Effie Zahos
Smarter Writer

Effie Zahos is editor of Money magazine and has over 22 years' experience in the finance industry.

Effie Zahos
Smarter Writer

Effie Zahos is editor of Money magazine and has over 22 years' experience in the finance industry.

Superannuation contributions are often overlooked by Australia’s small business owners.

Many people who are self-employed neglect to put money aside for retirement. And while 42 per cent of wage and salary earners achieved a super balance in 2009-10 of more than $100,000, only around 18 per cent of the self-employed managed to do so. Either way, $100,000 super is still a long way off from what the Association of Super Funds of Australia (ASFA) says you need for a comfy retirement.

If you intend to rely partly on the pension (assuming it’s still around) then ASFA says $510,000 in super and income product assets should be ideal; generating an income of $57,665 a year.

old superman cartoon

Don't Take this Risk with Your Superannuation

If you’re relying on the sale of your business to fund this shortfall, senior policy adviser for CPA Australia Michael Davison says you should think again. 

“It’s a high risk strategy to link the success of your business to retirement income. The main reason small business owners should have super is diversification. While a business may be successful in providing an income, there is no guarantee there will be a buyer at the time of retirement, or a buyer willing to pay the price the owner wants.” 

In short, Davison says there is significant risk for a small business owner to rely solely on the sale of their business to fund their retirement.

Of course, the biggest incentive to diversifying your retirement savings is that contributions to your superannuation are tax-deductible (see Checklist, below).

Some Good News

You can pay up to $25,000 of pre-tax contributions each year or up to $35,000 if you’re over 59. So if you pay $25,000 into your super and your average tax rate is 32.5 per cent you can claim a tax deduction of $25,000, which would reduce your tax by $8125.

If you are worried about exceeding these contributions the good news is that in the 2014 Federal Budget the government announced that there will no longer be an excess contribution tax (up to 93 per cent). Any excess amount will be included in your assessable income and taxed at your marginal tax rate. The changes took effect from July 1, 2013 thus applying to contributions in the 2013-14 tax year. It’s important to remember this legislation needs to pass through the Senate.

Another benefit of contributing to super is it can minimise capital gains tax (CGT) when selling the business.

If you are considering retirement and selling your business, up to $500,000 of the proceeds can be exempt from CGT if you contribute it to super.

- Michael Davison, senior policy adviser for CPA Australia
The Icing On The Cake

While self-managed super funds (SMSF) are not for everyone HLB Mann Judd divisional manager Glenn Roberts says they can have advantages for the self-employed. “Small business owners are permitted to purchase business premises within their SMSF and lease the property to their business,” he says. 

The icing on the cake is that once a pension is started, all income and capital gains from assets supporting the pension become tax-free. With planning, one could receive tax-free rental income from the property in retirement and even sell the property free of capital gains tax. Roberts advises engaging the services of an appropriately qualified SMSF adviser.

Checklist to deductions 

1. Do you meet the 10 per cent rule? 

To be considered self-employed, you need to earn at least 90 per cent of your income from self-employed work. Only then can you claim a deduction for contributions up to the caps.

2. Select a super fund 

To compare super funds visit: supersavvy.com.au, canstar.com.au and rainmaker.com.au. A self-managed super fund (SMSF) is only suitable if you actively take control.

3. Pay yourself when you pay your staff

It’s a cliché, but true − you need to budget for it!

4. Cut-off date

You must make all your contributions prior to June 30 in the year you wish to claim a deduction.

5. Fill in a notice of intent form 

If you intend to claim a deduction for personal superannuation contributions you need to fill in this form. You have until May the next year to fill out the notice of intent. Download from the ATO’s website here.

6. File your receipt

Your superannuation fund must give you an acknowledgment of their receipt of the notice. Be sure to keep this as proof for the tax office.

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