Call to increase compulsory super to 10pc

By Rod Brown

In the lead up to the state election Federation seeks a commitment from both the Government and Opposition to increase employer contributions to superannuation to 10 per cent without wage offsets in 2007.

The overwhelming majority of teachers receive the minimum provision for superannuation in the form of the Superannuation Guarantee (currently nine per cent of salary) and teachers relying on this to provide an income in retirement will most likely live in poverty.

Federation, along with the union movement generally (through both the ACTU and Unions NSW), recognises that the Superannuation Guarantee represents an inadequate provision for superannuation and in fact Federation supports the lifting of the Superannuation Guarantee from its current nine per cent to 15 per cent.

Already some other public sector employers pay in excess of nine per cent to superannuation. The Commonwealth now pays 15.4 per cent for all public sector employees, including MPs. Queensland pays 12.5 per cent where there is an employee contribution of five per cent. In NSW, Energy Australia pays 11 per cent and TransGrid pays 10 per cent.

Using the example of a beginning teacher in 2007 receiving the nine per cent Superannuation Guarantee, retiring at age 60 they would receive a lump sum of $280,800 in today's dollars. There are of course, various assumptions made in this calculation. You've no doubt seen the advertisements for industry superannuation funds. There are similar assumptions made here. An additional one per cent employee contribution would lift the lump sum from $280,800 to $313,400 in today's dollars.

Teachers in NSW government schools and colleges are covered by four separate superannuation arrangements: the State Superannuation Scheme (SSS -- the 'old' scheme), the State Authorities Superannuation Scheme (SASS -- the 'middle' scheme), the State Authorities Non-Contributory Scheme (SANCS -- which appears on member's superannuation statements as the 'Basic Benefit') and the Superannuation Guarantee. The SSS was closed to new members in 1985 while SASS was closed to new members in 1992. Members of SSS and SASS also have a SANCS account. All new teachers since 1992 and those teachers who are otherwise not members of the older schemes receive the Superannuation Guarantee.

The Superannuation Guarantee is the minimum provision to superannuation that an employer must provide on behalf of an employee. This is currently set at the equivalent of nine per cent of salary. The majority of teachers who receive the Superannuation Guarantee have their superannuation monies directed to First State Super. In the first quarter of this year, the number of active accounts (that is, where a contribution had been received in the preceding 12 months) was 15,682 in SSS, 14,000 in SASS and 121,096 in First State Super for all Department of Education and Training (DET) employees. Clearly, the overwhelming majority of teachers receive the minimum provision for superannuation in the form of the Superannuation Guarantee.

Federation has long-standing policy on pursuing better superannuation outcomes for all its members. Over the past 18 months there have been a number of significant developments in the area of superannuation.

As part of the last award settlement, Federation and DET agreed to support arrangements whereby members of the older superannuation schemes, the State Superannuation Scheme (SSS) and the State Authorities Superannuation Scheme (SASS), would be able to "salary sacrifice" their compulsory employee contributions to superannuation. Instead of compulsory employee contributions being made from post-tax contributions such contributions could be made before tax. Having secured the DET's support Federation pursued the matter with the NSW Government and Cabinet gave in-principle support earlier this year.

Subsequently changes were made to the legislation covering SASS with implementation effective from April 1, 2007. Changes to SSS were postponed until a cost and administrative assessment had been made. Initial advice was that changes to SSS would not be in place until 2008. Federation has continued to pursue the matter and is seeking a commencement date for SSS members from July 1, 2007.

