Superannuation and the self-employed

Superannuation and the self-employed

When we think of Australian superannuation, we tend to imagine a typical worker receiving contributions from their employer, slowly building up her or his retirement funds. But this is not the reality for many Australians. After all, 2 million Australians are self-employed, according to 2013 figures from Independent Contractors. What do these individuals do, when they have no employer to pay into their fund? They still have to retire like anyone else. 

For this very reason, self-employed individuals have to take particular care with their superannuation funds. Unlike other kinds of workers, the responsibility for making sure their super coffers are filled lies with them. Thankfully, they would have gotten a lot of practice taking care of themselves independently already. 

Making super contributions

Normally, an employer is compelled by law to pay 9.5 percent of a worker’s pay cheque into a regulated superannuation fund. But if you’re self-employed — whether you run your own business or are a contractor freelancing for different companies — there’s no such compulsory contribution. Therefore, it’s up to you and you alone to make sure your super is topped up. 

Contributing when there’s no legal requirement to do so can feel like you’re wasting your hard-earned money. But you have to think about the long term – the money you’re putting in will be used to finance all your post-retirement adventures, decades down the line. The Australian government also sets up specific incentives that could help make putting this money in super — instead of say, a seemingly equally good option like a high interest savings account – worthwhile.

Claiming tax deductions

You can generally get a tax deduction for any of your super contributions, as long as you’re self-employed or ‘substantially’ self-employed. The latter means you receive less than 10 percent of your assessable income, reportable fringe benefits and superannuation contributions from an employer — the rest might come from your business, investments, government pension or even your super fund itself. Just be aware that, whilst there is no limit on the amount you can claim as a deduction, there are caps on the amount of super contributions you can make before you pay extra tax, you can contribute up to the age of 75 and if you choose to claim the contributions as a tax deduction you should notify your super fund of this within the required timeframe. Once in your fund, any contributions for which you claim a tax deduction will be taxed at the special, lower rate of 15 percent. 

As a self-employed individual, if you do not claim the contribution as a tax deduction, the money you pay into super will be considered to be an after-tax (non-concessional) contribution. You’ll also have to abide by limits (contribution caps) in place for self-employed superannuation contributions after which your contributions will be added to your assessable income and taxed at your marginal tax rate: 

  • If you were under 50 in 2015-16, you can pay up to $30,000
  • If you were turning 50 or older in 2015-16, you can pay up to $35,000

In order to claim a tax deduction, you’ve first got to inform your fund or retirement savings account that this is your plan. You can do this a number of ways:

  • Fill out a form provided by the fund for that very purpose
  • Fill out an Australian Taxation Office form 
  • Write to your fund declaring that you’re going to lodge a notice by the due date 

Bonus government co-contributions

You might also be able to get a boost from the government if you’re self-employed. As part of this, the government will match contributions you make up to a certain point. There are a number of conditions, the three main ones being:

  • At least 10 percent of your income has to be from employment or business income, or a combination of both
  • You must make personal after-tax super contributions
  • You must earn less than $50,454 a year, before tax

The government will give you 50 cents in the dollar for every contribution you make, but there are minimum and maximum values: $20 at the least, and $500 at most. You’ll receive it once you’ve lodged your tax return for the year, provided that you are less than 71 years old at the end of the financial year. If you make less than $35,454, you’re eligible for the maximum, but this value declines as you get closer to the income cap. 

Taking these strategies on board means you won’t just be acting responsibly in regards to your future retirement — you’ll also be getting more of your money’s worth. 

 

 

 

DISCLAIMER

Advice contained in this article is general in nature and not specific to your particular circumstances.  Before making an investment decision you should consider your own financial situation and the relevant Product Disclosure Statement/s.  We also recommend you seek advice about your own particular circumstances from a licensed financial adviser.

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Learn more about superannuation

Do I have to pay myself superannuation if I'm self-employed?

No, self-employed workers don’t have to pay themselves superannuation. However, if you do pay yourself superannuation, you will probably be able to claim a tax deduction.

What superannuation details do I give to my employer?

When you start a job, your employer will give you what’s called a ‘superannuation standard choice form’. Here’s what you need to complete the form:

  • The name of your preferred superannuation fund
  • The fund’s address
  • The fund’s Australian business number (ABN)
  • The fund’s superannuation product identification number (SPIN)
  • The fund’s phone number
  • A letter from the fund trustee confirming that the fund is a complying fund; or written evidence from the fund stating it will accept contributions from your new employer; or details about how your employer can make contributions to the fund

You should also provide your tax file number – while it’s not a legal obligation, it will ensure your contributions will be taxed at the (lower) superannuation rate.

What are concessional contributions?

Concessional contributions are pre-tax payments into your superannuation account. The payments made by your employer are concessional payments. You can also make concessional contributions with a salary sacrifice.

What are government co-contributions?

