Super for the Self Employed

Written and accurate as at: 14 April 2014

In an alarming report released by the Australian Bureau of Statistics in late 2012, almost 25 percent of self-employed workers, including tradespeople and small business owners have no superannuation. The same survey found that the average superannuation balance for self-employed is $56,682 compared to an employed person who is likely to have on average $85,600 invested in superannuation.

For many self-employed people, because superannuation contributions are not compulsory (in contrast to employer SG contributions), they are often over-looked, with priority instead going to the re-investment of cashflow back into the business. However, by making regular contributions self-employed people can take advantage of a range of tax benefits and the sooner they start, the more they can contribute and the more they will have to fund their retirement lifestyle.

The ASFA (Association of Superannuation Funds of Australia) Retirement Standard benchmarks the annual budget needed by Australians to fund either a comfortable or modest standard of living in their post-work years. The most recent national figures show that, in general, a couple looking to achieve a comfortable retirement needs to spend $57,665 a year, while those seeking a ‘modest’ retirement lifestyle need to spend $33,358 a year. For singles, the amounts are $42,158 and $23,175 respectively. With this in mind, it’s important for self-employed people to think about building their superannuation now otherwise they may not have enough money for retirement.

For some self-employed, their retirement plan consists of relying solely on the sale of their business at retirement – but this comes with risk. Businesses can be difficult to sell and in some cases they do sell for less than you think they are worth. By building a separate pool of assets in preparation for retirement, it takes the pressure off selling the business and can mean there’s a much bigger nest egg to retire on.

Anyone who runs their own business or earns less than 10% of their total income from income paid by an employer is considered to be self-employed for the purposes of superannuation [1].  With this in mind, there are a number of ways that the self-employed can potentially boost their superannuation balances.

Some of these include:

Personal Deductible Contributions – these are superannuation contributions which you can claim a tax deduction for. A self-employed person or their business may be able to claim a tax deduction of up to $25,000 annually for personal contributions made to a superannuation fund ($35,000 annually if the person is aged 60 or more). The contributions are classified as concessional contributions, which are taxed at 15%. The contributions must be made before 30 June if a tax deduction is to be claimed. Care needs to be taken not to exceed the concessional contributions cap, as excess tax can apply to any amount contributed above the annual limit. You can read more about these contributions here.

Government Co-Contribution – For those self-employed persons who earn up to $48,516pa and whom make an after-tax personal contribution (a voluntary personal non concessional super contribution for which no tax-deduction is claimed) to superannuation, they may be entitled to the Government Co-Contribution. This payment is an incentive offered by the Government of up to $500pa. There are other conditions that apply. You may like to refer to the Superannuation learning module for more information on these types of contributions.

Contribution splitting – For those self-employed persons with a spouse, their spouse could choose to split available concessional contributions to help boost the superannuation balance of their self-employed partner. Up to 85% of concessional contributions can be split in a financial year and any amount that is split counts towards the contributions cap of the person who is transferring their superannuation to their spouse. 

Small Business Retirement exemption and other retirement-related incentives – For those operating their small business as a sole trader, partner in a partnership or under a trust or company structure, they may be entitled to one or a combination of the special concessions to reduce the capital gains on the sale of business active assets. These are discussed in detail in our Tax and Structures learning module. In addition small business owners who are also individual taxpayers may also be eligible for the 50% discount for Capital Gains Tax assets held for longer than 12 months. Under the retirement exemption, if a self-employed person sells an asset, which qualifies under the retirement exemption, they have the option to contribute all or part of the exempt capital gain to their superannuation (subject to a lifetime limit of $500,000). There are various eligibility and other requirements in order to be able to take advantage of the small business and retirement incentives, accordingly please seek professional taxation and financial planning advice.

As you can see, there are a number of incentives to encourage self-employed people to boost their retirement savings by contributing to superannuation. 

For most, the key is to start making some level of contribution, whether big or small. The sooner a regular contribution plan starts the greater boost it can have on your retirement nest egg over time.

A person who is unemployed or retired, provided those aged 65 or over meet the work-test (worked at least 40 hours in 30 consecutive days) may also be considered self-employed for superannuation purposes.

[1] A deduction is only available for personal contributions where the tax payers assessable income, reportable fringe benefits and reportable employer superannuation contributions for the financial year is less than 10% of the total income. Reference; ASFA Retirement standard Dec quarter 2013.