Some teachers may find appealing the capacity to salary sacrifice their compulsory employee superannuation contributions. In understanding the attraction of making such arrangements the following example may be helpful. A teacher on top of the pay scale who is a member of either SSS or SASS will, from January 2007, receive $72,454 per annum and pay income tax at $18,731 thereby receiving a net salary of $53,733 (not including Medicare levy). Currently, members of SSS or SASS would, typically, contribute six per cent of gross salary by way of the compulsory employee contributions to superannuation or an amount of $4347. This leaves a take home pay of $49,376. If the compulsory employee contributions are made before tax, superannuation contributions are deducted at 7.06 per cent or $5115. The change in the percentage is due to the different tax treatment of pre-tax contributions. Taxed salary is $67,339 and tax paid is $16,582 with net pay of $50,757. The difference between paying contributions after tax rather than before tax is $1,381 per annum or $53 per fortnight in the hand.

In November last year the then Tax Commissioner made a ruling regarding the level of salary that could be sacrificed. Until the ruling, there had been Commonwealth guidelines regarding the percentage of salary that could be sacrificed. Many employers including the NSW Government imposed a 50 per cent ceiling on such arrangements. The Tax Commissioner's ruling lifted the maximum amount that could be sacrificed to 100 per cent subject to all post tax obligations being fulfilled. The Premier issued a circular announcing the lifting of the limits with effect from April 1 of this year for all NSW public sector employees but allowed the implementation of the changed arrangements to rest with each of the respective public sector employers. In the case of DET it issued a circular to all schools and colleges regarding the changes and also a timetable for the implementation of salary sacrifice arrangements for temporary and casual teaching staff.

Since 'salary sacrifice' became available in 1998 DET has contracted out the provision of these services to a private company. Until this year that company was McMillan Shakespeare, however, following a tendering process at the end of last year, the company providing this service was changed to Smart Salary.

In April 2005 the then Commonwealth Assistant Treasurer announced changes to Commonwealth legislation which had until the changes became effective on July 1, 2005 required that employees retire permanently from the workforce in order to receive their superannuation through an income stream. Under the banner of "Transitions to Retirement" the changes are intended to provide greater flexibility in moving between work and retirement. Federation has been in discussions with the Public Employment Office (PEO) regarding "Transitions to Retirement". The PEO is the agency that acts as the employing authority on behalf of the NSW Government. In these discussions the PEO has raised significant costs concerns for the implementation of "Transitions to Retirement" for NSW public sector employees. In doing so the PEO noted that the Commonwealth had not implemented the "Transitions to Retirement" policy for its own employees, nor had any other public sector employer anywhere in Australia. Federation has asked for the analysis on which the PEO has based its advice.

In May Federal Treasurer Peter Costello announced sweeping changes to the tax treatment of superannuation benefits. The changes significantly simplify the tax arrangements that apply to superannuation benefits at the point at which they are taken. The changes also introduce new contribution limits, as well as other changes aimed at simplifying the superannuation system.

The Government's proposals provide for tax free superannuation benefits at age 60 or over. Benefits between age 55 and 59 would still be subject to some tax. Reasonable Benefits Limits are abolished for everyone. Preservation rules will not change under the Government's changes, that is, it will still be necessary to satisfy a condition of release, for example, retirement.

There are also new, proposed rules for taxation on death benefits which are currently subject to the pension Reasonable Benefits Limits. From July 1, 2007 these amounts paid to dependants would be tax free.

Earnings on lump sum assets left in a superannuation fund would be taxed at 15 per cent. Earnings on income stream assets, for example, an allocated pension, could be left in a fund with investment earnings on assets tax free.

Earlier this year, First State Super became a fully regulated, open fund subject to the Commonwealth's Superannuation Industry (Supervision) Act. First State Super was established under state legislation in 1992 to cover NSW public sector employees who receive the Superannuation Guarantee. As employees can choose to nominate an alternate fund for Superannuation Guarantee contributions, First State Super needed to change in order to retain members who worked across sectors or changed employment from public to private sector employment.

Superannuation is inextricably linked to the remuneration and status of the profession. Federation remains committed to improving the superannuation outcomes of all its members.

Rod Brown is a Welfare Officer. Federation does not provide financial advice. Members are advised to consult a qualified financial adviser regarding their individual circumstances.

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November 2006 contents