A government co-contribution is a bonus payment from the federal government into your superannuation account – but it comes with conditions. First, the government will only make a co-contribution if you make a personal contribution. Second, the government will only contribute a maximum of $500. Third, the government will only make co-contributions for people on low and medium incomes. The Australian Taxation Office will calculation whether you’re entitled to a government co-contribution when you lodge your tax return. The size of any co-contribution depends on the size of your personal contribution and income.

What is salary sacrificing?

A salary sacrifice is where your employer takes part of your pre-tax salary and pays it directly into your superannuation account. Salary sacrifices come out of your pre-tax income, whereas personal contributions come out of your after-tax income.

How much extra superannuation can I add to my fund?

There is an annual limit of $25,000 for concessional contributions – that is, money paid by your employer and extra money you pay into your account through salary sacrificing. There is also a limit on non-concessional contributions. Australians aged between 65 and 74 have a limit of $100,000 per year. Australians aged under 65 have a limit of $300,000 every three years.

What are reportable superannuation contributions?

For employees, there are two types of reportable superannuation contributions:

  • Reportable employer super contributions your employer makes for you
  • Personal deductible contributions you make for yourself

How do you create a superannuation account?

Before you create a superannuation account, you’ll need to check if you’re allowed to choose your own fund. Most Australians can, but this option doesn’t apply to some workers who are covered by industrial agreements or who are members of defined benefits funds.

Assuming you are able to choose your own fund, the next step should be research, because there are more than 200 different superannuation funds in Australia.

Once you’ve decided on your preferred superannuation fund, head to that provider’s website, where you should be able to fill in an online application or download the appropriate forms. You’ll need your tax file number (assuming you don’t want to be charged a higher tax rate), your contact details and your employer’s details (if you’re employed).

What happens if my employer falls behind on my superannuation payments?

The Australian Taxation Office will investigate if your employer falls behind on your superannuation payments or doesn’t pay at all. You can report your employer with this online tool.

What are ethical investment superannuation funds?

Ethical investment funds limit themselves to making ‘ethical’ investments (which each fund defines according to its own principles). For example, ethical funds might avoid investing in companies or industries that are linked to human suffering or environmental damage.

Can I buy a house with my superannuation?

First home buyers are the only people who can use their superannuation to buy a property. The federal government has created the First Home Super Saver Scheme to help first home buyers save for a deposit. First home buyers can make voluntary contributions of up to $15,000 per year, and $30,000 in total, to their superannuation account. These contributions are taxed at 15 per cent, along with deemed earnings. Withdrawals are taxed at marginal tax rates minus a tax offset of 30 percentage points.

Voluntary contributions to the First Home Super Saver Scheme are not exempt from the $25,000 annual limit on concessional contributions. So if you pay $15,000 per year into the First Home Super Saver Scheme, you have to make sure that you don’t receive more than $10,000 in superannuation payments from your employer and any salary sacrificing.

How much superannuation do I need?

According to the Association of Superannuation Funds of Australia (ASFA), here is how much you would be able to spend per week during retirement:

Lifestyle Singles Couples
Modest $465 $668
Comfortable $837 $1,150

Here is the superannuation balance you would need to fund that level of spending:

Lifestyle Singles Couples
Modest $50,000 $35,000
Comfortable $545,000 $640,000

These figures come from the March 2017 edition of the ASFA Retirement Standard.

The reason people on modest lifestyles need so much less money is because they qualify for a far bigger age pension.

Here is how ASFA defines retirement lifestyles:

Category Comfortable Modest Age pension
Holidays One annual holiday in Australia One or two short breaks in Australia near where you live Shorter breaks or day trips in your own city
Eating out Regularly eat out at restaurants. Good range and quality of food Infrequently eat out at restaurants. Cheaper and less food Only club special meals or inexpensive takeaway
Car Owning a reasonable car Owning an older, less reliable car No car – or, if you do, a struggle to afford the upkeep
Alcohol Bottled wine Casked wine Homebrew beer or no alcohol
Clothing Good clothes Reasonable clothes Basic clothes
Hair Regular haircuts at a good hairdresser Regular haircuts at a basic salon Less frequent haircuts or getting a friend to do it
Leisure A range of regular leisure activities One paid leisure activity, infrequently Free or low-cost leisure activities
Electronics A range of electronic equipment Not much scope to run an air conditioner Less heating in winter
Maintenance Replace kitchen and bathroom over 20 years No budget for home improvements. Can do repairs, but can’t replace kitchen or bathroom No budget to fix home problems like a leaky roof
Insurance Private health insurance Private health insurance No private health insurance

How can I increase my superannuation?

You can increase your superannuation through a ‘salary sacrifice’. This is where your employer takes part of your pre-tax salary and pays it directly into your superannuation account. Like regular superannuation contributions, salary sacrifices are taxed at 15 per cent when they are paid into the fund.

What happens to my superannuation when I change jobs?

You can keep your superannuation fund for as long as you like, so nothing happens when you change jobs. Please note that some superannuation funds have special features for people who work with certain employers, so these features may no longer be available if you change jobs.