How to become super-charged when you’re self-employed

4 min read

When you’re caught up in the daily grind of managing your small business or working as a sole trader, it can be easy to forget about the bigger picture – you and your financial future. Planning for retirement and paying superannuation might feel like an unnecessary extra expense when you are worrying about cashflow but you could be doing yourself a big disservice.

Superannuation might be something you need to take seriously, especially if you consider the following results from the 2016 BT Australian Financial Health Index1:

  • 41% of Australians are worried about not having enough money in retirement
  • 18% of self-employed Australians either don’t have a superannuation fund, have another plan or don’t have anything compared to 7% of employees.

More disturbingly, The Association of Superannuation Funds of Australia (ASFA) found that the average super savings for small business owners and the self-employed was much lower at $60,916 than the typical balance of employees at $88,2292.

So what’s the big deal about superannuation?

Superannuation could end up being one of your key financial supports in your retirement (whether you completely retire, or just slow down).

The way your business is structured will dictate whether you are currently obliged to pay yourself superannuation. For example, a sole trader is not obliged to pay themselves superannuation. If your business is set up as a company though, 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 know where you stand at www.ato.gov.au

If you’re planning your retirement, superannuation might be a valuable tool to consider.

- Tax effective environment

Earnings on investments in superannuation receive a different tax treatment of 15%, which could be significantly less compared to other types of investments.  For example, if an investment is held personally, you could be taxed at up to 47% (see the latest tax rates at ato.gov.au). It can be difficult to picture what difference this can make until you put it into dollar terms. Say 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 on that investment earning would be $1,035. Compare this to if you earned $3,000 on an investment in superannuation which is taxed at 15%. The tax payable would instead be $450. Even a few hundred dollars could be important when it comes to what your retirement looks like.

- Pay the same amount of tax as employees (instead of the potential of more tax)

Further to that, if you make a concessional contribution up to the limit of $25,000 per financial year (which includes SG payments representing 9.5% of your salary), you can claim a tax deduction on this. Concessional contributions are taxed at 15%, though an additional 15% may apply to higher income earners. In fact, as a self-employed person not making contributions, you may be paying more tax than an employee who has SG deductions. Take, for example, the table below.

The below table is a fictional example calculated using the 2017/2018 tax tables from the Australian Tax Office. All values are calculated to the nearest $1.00. You can find the latest information about tax rates at www.ato.gov.au

 

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)

$17,422

$15,177

TOTAL TAX PAYABLE

$17,422

$16,153

After tax

$57,578

$53,316

Net super

$0

$5,531

Total wealth change

$57,578

$58,847

Assumes SG for an employee reduces their total remuneration package.

- A disciplined savings method

It can be easy to dip into your savings account whenever the desire takes you. Using superannuation to save might take the temptation away to dip into your savings as you can’t access the money until you retire (unless you meet specific and limited criteria called Conditions of Release, you can find out more here). Obviously, that same inability to access savings could be a problem too depending on your situation so it can be worth getting financial advice to see what might work best for you.

- Potential to access better value insurance

Many superannuation funds offer insurance such as life insurance, total and permanent disability (TPD) and income protection. Having a large number of members might allow them to offer this insurance through the fund at a better value compared to purchasing insurance outside of superannuation. It all varies across providers so if this is something which you are interested in, it may be worth investigating what is on offer. You should also be aware this might not be an option if you decided to set up a self-managed superannuation fund (SMSF) instead.

Super and small business

If you’re thinking about using superannuation, here are some ideas you might want to consider.

1. Concessional contributions

These are any payments made into your superannuation that you can claim a tax deduction for.  They 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 may be applied.

2. 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 and will not be claiming a deduction for. It is subject to restrictions and is capped at $100,000 per financial year and you can find out more here. If your wage earning from your business is an amount lower than the set threshold, you might be eligible for a Government co-contribution for making non-concessional contributions. That is, if you earn below $36,813 per financial year in wages and make a non-concessional contribution to your superannuation, the government may match your contributions up to the value of $500. Even those earning up to $51,813 may be eligible for some form of government contribution.

3. SMSFs and purchase of business property or portions of your business

This starts with the caveat that SMSFs are not suitable for all people and even for those with a SMSF, this approach may be too risky or not even possible. However, some small business owners with a SMSF have considered using this to purchase a portion of their business (it can be no more than 5% of their SMSF) to allow the earnings of their business to help bolster their super. Others have also looked at purchasing the property their business operates in (provided it is solely used for business) 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 SMSF financial adviser will be helpful in understanding your options and whether it is appropriate for your situation.

4. 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 applies to those aged over 55 years who are retiring or permanently incapacitated. 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 be able to contribute this to your superannuation fund without it affecting your non-concessional contribution caps. The retirement exemption applies to those aged under 55 years and allows you 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 wouldn’t affect the non-concessional contributions cap.

There’s a lot to consider when it comes to managing both your superannuation and your small business. You may wish to seek financial advice to understand your options. Request a callback.

1. 2016 BT Australian Financial Health Index, June 2017.
2. Clare, R and Craston, A. Super and the self-employed. May 2016. ASFA Research and Resource Centre.

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This information is current as at 31 July 2017. 

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. 

This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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.

Any tax considerations outlined above are general statements, based on an interpretation of the current tax law, and do not constitute tax advice. The tax implications can impact individual situations differently and you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser. 

Any projections are predictive in character. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be affected by inaccurate assumptions or may not take into account known or unknown risks and uncertainties. The actual results actually achieved may differ materially from these projections.

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