One of the most common questions we receive from people when they start their own business is what about superannuation and should I still contribute? The answer is an emphatic YES
So we are going to breakdown how you can go about doing that depending on which type of business you have, but first we need to address why it is important to contribute to superannuation?
There are a few different reasons:
The biggie is that it is how you save for your retirement. In their latest report from December 2021 the Association of Superfunds Australia (ASFA) estimated that to retire at a comfortable standard, single people would need $45,962 per annum to fund their lifestyle and couples would need $64,771 per annum. If you would like to be retired for 20 plus years this would mean as a single person you would need a balance of approx $550,000 for singles and $650,000 for a couple to retire at age 60. To get these balances you need to factor making regular contributions into your business cashflow as there are contribution caps that may prohibit large sums being deposited down the track and trust us when we tell you not to rely on the government pension for this one if you don't have to.
Another reason to contribute to super is that you can get a tax deduction for the contribution, up to a maximum of $27,500 each year (jumping up to $30,000 from 1 July 2024). There are even carry forward unused concessional contribution rules that you may be able to tap into, which is a topic for another day unless you want to deep dive now).This will reduce the amount of tax your business pays in that financial year. It is a win win all round!
So with all that in mind, how do we go about paying super? Here are the nuts and bolts ...
Sole Traders
Superannuation contributions are not compulsory (yet!) for sole traders but are highly recommended. If you consider that as an employee you would get 11% (jumping to 11.5% from 1 July 24) of your wage as super, so it is good practice to contribute 11% of your earnings to your superannuation fund, up to a maximum of the concessional contribution limit of $27,500 (jumping up to $30,000 from 1 July 2024).
To ease cashflow this can be done in regular intervals such as monthly or quarterly, or can be done as a lump sum just prior to 30 June. To make the contribution you need to contact your superannuation fund and obtain details from them on how to make a contribution. You also need to advise them that the contribution is a personal concessional contribution so they treat it correctly within the fund and send you the correct documentation to allow you to claim the contribution as a tax deduction at the end of the year. The administration behind these superannuation contributions is fairly easy, the hard part is managing the cashflow component. This why we recommend regular payments rather than annual lump sums. As a sole trader, you will claim the tax deduction for the contribution in your individual tax return.
Family Trusts and Partnerships
For those small businesses that operate through a family trust or partnership and are not employees, the concept is very similar to a sole trader. In this case you would determine roughly what your wage would be if you worked in that business and then put 11% into superannuation each year. Again, the cashflow component is important and regular payments are recommended. If you are not an employee you can make the contribution out of the business bank account and claim it as a business expense, but it would need to be treated as a Reportable Employer Superannuation Contribution (RESC) and you would need to report this via STP and a payment summary would need to be lodged with the ATO. In this case it may be easier to make the payment from your business bank account but treat it as drawings and claim the contribution in your personal tax return. This is something you should consult your accountant about as to what suits your personal circumstances.
Companies
Superannuation for non-employee directors of companies works similar to the above for family trusts and partnerships. You would determine your market value wage and then make contributions of 11% of that into your superannuation fund. Again, the company can pay this amount on behalf of the director and can claim the tax deduction for it. However, this amount will need to be reported as Reportable Employer Superannuation Contribution via STP and a payment summary issued to the director at year end. This can easily be handled by using accounting software such as Xero. In this case the director will not claim a personal tax deduction for the contribution, the company will. The Director will include the RESC amount in their individual tax return but it is not taxable income.
NOT SO SECRET WOMEN'S BUSINESS
women retire on average with 23.4% less super than their male counterparts. Yes there is still that pesky gender pay gap issue with women earning on average 13.8% less than men. This means less super contributed on their behalf.
women also tend to leave the workforce to raise families. A common way for women to re-enter the workforce and obtain flexibility is to start a small business. In the past decade 2/3rds of all new businesses created were founded by women. However it is common for women business owners to neglect to pay themselves superannuation, which is contributing to the problem of women retiring with less super.
So get onto it ladies!
WRAP UP
Superannuation can be a complicated matter and requires professional guidance. We recommend that you consult with your accountant (hint hint US 😉) and a qualified financial advisor before making any decisions.
Our motto at All In is if you have taken the time read this, please make sure you DO SOMETHING with the information. If it is booking an appointment with us (here is the link😉) or your advisor then that is a great first step!
Here’s to a happy retirement!
Disclaimer: This blog is for general informational purposes only. For advice on your specific situation, please contact a tax professional, ie us 😊