Self-employed super contributions – what you need to know

3 min read

It’s almost the end of this financial year, which means, it’s time to consider your self-employed super contributions as a sole trader which could help build your retirement savings and lower your tax bill.

People who work for themselves make up about 10 per cent of the population and are an important contributor to the nation’s wealth. While sole traders don’t need to pay themselves the superannuation guarantee, self-employed super contributions are an important part of retirement planning (even if retirement is many years down the track). Also remember that you still have an obligation to pay the super guarantee (SG) currently 9.5 per cent if you operate in a company structure, even if you’re the company’s only employee. 

You may choose to reduce your contribution to your superannuation in the early years of self-employment while you’re building up your cash flow. But it may be a good idea to pay more attention to your super fund as your business becomes more established. 

This is important, as research shows self-employed people tend to have a lower super balance than people in full-time employment. People who work for themselves tend to have just $60,916 in their super account. The situation is especially concerning for women, whose super balances are about a third lower than other working females, as well as men who work for themselves. 

These stats can be concerning the closer you are to retirement, with the super balances of the self-employed tending to be half that of other working people aged between 60 and 64. In fact, just 27 per cent of people who work for themselves who are aged 60 to 64 have more than $100,000 in superannuation.1

Aside from helping you build for retirement, there may also be tax advantages when you make contributions to your superannuation. Here are some reasons how:

Create a tax-effective environment

Super’s low-tax environment is one of the reasons it’s an attractive investment. Earnings on investments in superannuation are taxed at just 15%, a tax rate that may be lower than the tax rate you pay on other investments. 

Additionally, you can claim a tax deduction for any concessional contributions, which is money you put into your super fund before you pay tax, up to a limit of $25,000 a year including the super guarantee. Concessional contributions are taxed at 15%, although an additional 15% may apply to higher income earners. 

Plus, you may be paying more tax than an employee who has super guarantee deductions if you’re self-employed and you’re not making contributions. 

Contribute to your super 

There are lots of options to make self-employed super contributions your superannuation, which may give you both tax benefits and help build your wealth. 

Taking advantage of government incentives 

If you are a low-income earner, you may be able to take advantage of the government co-contribution scheme on non-concessional contributions. A non-concessional contribution is any payment made to your superannuation from money you have already paid tax on and for which you will not be claiming a tax deduction. 

Under this scheme, if you earn below $53,564 a year in wages and make a non-concessional contribution to your superannuation, the government may match your contributions up to the value of $500. This program is subject to restrictions and is capped at $100,000 per financial year. Find out more here.

Consider an SMSF  

There may be a range of options for small business owners to build wealth with a self-managed super fund (SMSF). The fund may be able to buy part or all of a business, as long as the asset makes up no more than 5% of the SMSF’s total assets. In this approach, the business’s earnings can help bolster the super balance. Another option may be for the SMSF to buy the business’s premises, with the rent accruing to the super fund. 

It’s essential to speak to a financial adviser who has specialised experience with SMSFs who understands your circumstances and can help you work out if this is an appropriate path given your situation. SMSFs are not suitable for everyone and, even for those with an SMSF, these strategies may be too risky or not possible.

Sell your business and super

You may be able to use the sale proceeds to boost your super balance if you’re planning on selling your business. Under the 15-year asset exemption, you may not have to pay capital gains tax on this money if you’ve owned your business for at least 15 years and you’re over 55 and retiring or permanently incapacitated. If the sale price is $500,000 or less, you may be able to contribute all or part of these funds to your super fund without it affecting your non-concessional contribution caps. 

Insurance and super 

Many superannuation funds include insurance such as life insurance, total and permanent disability (TPD) and income protection inside their members’ accounts. Because super funds arrange ‘group’ cover for a large number of fund members, premiums may  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. This doesn’t apply to SMSFs. 

As you can see, super is complex. But there are lots of opportunities for people who work for themselves to take advantage of incentives to build their super nest egg. Remember, to claim a tax deduction for your self-employed super contribution in the current financial year, you need to make sure you have made the contribution before 30 June.

1 https://www.superannuation.asn.au/ArticleDocuments/359/Super-and-the-Self-Employed-May2016.pdf.aspx?Embed=Y

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This information is current as at 19 June 2020. 

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.