While everyone has a rough understanding of what superannuation is and how it works, it’s an entirely different situation when you're a business owner.
The mistake many business owners make is that they don't contribute to their super throughout the life of their business. They may believe that when it’s time to retire and they want to sell their business, they’re going to generate a great sale price, so there’s no need to worry about it at this point in time.
While it's a hopeful goal, this isn’t always the case.
Business conditions and technology can change quickly, and the shifting market makes it difficult to command the price you want.
Contributing to your own superannuation along the way avoids the risk of being solely reliant on exiting your business with a sale. It allows you to generate wealth for a comfortable retirement while you build your business, and provides peace of mind that you're taking care of your future.
At Liston Newton Advisory, we understand that superannuation for business owners can sometimes be a secondary thought. Our superannuation advisers are here to provide in-depth guidance and support to help you manage your superannuation.
Do I have to pay my own superannuation as a business owner?
If you operate your business as a sole trader, a trust, a partnership, or a company, and you’re paying yourself from the profits your business makes, then you’re not obligated to pay yourself superannuation.
Business owners only need to pay their own superannuation if you pay yourself a wage. Paying yourself a wage places you on the PAYG system, meaning you pay tax and superannuation during regular payroll runs.
But while there is no obligation to pay yourself super, we highly recommend that you do.
One exception to this is when your business is just starting out. At this time it’s generally okay to avoid paying super, as you need to reinvest every dollar back into the business.
However, we recommend that all business owners eventually make allowances in their business budget to pay superannuation at regular intervals. Superannuation for business owners is a great way to build long-term wealth and set yourself up for a comfortable retirement.
It’s also a reliable back-up plan if your business goals don't eventuate, or you don’t command the sale price that you’d hoped for.
How much superannuation does a business owner need to pay, and how often?
As per above, if you’re drawing a wage from your business, then you need to pay yourself the minimum 9.5% obligation, on top of your wage amount. This needs to be completed on a quarterly basis, otherwise fines will apply.
If you’re paying yourself from the profits of your business, then paying superannuation as a business owner is optional. However, we do recommend that you pay yourself a superannuation contribution from these profits into your nominated super fund, prior to the end of the financial year.
Can I claim superannuation as a tax deduction? How does this work?
One of the perks of being a business owner is that you can claim a tax deduction on superannuation payments.
This works to reduce the overall tax payable for your business, and allows for business owners to build their wealth in a tax-protected environment.
As part of a wage
If you’re paying yourself superannuation as part of a wage, then your business will claim this as a tax deduction, as it’s classified as a business expense.
You can also claim a tax deduction if you’re paying yourself superannuation from the profits of your business. This will be considered a personal tax deduction within your personal tax return.
To make this tax deductible, you need to lodge a notice of intent to claim or vary a deduction for personal contributions through your super fund first. This is available on the ATO website.
Ultimately the tax payable for both methods works out to be the same, regardless of where you claim the deduction.
In the circumstance where businesses have multiple owners and make different choices about contributing to super, it’s best to make a personal superannuation contribution and claim the tax deduction within your personal tax return.
How does a Self-Managed Super Fund work for business owners?
A Self-Managed Super Fund (SMSF) is essentially a type of trust, designed to provide the owner an income when they retire. To create one, you firstly need to establish the SMSF by creating an SMSF trust deed. Once this is completed you simply open a new SMSF bank account, and create a tax file number and ABN for this account, then direct your superannuation contributions into this fund.
Unlike a bank account, however, SMSF investments are bound by strict administrative, lodgement, and record-keeping requirements, and the owner is required to lodge a special SMSF tax return at the end of each financial year.
A flexible option
SMSFs can work particularly well for business owners because of the flexibility allowed within their structure. For example, they can allow business owners to purchase their business property inside their SMSF.
Say the business owner purchases an office. They borrow money within their SMSF to buy the property, which the SMSF then owns. Once the property is purchased, the SMSF rents out the property to the business; the business pays rent to the SMSF, which the business then claims the rent as a business expense.
As there has been borrowing within the SMSF to buy the property, the interest on the loan it uses should mostly offset the income, meaning the SMSF pays minimal tax.
When done at commercial rates, this is a perfectly legal benefit to be taken advantage of.
An SMSF also allows you to make investments in other businesses that may not be listed on the ASX. For example, a SMSF may be able to invest in a friend or a relative's business, which can allow you to be part of their business success, while building your own retirement wealth.
Self-Managed Super Funds require a lot of patience and planning. Get in touch with our expert SMSF accounts to see how your SMSF adviser will help you manage your investment.
Are there differences in superannuation for different business structures?
On the whole, superannuation is the same for all common business structures.
As we mention above, sole traders who pay themselves from their business profits aren’t obligated to make super guarantee payments for themselves. However, it’s prudent to make personal superannuation contributions, and continue saving for your retirement.
If you have employees, and they’re over 18 and earn $450 or more per month, then you’re required by law to pay them a superannuation guarantee of 9.5%.
If your business is set up under a company structure structure,and you pay yourself a wage, then you are obligated to pay tax and superannuation for yourself each quarter. If you pay yourself from the business' profit, then superannuation is optional.
A partnership operates much like a sole trader structure. Unless you’re paying yourself a wage from your business you’re not required to make super guarantee payments for yourself.
As per the above structures, if the owner of a trust pays themselves a wage then they're obligated to pay tax and superannuation for themselves each quarter. If they pay themselves from the business' profit, then superannuation is optional.
What happens when I sell my business?
When a business is sold by its business owner, the capital gains tax (CGT) will be a significant factor in how much wealth they retain.
This relates to the opportunity for a business owner to significantly reduce their CGT by contributing some of the sale proceeds into their superannuation. It is known as the “retirement exemption” — named based on the assumption that business owners only sell upon retirement.
If aged under 55, the selling business owner is allowed to disregard up to $500,000 worth of the gains made from their small business. They then must contribute this amount into a superannuation fund or retirement savings account.
For those over 55, the business owner receives their capital gain tax-free.
The final word
At Liston Newton Advisory we believe superannuation is vital to a business owner's wealth strategy.
Business owners should always make an effort to contribute to their superannuation fund while operating their business, to enable a comfortable retirement lifestyle in the future. This forms a key part of our Get Free methodology, which is designed to empower our clients to achieve financial freedom.
However, it’s crucial to understand how to handle your superannuation in a way that’s going to provide the most benefit for the long term.