much you need to save. To live modestly in Australia you need around $22,000 a year ($31,700 if you are a couple) but if you want to travel a little, have a nice car and private medical insurance you will need a lot more: around $40,500 ($55,400 for a couple). Compare that to the average age pension for a single homeowner, which is around $18,000.

4) Assess your risk tolerance.

Your risk tolerance measures how willing you are to invest in products that have a high potential for growth but also carry a high risk of failing. To illustrate, treasury bonds are safe but provide a low return, while investing in the stock market may offer higher returns but are risky. Your risk tolerance will depend on your goals, your attitude toward life and your age. If you are close to retirement and you have reached your basic goals for your super, it is no time for high risk investments that could squander your life savings.

5) Choose investment options that meet your goals and your risk tolerance.

Although switching investment options is not always a good idea, there are circumstances when bailing out a bad fund is the smart move. Learn how to determine when you should switch in our next post: Should You Switch Super Funds?

The Australian Taxation Office offers you incentives to save for your retirement. This is a sweet way of saving for your golden years and reducing your current tax liability. However, all good things come to an end and that includes tax breaks on your superannuation fund. Although most of us are unlikely to get even close to these limits, they may affect you if you are close to your retirement age and you are trying to maximise the tax-saving potential of your super to the full.

Before we look into specific super caps we must understand the two main types of super contributions: concessional contributions and non-concessional contributions.

Concessional contributions include before tax contributions such as the compulsory 9% contribution paid by your employer, amounts you sacrifice from your salary to boost your super and personal contributions you make as part of your super deduction in your income tax return. For a full list of concessional contributions click here.

Non-concessional contributions, on the other hand, include after-tax contributions to your super fund, such as contributions over and above your income tax personal super deduction, contributions made by your spouse and excess concessional contributions.

The Numbers

Now to the nitty-gritty of contribution caps.

The cap for concessional contributions depends on your age and the year in which you make the contributions.

- For the 2011-2012 year (it hasn’t changed since the 2009-2010 year) the cap is $25,000, if you are under 50 years old; $50,000 if you are 50 years old or over. This means you can make a yearly contribution of $50,000 after you turn 50 and still receive the full tax benefits of concessional contributions.

- For the 2007-2008 and 2008-2009 years the caps were set at double the current caps: $50,000 for workers under 50 and $100,000 for those over 50.

The cap for non-concessional contributions is set at six times the cap for concessional contributions of the same year. For instance, the non-concessional cap for people under 50 for the 2011-2012 year is $150,000. Notice that any extra concessional contributions over and above your concessional contributions cap will automatically count toward your non-concessional contributions.

If you are under 65 years old you can contribute up to three times the yearly non-concessional cap in one year during any given three-year period. The three-year period will start with the year you first pay more than your non-concessional cap.

Penalties

It is worth taking these caps into consideration when planning your super contributions because the tax rates on contributions over the cap are steep. The tax rate for contributions over the concessional contributions cap is 31.5% on top of the standard 15% your super fund pays. The tax rate for contributions over the non-concessional cap are even worse: 46.5%.