You don’t have to pay yourself super, and for many self-employed business owners that’s the last thing to worry about. Surely re-investing in my business is more beneficial than paying super.
In some cases this is true, however when you retire you might regret not paying more attention to it. Especially when you hear some of your friends are receiving tax free pensions of $100,000 p.a. in retirement because they made super a priority throughout their working life.
Along with building your retirement assets, there are advantages to contributing to super that really make it worth it;
- You can claim a tax deduction for super contributions. Super contributions are taxed at 15%, compared to your marginal tax rate which is generally much higher than this i.e. 47% for the top tax bracket.
- Expected long term returns for Super investments are better than bank savings accounts, so your savings will grow faster.
- Earnings within super are only taxed at 15% compared to investments held in your own name such as investment property or shares which are taxed at your marginal rates such as 34.5%, 39% and 47% (including Medicare)
- In retirement (pension phase), earnings and withdrawals are tax free. That’s right 0% for accounts up to $1.6M each.
Given the significant advantages, how do you start paying yourself super?
If you already have a super fund, check that you can make contributions when you’re self employed. You’ll need to give your fund your tax file number (TFN) so they can accept contributions. If you don’t have a fund, there are many to choose from and are categorised between industry, retail and Self Managed Super Funds. I recommend you seek advice from a qualified financial adviser on what super fund best suits you.
Once you have a fund, there are two ways to contribute, depending on how you pay yourself. If you receive:
- A wage from your company/business — set up a regular transfer into super from your before-tax income.
- Income from business revenue — transfer a lump sum when you have enough cash flow.
Claiming Tax deductions?
To claim a tax deduction, you need to send a ‘Notice of intent to claim’ form to your super fund before the end of the financial year. Contact your fund to find out how much time you need to allow for processing. I.e. don’t leave it too late.
How much to contribute to super?
As a guide, employers contribute at least 9.5% of an employee’s earnings to super. This would be a great aim to start with. However there are limits to how much you can contribute each financial year:
- up to $25,000 in concessional contributions (from your pre-tax income, for which you can claim a deduction), and
- up to $100,000 in non-concessional contributions (from your after-tax income)
One tip is if you or your spouse are on a low income, you may benefit from making a non-concessional contribution of $1,000 to be eligible for government super contributions of $500. That’s a 50% return of your money as soon as you complete your tax return. The ATO automatically will make up your income and any non-concessional and pay up to $500 directly to you super fund.
Considering you can contribute up to $125,000 p.a. each, the next question is how much do I need to contribute so I can retire and live a great lifestyle. To work this out requires many factors and expertise around retirement projections.
As this is a complex question the best step to take would be to work with financial adviser to provide the answers and more importantly an action plan. The adviser can help make it happen and can provide ongoing advice and accountability to help you to stay on track.
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