How to boost your super when you're self-employed

3 min read

When you’re caught up in the day-to-day of managing your small business or working as a sole trader, it can be easy to forget about the bigger picture – you and your personal wealth.

Planning for retirement and paying superannuation might feel like an extra expense when you’re concerned about cash flow, but not doing so could compromise your financial future. 

According to the 2019 BT Australian Financial Health Index, one in two Australians believe they won’t have enough in superannuation and other investments for their retirement. When it comes to self-employed Australians, one third don’t even have superannuation, and most of those who do, have a superannuation balance of less than $40,000.1

Superannuation when you’re self employed 

The way your business is structured will determine whether you’re currently obliged to pay yourself super. For example, a sole trader is not obliged to pay themselves superannuation, however, they may want to make personal contributions as a way of saving for their retirement. 

If your business is set up as a company, in which you are considered an employee, you would need to be paying yourself and your employees Superannuation Guarantee (SG) payments. There are penalties involved if you fail to pay SG when your business is meant to under Australian laws, so make sure you understand your obligations. 

Australian super and tax contributions

Earnings on investments in superannuation are taxed at a concessional rate of 15%, which could be a lower rate compared to other types of investments. For example, if an investment is held personally, some taxpayers could be taxed at up to 47% depending on their overall income tax position. 

In dolla r value terms, if you earn $3,000 on an investment in shares and your marginal tax rate is 34.5% (including the 2% Medicare levy), your tax payable would be $1,035. In comparison, if you earned $3,000 on an investment in superannuation which is taxed at 15%, the tax payable would be $450. Even a few hundred dollars per year could make a difference when it comes to your retirement finances. 

Tax deductions on concessional contributions 

If you make concessional contributions to super (up to the limit of $25,000 per financial year), you may be eligible to claim a tax deduction on your contribution. Concessional contributions are taxed at 15%, though an additional 15% may apply to higher income earners. In fact, if you are a self-employed person not making concessional contributions, you may be paying more tax than an employee who has SG contributions going to their super fund. The below table is a fictional example calculated using the 2018/19 tax tables from the Australian Tax Office. All values are calculated to the nearest $1.00. 

Self-employed

Employee

Annual income / remuneration package

$75,000

$75,000

Marginal tax rate

32.5%

32.5%

Concessional contributions (including SG)

0

$6,507

Tax on concessional contributions

0

$976

Taxable income (assuming no further deductions)

$75,000

$68,493*

Tax payable on income (including 2% Medicare levy, less LMITO)

$16,342

$14,097

TOTAL TAX PAYABLE

$16,342

$15,073

After tax

$58,658

$54,396

Net super

$0

$5,531

Total wealth change

$58,658

$59,927

* Assumes SG for an employee reduces their total remuneration package.

Superannuation and insurance

Many superannuation funds offer insurance such as life insurance, total and permanent disability (TPD) and income protection. As super funds arrange ‘group’ cover for a large number of fund members, the premiums can be cheaper than if you were to arrange your own, separate insurance directly through an insurer. This varies across providers, so if it’s something you’re interested in, it may be worth looking into what’s on offer. Note: this might not be an option if you decided to set up a self-managed superannuation fund (SMSF) instead. 

Superannuation and your small business – what to consider

If you’re thinking about using superannuation in your small business, here are some ideas you may want to consider.

Concessional contributions

These are any payments made into your superannuation against which you claim a tax deduction.  Concessional contributions generally comprise employer contributions, such as SG, salary sacrificed amounts and personal deducted contributions. These contributions are taxed at 15% within the super fund (an additional 15% tax applies to higher income earners) and an annual limit of $25,000 applies before additional penalties such as an excess concessional contribution charge may be applied.

Government co-contributions on non-concessional contributions for low income earners

A non-concessional contribution is any payment made to your superannuation from money you have already paid tax on. It is subject to restrictions and is generally capped at $100,000 per financial year. If your income is lower than certain thresholds, you might be eligible for a Government co-contribution when you make a non-concessional contribution. That is, if you earn below $37,697 per financial year in wages and make a non-concessional contribution to your superannuation, the government may match your contribution up to a maximum entitlement of $500. Even those earning up to $52,697 may be eligible for some form of government contribution.

SMSFs and purchase of business property

This starts with the caveat that SMSFs are not suitable for all people and even for those with a SMSF, this approach may not be appropriate or even possible. Some small business owners have looked at purchasing the property their business operates from, so that their SMSF can access the rental income of their business using the premises. If this is something you want to consider, speaking to a financial and tax adviser will be helpful in understanding your options and whether it is appropriate for your situation.

The proceeds of selling your business and superannuation

If you plan to sell your business, you might be able to use the proceeds to boost your superannuation, should you wish to. The 15-year asset exemption generally applies to those aged over 55 years who are retiring. If you have owned your active business asset for at least 15 years, you may be exempt from paying capital gains tax on the proceeds when you sell the asset. You might also be able to contribute an amount to your superannuation fund without it affecting your non-concessional contribution caps. The retirement exemption applies to those aged under 55 years and allows eligible individuals to receive a capital gains tax exemption on the proceeds of selling an active business asset up to a lifetime limit of $500,000, provided the money is paid into a complying superannuation fund or retirement savings account. This also may not affect your non-concessional contributions cap.

[1] BT Financial Health Index, 12 months to March 2019. Base: Australians aged 18-74 years (4,420). https://www.bt.com.au/insights/perspectives/2019/07/the-impact-of-falling-house-prices.html

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This information is current as at 11 June 2019

This article was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141, AFSL and Australian Credit Licence 233714 (Westpac).

This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.  It does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. BT cannot give tax advice. Any tax considerations outlined in this article are general statements, based on an interpretation of the current tax law, and do not constitute tax advice. The tax implications of investing in property, shares or superannuation can impact individual situations differently and you should seek specific advice from a registered tax agent or registered tax (financial adviser).

Superannuation is a means of saving for retirement, which is, in part, compulsory. The government has placed restrictions on when you can access your investment held in superannuation. The Government has set caps on the amount of money that you can add to superannuation each year on both a concessional and non-concessional tax basis.  There will be tax consequences if you breach these caps.  For more detail, speak with a financial adviser or visit the ATO website.