Understanding super for sole traders

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Self Managed Superannuation
By
John Liston
John Liston
Director | Adviser
September 29, 2020
6
minute read

What you need to know as a sole trader when making contributions to your superannuation

Paying super for sole traders is a different experience when compared to an employee: you’re in the unique position of being the one in control over your superannuation. You can choose where your super contributions go, how much you pay — and whether you pay super or not at all.

As a self-employed business owner, your super isn’t going to take care of itself. There’s a lot to consider when it comes to saving for your future, so it’s important you get the right advice.

Liston Newton Advisory is here to help sole traders make smarter choices with money. Find out more about our financial advisory services, and see how we can help you maximise your super’s potential.

Why paying super for sole traders is important

As a sole trader, running your business can often consume your life. You spend your time performing your work, chasing clients, and managing your immediate income, often leaving little time to take a step back and think about the future.

With all this going on, your superannuation can often become an afterthought. There are bills to pay now, and you’re focused on keeping your cash flow healthy.

This is a dangerous trap for sole traders to fall into. If all your money and thinking is focused on the here-and-now, what happens when you retire? If you don’t start thinking about your super now, there will be nothing to rely on when you wrap up the working stage of your life.

Giving your super serious consideration from the start of your business journey doesn’t just help you set savings aside for your retirement. It also provides a tax-effective way to manage your cash flow now.

Different types of super funds for sole traders

If you don’t have an existing super fund, or you’re looking for a new provider, there are three options available when paying super for sole traders.

Retail super funds

Retail super funds are those managed and operated by financial companies. These funds are designed to generate profit for that particular financial institution, hence the name ‘retail’. One benefit is that these funds often guide you in managing your money within your super — but this does come at a percentage fee of your funds held.

Industry super funds

You may have seen TV ads for industry super funds. This type of fund started its life as a super fund that was exclusively for a specific industry, carefully guarded by trade unions and industry bodies. They were set up as a way to provide workers in that industry with a comfortable retirement.

A modification of super rules in 2005 deemed that industry funds were no longer required to be industry-specific, and their membership was expanded to anyone. The majority of industry super funds are not-for-profit, and this enables them to return their profits to their members, resulting in lower fees.

A self managed super fund

A self managed super fund (SMSF) isn’t a set-and-forget savings method like other super options. Instead, you're the one actively managing your retirement savings to invest and grow your personal wealth. You choose your own investments, manage your own insurance, and undertake your financial reporting each year. It’s a lot more hands-on than other super funds, but this affords you a much greater level of control over your money.

How to pay yourself super as a sole trader

One benefit of being a sole trader is that you’ve got flexibility on how, and even if, you pay yourself super. There are two ways to do this.

You pay yourself a wage

If your business is set up under a structure that means you pay yourself a wage, then you’re required to pay yourself the minimum 9.5% super on top of your wages. This payment must be made every quarter; failure to pay can result in hefty fines or even jail time.

Paying yourself from profits

If you pay yourself from the profits of your business, rather than as a wage, then paying yourself super is optional.

That’s not to say you shouldn’t do it — you most definitely should — but you also have the option of deciding when to pay yourself super, and how much.

For some sole traders, paying super is something they decide towards the end of the financial year. The amount depends on how their business performed that year, and the amount of cash they have available.

Making your super tax-effective

For a sole trader tax and super go hand in hand, as you’re able to claim your super payments as a tax deduction.

This benefits you on multiple levels:

  • You reduce your overall tax payable for the year
  • You’re actively saving for your retirement
  • You’re building your wealth in a tax-protected environment

If you’re paying yourself super as part of your wage, then this is classified as a business expense, and your business can claim it as a tax deduction. However, if your business has multiple owners, to keep things simple you can make a personal super contribution instead, and then claim this on your personal tax return.

If you pay yourself from your profits, then you can make your super payment and claim it as a personal tax deduction. All you’ll need to do is lodge a Notice of Intent to Claim through your super fund, prior to lodging your tax return. Your super may have their own version of this form available. Otherwise, you can find one on the ATO’s website.

How to get the money into your super fund

How you get the money into your fund depends on how you make your contribution.

If you’re receiving a wage from your business, the 9.5% contribution will be completed via a superannuation clearing house, which you can set up through your accounting software. If you need help doing this, a Liston Newton Xero Specialist can guide you through the process. Otherwise, the ATO has a free clearing house application you can access here.

If you’re making voluntary super payments from your business profits, speak to your super fund about the best way to make a voluntary concessional contribution. This is usually through a BPAY or bank transfer, which they can supply you with the correct details.

If you’ve got more than one fund, you have to make the choice which one will receive the contribution. We recommend consolidating your funds into one, to reduce your fees and boost your performance. A Liston Newton Superannuation Adviser can help you do this.

How much super you should contribute

How much super you contribute as a sole trader is up to you.

When paying yourself a wage, though, it must be at least 9.5% of that wage. Regardless of how your business is structured, it’s useful to use that figure as a base calculation.

But ultimately, it helps if you budget for your super. Whether you pay yourself a wage, or you’re contributing from your profits, building regular super payments into your budget means that it’s not just an afterthought. You can make active contributions to your future, while still managing your cash flow in the present.

The final word

Superannuation for sole traders isn’t just a nice-to-have feature, it should be a crucial part of your financial plan.

If you make regular contributions into your super, you can take advantage of the tax deductions, and save for your retirement at the same time. And the sooner you start building your funds, the more time you have for your returns to compound.

Better still, these savings are protected in the event that your business doesn’t succeed.

For sole traders, paying super is a win-win.

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