Sole Traders and Superannuation—Don’t Cheat Yourself Out of Future Security
It is easy to get caught up in running your solo operation, trying to be across all areas of the business and looking after your customers, suppliers and workers. While you are running your operations and looking after everyone else, are you also looking after your own future financial security?
Paying yourself and others appropriately is one thing. Planning for your own superannuation is also part of the bigger picture that you must consider—and the fact is that many sole traders are disadvantaged by not including their own superannuation in their business planning and costing.
Sole traders are (unfortunately) renowned for not paying themselves superannuation for a variety of reasons, particularly cash flow issues and a lack of interest in or understanding of the topic. There are, of course, some sole traders who have significant assets in other forms and do not feel they need superannuation, as their future security is provided for by other means. However, for the average sole trader starting in business, superannuation is the primary, if not the sole, means of planning for retirement income (apart from the Age Pension).
In today’s employment environment, there is in general a greater awareness of the rights of employees to be paid their superannuation by employers. However, there is still a tendency for sole proprietors to fall short of paying their own superannuation.
Many we speak to assume that some time in the future they will be able to put lump sums into super ‘when business is good’—but this may never eventuate. Others assume that their circumstances will never change and their spouse will provide for them—but personal circumstances do change, whether due to divorce, illness or the partner’s employment situation. Some sole traders assume that they will build their business into a larger and saleable operation over time, but again, business plans don’t always happen as intended.
Sometimes it is a matter of sole traders putting their own value last rather than first (or at least equal to others in the business), and always finding more enjoyable things to spend money on right now rather than planning sensibly. Why go into business if not to pay yourself sufficiently now and to provide for your future?
Others simply don’t take the time to educate themselves on money management in general and superannuation in particular; this does not respect yourself as a worker in your own business. If you as a sole trader were to employ a worker, you would have to educate yourself about superannuation in order to meet your legal obligations as an employer. So why not do it for yourself? Provide for yourself just as you would any other valued worker in your business!
Not paying your own superannuation is a form of cheating yourself out of future earnings and lowering your own value in the business.
It is definitely better to plan now for small, regular amounts of contributions to your super fund and therefore start earning cumulative interest, rather than hoping for a future rescue remedy that may not happen.
Replace or Top Up the Age Pension
Sole traders, or self-employed people, are responsible for contributing to their own super funds in order to provide for retirement, yet there is no legal obligation to do so.
Although the Age Pension exists, if you are relying only on this for support in your retirement, you may be surprised at the shortfall of the pension compared to what you are currently used to living on.
Currently the maximum basic rate payable for a single person is $846.20 per fortnight. This is approximately half of what is required to fund a ‘comfortable’ lifestyle in retirement. Based on current figures, this would require at least $590,000 in superannuation with a 5% return, and this is assuming a partial Age Pension can be claimed.
Check your own super fund balance now—is it likely that you will reach this amount before retiring given your current contributions? Do you know how much you actually need in your super to fund the lifestyle you would like? Check the Super Guide – How much do you need?
Since 1 July 2017, workers under the age of 75 may claim tax deductions for personal superannuation contributions up to the concessional contribution cap of $25,000.
Contributing to your own superannuation can count as a tax deduction. Talk to your tax agent for further advice.
Sole proprietors have the cheapest and simplest business structure to set up. During the 2017 financial year, most new businesses set up were in the sole proprietor category; correspondingly sole proprietors have the highest exit rate as well.
There is still quite a discrepancy between the percentage of men and women who hold superannuation, and also the amount being held. Fewer women hold a lower percentage of superannuation than men of the same age; on average 76% of men are covered by super, compared to 66% of women. Especially for women sole traders, we encourage you to put funds towards your own superannuation—but the principles apply to any sole trader.
- Do you have a separate bank account into which you transfer funds dedicated to GST, income tax and superannuation? Make it a regular practice to transfer a percentage of all income to this dedicated account so that you always have enough funds to cover these expenses and liabilities.
- Set up an automatic monthly contribution for your super. Either plan for a regular amount to be debited automatically from your account, or pay a percentage based on earnings each month. The easier you make this process the more likely it is that you will commit to it!
- Once you have paid your annual tax obligation, if you have a significant balance in your dedicated account, consider transferring this balance into super as a top-up amount if it is not required for business development.
- Consolidate your super into one fund. If you have previously been employed, you may still have multiple active funds. Pick one fund to be your chosen fund and consolidate all other balances into this fund. This way you are not paying fees and admin charges on multiple small balances. You will most likely earn more interest when your super is in the one fund.
- Assess your income, expenses and cash flow—for both business and personal needs. If you can’t afford to pay yourself superannuation of at least 10% of earnings, why not? Be honest; look at your expenses and consider whether you may be living beyond your current means. Is it a matter of cutting back on personal spending? Or perhaps it is a matter of increasing your business fees? Most likely it will be a combination of getting real with your spending habits, both personal and business, increasing fees to allow for superannuation, and purposefully managing your existing finances.
- Consider whether you are able to make a contribution before 30 June to receive a tax deduction in this financial year.
- Get advice from relevant professionals if you need assistance in planning for superannuation and/or income tax as a sole trader.