Sole trader

I'm self-employed and have no Superannuation

James is a 35-year-old self-employed Electrician from QLD. James started out his career working as an employee for a large company, however for the last 8 years he’s been working for himself, and during this time he hasn’t paid any money into his super fund.

Superannuation hasn’t been a priority for James. He’s been busy working on building his reputation and client base, quoting jobs, becoming profitable, and keeping on top of his taxes and expenses. He keeps thinking that ‘one day’ when his cash flow is better, he’ll start paying into his super fund again. James has recently had a conversation with his parents about the importance of putting aside for retirement but he’s finding it hard to justify. Retirement seems so far off, and building the business seems like a better investment right now.

Things to consider...

Why should I pay super?

If you are a contractor, sole-trader or self-employed, you are responsible for contributing to your superannuation, however, there is no legal obligation to do so.

As a sole trader, paying yourself superannuation is generally last on the list. Cash flow might not be great, or perhaps you are focussing on building assets and feel that super isn’t relevant to your situation. Maybe you’re not quite sure on how to actually pay your own super.

It’s easy to prioritise investing money back into growing the business, such as buying new tools or spending money on marketing. And if business is going well, it may be tempting to draw a higher salary from the business so you can live a great lifestyle now.

Paying into your super fund should be a priority, as it is generally the primary means of retirement income (apart from the Age Pension). By not paying yourself super, you are cheating yourself out of future earnings. If you start paying small, regular amounts now, your money will start earning cumulative interest and your fund will grow much faster.

Tax benefits of paying super
If you make pre-tax payments into your super fund, you will only pay 15% tax on the payment once it reaches your super fund. For example, in FY19 James earnt $65000. If he paid $5,000 of his pre-tax income directly into his super fund in the same financial year, he would save $1,018 in tax, as he only had to pay 15% tax on his superannuation payment rather than the normal 34% income tax amount.
James' income Without Salary Sacrifice With Salary Sacrifice
Gross Salary $65,000 $65,000
less Salary Sacrifice to Super $5,000
less Tax and Medicare Levy $14,040 $12,272
Take home (net) pay $50,960 $47,728

James' Super $6,175 $6,175
plus Salary Sacrifice $5,000
less Contributions Tax $926 $1,676
Net Super Contribution $5,249 $9,499
James' take home pay will drop by $3,232, however, he will save $1,018 in tax on his income and super and will have an extra $4,250 in his Super. Assumptions: The figures are based on 2019-2020 income tax rates and include the Medicare levy.  Super Guarantee contributions remain the same after Salary Sacrifice.
What about the Age Pension?

If may be tempting to not pay super and rely solely on the Age Pension for retirement. Currently, the maximum basic rate payable for a single person is $860.60 per fortnight. This can be a surprising shortfall compared to what you are used to living on, and it’s also about half of what is required to fund a ‘comfortable’ lifestyle in retirement.

How much super do I need for retirement?

This will depend on many things, such as what age you want to retire, if you have a partner, and if you have a mortgage or other debt obligations.

The ASIC website ‘MoneySmart’ has a great retirement planner calculator, which can help you determine how much income you will likely receive from your super fund when you retire:

Super tips for sole traders
  • Get advice from relevant professionals, such as Super Equity, if you need assistance in planning for Superannuation
  • Set up an automatic payment that goes directly to your super fund each month (try to pay the standard super guarantee amount of 9.5% of your income).
  • Consider paying a lump sum into your fund at the end of the financial year. You can contribute up to $25,000 of your pre-tax income, and up to $100,000 of your taxed income.
  • Check if you are eligible for the super co-contribution payment – this is a government payment of up to $500. This payment is for low to middle-income earners.
  • Ensure you only have one active super fund – if you have previously been employed you might have multiple funds. Super Equity can assist with consolidating your funds. 

NOTE: Any advice or information in this article is of a general nature only and has not taken into account your personal circumstances, needs or objectives therefore, before acting on the advice, you should consider its appropriateness to you, having regard to your objectives, financial situation or needs

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