Self Employed Superannuation

Are you self employed and struggling to make superannuation contributions? Like many self employed Australians, you probably prefer to put your money back into the business, rather than your superannuation funds. But don’t cut yourself short, because being self employed has its advantages, especially when considering the idea of making contributions into Superannuation. 

Self employed superannuation contributions and tax deductions

The self-employed are entitled to a full tax deduction under Australian law (s 290 -150 ITAA) for their personal concessional contributions until age 75, consistent with employer contributions made on behalf of employees, whether in small business or large business.

Small business owners operating via unincorporated enterprises (such as sole traders and partnerships) are not necessarily covered by the compulsory 9% superannuation guarantee regime in respect of themselves as they are not "employees". Therefore, a government initiative was created to encourage self-employed persons to save for their retirement by offering a tax deduction on personal superannuation contributions.

In certain circumstances, small business operators engaged in their business also have additional flexibility in terms of determining whether to distribute profits via salary, employer superannuation contributions or distributions to an interposed entity. 

Saving for retirement via a small business

Small business owners are often not attracted to the tax advantages of superannuation as they usually require any surplus finances to be injected back into their business. Instead, saving for retirement by aggressively growing a small business to accumulate wealth can be a viable alternative approach to traditional retirement savings in certain circumstances.

However, such a small business retirement saving strategy can have disadvantages. The higher returns that a specific small business may be able to achieve compared to traditional superannuation may also carry a higher risk profile.

In particular, a small business strategy generally lacks the diversification that can be achieved from investing via a diversified portfolio where risk is spread across several assets classes and underlying assets.

However, the opportunity to transfer significant wealth to superannuation immediately prior to retirement is restricted by the annual non-concessional contributions cap of $150,000 (or $450,000 every 3 years for those under age 65):

Importantly, the CGT exempt component is exempt from this annual cap on non concessional contributions 

Small business CGT retirement exemption

Nevertheless, accumulating wealth via a small business can be very effective in certain circumstances, especially where it is combined with the CGT small business tax concessions.

In particular, the small business retirement exemption can enable qualifying small business owners to access an exemption from CGT, up to a lifetime maximum of $500,000 (ie CGT exempt component), where the proceeds of the sale of their business are contributed to superannuation to fund their retirement.

Non-concessional contributions cap – exception for small business assets

Contributions arising from the disposal of small business assets that qualify for the CGT small business retirement exemption or the 15-year exemption are excluded from the non-concessional contributions cap up to a lifetime "CGT cap amount" of $1.1m for 2009-10 (indexed).

Accordingly, in addition to the annual cap on non-concessional contributions, small business taxpayers are able to contribute certain amounts arising from the disposal of assets that qualify for these CGT small business concessions.

As a result, this is an important concession for those small business owners close to retirement who are looking to make contributions above the standard contributions limits for the purposes of establishing a tax-effective retirement income. 

Super Tips to Note:

• The contribution is only deductible for the year in which the contribution is made
• The contribution must be made to a complying super fund or a RSA (retirement savings account)
• The tax payer must give notice to the trustee of their intention to claim a tax deduction.
• Be aware of not exceeding the amount you are able to contribute to superannuation.  (See article on Superannuation Advice).  

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December 2009