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Superannuation is optional for self-employed Australians, even though it’s compulsory for employees via the 9.5% employer superannuation guarantee. If you’re one of the approximately 10% of Australians who are self-employed, it’s totally up to you to provide for your own retirement.
This can place self-employed people at a disadvantage if they don’t make voluntary contributions to a super fund, unless they can either:
- sell all or part of their business to finance their retirement, and/or
- still draw an income from its profits after they have retired.
Self-employed super statistics
According to the latest research from ASFA (the Association of Super Funds Australia):
- About 20% of self-employed people in Australia have no superannuation at all.
- Self-employed people generally have lower superannuation balances than employees across all age groups.
- Most self-employed people who do have super accumulated it while they were working as an employee.
- Only 30 per cent of self-employed people aged 60 to 64 have more than $100,000 in super, compared to almost 60 per cent of employees who do.
- The average super balance of self-employed males aged 60 to 64 is approximately $143,000. Male employees aged 60 to 64 have an average super balance of about $283,000.
- The average super balance of self-employed females aged 60 to 64 is approximately $83,000. Female employees aged 60 to 64 have an average super balance of about $175,000.
Self-employed super fund options
If you’re self-employed and you want to save money for your retirement in the tax-friendly super environment, you have three main options:
- Join a retail fund that’s offered by a bank or other financial institution.
- Join an industry super fund. Anyone can usually join a larger industry super funds, though you may need to be employed in a specific industry to join some smaller industry funds.
- Start up your own self-managed super fund (SMSF). However, it’s important to understand that there are set up and ongoing management costs for SMSFs that may make them unsuitable if you have a small super balance. You will also be required to become a trustee of your fund, meaning that you will be legally responsible for ensuring that your fund is compliant with superannuation legislation.
If you decide to join a retail or industry fund, it’s worthwhile to research and compare offerings from different providers. Important considerations include their investment performance over time, the benefits they offer, and the fees they charge.
The benefits of super
There are four main benefits of super if you’re self-employed:
1. Superannuation contributions and fund earnings are taxed at the concessional rate of 15% in Australia, which is lower than even the lowest marginal tax rate.
These contributions can be regular payments, or irregular lump sum contributions that you make whenever you can afford them.
2. You can claim a tax deduction for your contributions up to the concessional contributions cap if you met the eligibility criteria (outlined later in this article).
The concessional contributions cap is currently $25,000 per year (and up to $125,000 if you’re eligible to use the carry-forward rule).
Example: Jim is self-employed and earns $80,000 per year. He contributes $10,000 of this income to a super fund and is eligible to claim this amount as a tax deduction. He pays 15% tax on this super contribution (i.e. $1,500), instead of paying tax on it at his marginal rate of 32.5% plus the 1.5% Medicare levy (i.e. $3,400). That’s a tax saving of $1,900.
Prior to 1 July 2017, only self-employed people could claim a tax deduction for their super contributions. However, employees who meet the eligibility criteria can now claim tax deductions for any voluntary after-tax contributions they make.
3. Super fund benefits are tax-free after the age of 60 when you meet a condition of release, such as retiring or turning 65.
4. You can avoid or reduce your capital gains tax (CGT) obligation on the sale of business assets if you meet the eligibility criteria of the Small Business Retirement Exemption.
The Small Business Retirement Exemption allows you to disregard all or part of any capital gains made on the sale of your small business and/or its assets. You simply contribute the capital gains on any asset sales to any complying Australian super fund (including SMSFs). These contributions are treated as non-concessional (i.e. contributions made after tax) and are therefore not included in your fund’s taxable income.
It’s important to understand that you don’t necessarily have to sell your business entirely and cease operating in order to claim the small business retirement CGT exemption. You can do that, but you can also progressively claim the exemption each time you make a capital gain selling any of your small business assets, before you reach your preservation age.
Eligibility criteria and how to claim a tax deduction for your super contributions
To be eligible to claim a tax-deductible super contribution if you’re self-employed, you must:
- Be aged under 75.
- Meet the work test if you’re aged between 65 and 74.
- Not use the contribution to help fund an existing super income stream/pension.
- Not be splitting the contribution with your spouse (married or de facto).
If you meet these eligibility criteria, you must then provide your super fund with a ‘Notice of intent to claim or vary a deduction for personal super contributions’ form. This form is downloadable from the Australian Taxation Office’s (ATO’s) website, or it can be obtained from your super fund. Once you complete this form, you must:
- Provide it to your fund by end of the following income year in which you made the tax-deductible super contribution, or by the day you lodge your tax return for the income year in which you made the contribution (whichever date is the earliest).
- Receive written acknowledgement from your fund before you claim the tax deduction on your tax return. This acknowledgement will confirm the super contribution amount that you are eligible to claim as a tax deduction.
If you do claim a tax deduction for your super contributions, you won’t be eligible for any government super co-contribution entitlement.
Eligibility criteria and how to claim the Small Business Retirement Exemption
The eligibility criteria for claiming the Small Business Retirement Exemption are as follows:
- Your business must have an annual turnover of less than $2 million.
- The asset sale for which you’re claiming the CGT exemption must have been an “active” asset. This means that it must have been either used in the course of carrying on your business at the time of the sale or it must have been an intangible asset (like goodwill) that’s connected to the business.
- The net value of your other personal assets can’t exceed $6 million.
- You can claim up to a lifetime CGT exemption cap of $500,000.
If you meet these eligibility criteria, you can claim the Small Business Retirement Exemption via the ‘Tax return for individuals (supplementary section)’ form that is available from the ATO.
Although it’s not compulsory, contributing to super is something that all self-employed people should at least consider. In addition to providing funds for your retirement, contributing to super as a self-employed person can provide you with tax benefits. It’s worthwhile to seek independent financial advice based on your specific circumstances.
The information contained in this article is general in nature.