How to super when you're self-employed

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Published: 16 Apr 2019

If you’re an employee, the minimum level of super should be delivered to your nominated account, almost like magic. It’s called the Superannuation Guarantee (SG). It just happens.

But it’s a different story if you’re self-employed. People doing it on their own can choose whether they contribute to their super. If you’re in the daily grind of building a business, contributing to super is one of those things that can easily fall lower on the priority list. Almost a quarter of self-employed Australians had no super at all in 2016, according to research by the Association of Superannuation Funds of Australia (ASFA). In researching this story, many business owners told me super was something they haven’t done yet. “I’m TERRIBLE! Thank you for the reminder!!” they emailed.

But here’s the thing. Super could end up being the key to whether you retire modestly or comfortably. Do you dream of drinking cask or bottled wine in your retirement? That’s the difference. While you might be making ends meet today, future you will appreciate a hand as well. Of course, balancing these competing priorities is a lot easier said than done.

So how does the freelancer or sole trader navigate their super? We asked a few to see how they make it work.

How much should you contribute?

Most people dream of being their own boss for the obvious reasons — there’s the financial and lifestyle benefits, pursuing your dream and, ultimately, calling the shots. But doing it on your own also means managing your money well. Boring but true.

The good news is, it’s easy to do super, even if you’re self-employed.

If you pay yourself a wage (this is a good idea in general), consider setting aside the standard SG amount, which at least 9.5 per cent of your before-tax income to your super fund. If your super is taken from the business’s revenue, the majority of super funds accept lump payments to fit with the unpredictable nature of cash flow. Like all Aussies, self-employed people must adhere to the contribution cap, and they must pay super to anyone they employ.

Eloise Rankine runs Elph, a Sydney-based homewares shop with her mum. She says contributing to super has always been a priority for the business.

“We were determined to set up our store as a viable and sustainable business where the model includes salaries and entitlements including superannuation so that we can build our business with a good structural base,” she says.

She says regular super contributions are particularly crucial given Elph is an all-female team. Currently, Aussie women on average approach retirement with super balances that are 37 per cent lower than men due to factors like the gender pay gap and parenting commitments.

Currently men on average take home more earnings than women, which means women retire with a 37 per cent lower super balance.

Ms Rankine says online accounting software has been a handy accounting tool for the business to work out their salary and calculate their wages.

“Recently we have transitioned to using the ATO’s Small Business Superannuation Clearing House (SBSCH), which is a free service we use to lodge details and pay our super quarterly as a lump sum,” she says. “The clearing house system is much easier than making separate payments for each employee, and we rely on Xero to update any changes to the amounts that need to be paid.”

It might make financial sense to defer contributing super to yourself for a short period (the general rule of thumb is no more than 12 months), but once your business is chugging along, your super contributions should increase to at least what you’d be paid if you were working for someone else. A good strategy to avoid forgetting to transfer money over to your super is to set up an automatic monthly payment.

Small amounts can create considerable value over time

Future you will appreciate the money you add now. Early contributions can make a big difference down the line thanks to compound interest and super being a tax-friendly form of saving and investing.

Compound interest is a bit like a snowball rolling down a hill: It grows and accelerates the longer it keeps moving. Like the snowball, your super balance grows by contributions as well as returns on investments. The returns can generate more savings the longer it’s able to accumulate over time. Even modest contributions can make a big difference, and the earlier it’s invested, the better.

Kadri Kutt runs walking tours around Byron Arts & Industrial Estate where tourists, and even locals, can meet some of the makers behind the region’s yummiest treats. He says super wasn’t really a priority until he hit his 40s.

“It must be that I’m on the closer side of retirement!” he says.

Nowadays, he contributes to his super account when he can, because every little bit can make a difference.

“It’s not on a regular basis,” he says. “It all depends on the income I am receiving. When I do feel I have extra, I try to contribute 10 per cent to my superannuation fund.”

Can I sell my business to fund my retirement?

Many business owners think the eventual sale of their business will fund their retirement. But relying on the sale of your business is fraught with danger. The reality is many businesses end up being difficult to sell, and others sell for a disappointing result. Truth be told, your business might not be worth so much without you running it.

Contributing to super can also be a tax-effective way of building a separate pool of retirement savings.

Tasmanian business owner Brooke Saward realised this recently. After building a popular blog and travelling the world for four years, she launched a bakery, Charlie's Dessert House, and bridal boutique Little White in Tasmania as a way of diversifying the income (“full-time travel takes its toll after a while”).

“My accountant advised me that I would be better reinvesting that money in my businesses as small businesses are often a quick investment — you work really hard at for a few years and then sell,” she says. “But three years later and I'm still here!”

Ms Saward read the bestseller The Barefoot Investor recently and realised this strategy was a mistake.

“I realised that investment into my super is not only important but necessary, much like property investment, to keep up with inflation,” she says. “I've just purchased my second home, so once I've found my feet again with finances, my next step will be to start investing into my super.”

Bottom line: the sale of your business should be the icing on the cake for your retirement, but not the whole cake.

Take advantage of incentives

Whether you’re living the freelance dream, or calling the shots as a business owner, all self-employed Aussies can claim a tax deduction for concessional contributions made to their super. Yup, super just got a whole lot sexier.

So how does it work? If you are self-employed and under 65, or between 65-70 and meet the work test, you can make extra contributions to your super directly from your bank account. These are concessional contributions, and they're taxed at 15 per cent when they enter your super fund. This means your hard-earned money can funnel into a long-term savings account (your super) rather than going to the government in tax. You can claim a tax deduction of up to $25,000 per year in concessional contributions.

If you make any after-tax contributions to your super and you earn less than $52,697 a year, you could be eligible for a government super co-contribution. The co-contribution is paid on a sliding scale with the maximum commencing at the lower income threshold currently at $37,813 a year.

This article was first published by News.com.au on 16 April 2019. The information referred to may change from the date of publication and care should be taken when relying on such information.