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.

Can I transfer money from overseas into my superannuation account?

Yes, you can transfer money from overseas into your superannuation account – under certain conditions. First, you must provide your tax file number to your fund. Second, if you are aged between 65 and 74, you must have worked at least 40 hours within 30 consecutive days in a financial year. (Australians under 65 aren’t subject to a work test; Australians aged 75 and over cannot receive contributions to their superannuation account.)

Money transferred from overseas will generally count to both your concessional contributions limit and your non-concessional contributions limit. You will have to pay income tax on the applicable fund earnings component of any money transferred from overseas. You might also be liable for excess contributions tax.

How do you open a superannuation account?

Opening a superannuation account is simple. 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 might want to provide your tax file number as well – while it’s not a legal obligation, it will ensure your contributions will be taxed at the (lower) superannuation rate.

What are personal contributions?

A personal contribution is when you make an extra payment into your superannuation account. The difference between personal contributions and salary sacrifices is that the former comes out of your after-tax income, while the latter comes out of your pre-tax income.

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 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

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.

Is superannuation taxed?

Superannuation is taxed. It is generally taxed at 15 per cent. However, if you earn less than $37,000, you will be automatically reimbursed up to $500 of the tax you paid. Also, if your income plus concessional superannuation contributions exceed $250,000, you will also be charged Division 293 tax. This is an extra 15 per cent tax on your concessional contributions or the amount above $250,000 – whichever is lesser.

What are reportable employer superannuation contributions?

Reportable employer superannuation contributions are special contributions that an employer makes on top of the regular compulsory contributions. One example would be contributions made as part of a salary sacrifice arrangement.

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.

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.

Can I take money out of my superannuation fund?

Superannuation is designed to provide Australians with money in their retirement. The government has strict rules around when people can take that money out of their fund because it wants to prevent people eroding their savings before they reach retirement.

As a general rule, you can only take money out of your superannuation fund when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

That said, you can take money out of your superannuation fund early based on one of these seven special conditions:

  • Compassionate grounds
  • Severe financial hardship
  • Temporary incapacity
  • Permanent incapacity
  • Superannuation inheritance
  • Superannuation balance under $200
  • Temporary resident departing Australia

How long after divorce can you claim superannuation?

You or your partner could be forced to surrender part of your superannuation if you divorce, just like with other assets.

You can file a claim for division of property – including superannuation – as soon as you divorce. However, the claim has to be filed within one year of the divorce.

Your superannuation could be affected even if you’re in a de facto relationship – that is, living together as a couple without being officially married.

In that case, the claim has to be filed within two years of the date of separation.

Either way, the first thing to consider is whether you’re a member of a standard, APRA-regulated superannuation fund or if you’re a member of a self-managed superannuation fund (SMSF), because different rules apply.

Standard superannuation funds

If your relationship breaks down, your superannuation savings might be divided by court order or by agreement.

The rules of the superannuation fund will dictate whether this transfer happens immediately, or in the future when the person who has to make the transfer is allowed to access the rest of their superannuation (i.e. at or near retirement).

Click here for more information.

SMSFs

If your relationship breaks down, you must continue to observe the trust deed of your SMSF.

So if you and your partner are both members of the same SMSF, neither party is allowed to use the fund to inflict ‘punishment’ – such as by excluding the other party from the decision-making process or refusing their request to roll their money into another superannuation fund.

This no-punishment rule applies even if the two parties are involved in legal proceedings.

Click here for more information.

Financial consequences

Superannuation funds often charge a fee for splitting accounts after a relationship breakdown.

Splitting superannuation can also impact the size of your total super balance and how your super is taxed.

Click here for more information.

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.