To understand what a retirement bonus is, you must first understand how the average super fund is structured. The typical super fund (including industry funds) is what’s called a master trust. A master trust is where all the members’ money is pooled together into one, where it is then invested. This isn’t necessarily a bad thing, but it has some characteristics to be aware of.
The way tax works within a master trust isn’t immediately clear when looking at your statement. Tax is actually paid at the fund level; this means that your personal super doesn’t have direct tax on earnings applied to it. Any income made by the fund each year is taxed before the returns are distributed to you via a change in the unit price.
The same applies for capital gains tax, except that each year that the fund makes a gain, assets are provisioned to pay this tax when the assets are sold down. They may need to be sold due to you moving your super elsewhere or the fund manager changing the allocations around.
This characteristic is why the retirement bonus exists for many master trust style funds.
What is a retirement bonus?
A retirement bonus is essentially a refund of your provisioned capital gains tax mentioned earlier. When you begin a pension from your super, the tax rate becomes 0% (from 15%). This means that any capital gains you have accumulated over that time will not have any tax payable if you choose to sell them whilst in pension phase.
Therefore, because the fund no longer has to use the funds it provisioned to cover your capital gains tax liability, it instead pays some back to you, as a Retirement Bonus.
Now, the word bonus is a little misleading. The money is technically yours, but due to the nature of master trusts, it needs to be kept aside in case tax is payable at some point. This is simply a downside of these types of industry funds, but it is good to see that some funds recognise this and are returning some of this money back to members when they move to pension.
How much do I get and how is it calculated?
Firstly, you need to be in a fund that actually pays the retirement bonus. The bonus as a concept is relatively new, so not all funds are on board yet. The largest funds such as AustralianSuper & Australian Retirement Trust (ART) pay the bonus, but another large fund such as Aware Super currently does not.
Each fund will have its own way of calculating how much you get and will usually have a minimum membership period to be eligible. For example, with ART you need to have been a member for 12 months to be eligible. If you are eligible the bonus is calculated as 0.50% of the balance in select investment options being used to commence a pension. Each fund will have their own eligible investment options for the bonus calculation. This is because options such as cash or fixed interest will not have any or very little tax provisions due to their nature of being income focused rather than growth.
This means that if you are eligible and have a balance of $500k in eligible investment options, your bonus with ART will be $2,500. This amount is paid directly into the fund and is neither taxable nor counts toward contribution limits. It does have an impact on your transfer balance cap, however. ART alongside all other funds also impose a cap on the bonus, for ART this is currently $9,500.
You also need to be aware that some funds have a clawback period. This stops you from moving your money away from the super fund itself once you receive the bonus. For example, AustralianSuper will clawback your bonus if you withdraw more than 50% of your money in the first financial year of receiving the bonus. ART doesn’t have a clawback though.
Does the retirement bonus solve the issue with pooled master trust super funds?
The simple answer is no. The retirement bonus is a fairly blunt tool to account for the inherent unfairness of tax treatment in pooled super funds. This is obvious when you consider that a person who may have been in the fund for 30 years, accumulating considerable capital gains over that time will receive the exact same amount of bonus as someone who joined 3 years ago.
It is great that super funds are starting to be proactive on this though. However, it would be good to see more in-depth calculations that better reflect an individual members situation in the future.
Until then, the only way to manage your own tax implications in super is to use one of the following:
- Open a self-managed super fund
- Use the member direct option provided by some funds
- Utilise a wrap account usually only accessible via a financial adviser
Each of these will have its own benefits and costs. It’s too simple to suggest any of these options are inherently better than a pooled fund in every scenario.
In conclusion, the gaining popularity of the retirement bonus is a great thing, but it doesn’t do enough to account for the unfair tax treatment of pooled super funds.
