A business owner’s guide to maximising your superannuation

Given the myriad obligations confronting small business owners — including payroll obligations, making good on compulsory super payments to staff, plus countless other fixed-cost imposts involved in running the business — the time-honoured notion of ‘paying yourself first’ can often be overlooked.

As a result, all too often small business owners abandon regular commitments to their own super, and instead promise to make lump sum top-ups that somehow never happen. 

With a view to helping SME owners play catch-up on their own super, SmartCompany Plus has put together a quick and easy guide to help maximise the opportunities you may be unaware of.

Given you’re most likely going to be playing super catch-up, Andrew Zbik founder of CreationWealth suggests the best starting point is to take a step back and assess how you’re currently being remunerated by the business. To a large degree, Zbik says this will determine what options you’ve got, and which one will deliver the best outcome.

Assuming you’re either paying yourself some kind of salary, or are receiving income from the business as dividends or directors fees, you’re paying tax. As a result, the first step to turbocharging your super is to maximise what are called concessional contributions, which is a taxable amount you’re allowed to put into super. 

Given the current annual cap on concessional contributions annually is $25,000, you can top up any outstanding amount after compulsory super has been paid. 

Simply put, if you’re earning $100,000 in salary, $9,500 will be paid to you as compulsory super. This means you can chip in another $15, 500 to maximise the total $25,000 you’re currently allowed to make annually. Alternatively, even if you’re not drawing any income from the business as remuneration, you’re still entitled to make $25,000 worth of annual concessional contributions to super.

Less tax and capital growth

The beauty of maximising concessional contributions is that you’re effectively only paying 15% tax instead of your marginal tax rate. However, Zbik reminds business owners and PAYE employees alike that if they plan to recover tax by increasing their after-tax concessional contributions into super, they must complete what’s known as a notice of intent to claim.

Unbeknown to many, the notice of intent to claim form needs to be lodged with the Australian Taxation Office well before your tax return, and ideally at the same time your additional concessional contributions to super are made.

Alternatively, Zbik suggests business owners who aren’t currently paying themselves a salary may choose to put themselves on the payroll, hence automatically receiving compulsory super — which goes up to 10% after July 1, 2021, and up to 12% by 2025.

“Given its tax effectiveness, maximising concessional super contributions is a no-brainer, and by keeping your salary under $90,000 you can also stay under the maximum tax threshold,” Zbik reminds SME owners.

“If your salary is under $41,112 you could also benefit from the government’s co-contribution of up to $500.”

Zbik adds that if your super balance is under $500,000, another way to turbocharge it is to capitalise on catch-up provisions, which allow you to bring forward any unused annual $25,000 concessional limit for the previous five years.

For example, someone on an annual salary of $100,000 would be able to top-up their super with an additional $55,000 in unused concessional contributions, (after their compulsory super paid). This assumes they have $15,000 of unused concessional contributions for the previous two financial years.

Business owners should also note, maximum annual concessional contributions will increase to $27,500 after July 1, 2021.

Assess the benefits first

Are you a business owner who has made zero contributions to super over the years? If so, Wayne Leggett, founder and managing director of Paramount Financial Solutions, recommends assessing your financial position together with your accountant or advisor to establish how you would benefit from plonking surplus money into super. 

While making concessional contributions is a smart way to reduce your tax bill, Leggett says the rationale for making non-concessional contributions depends on whether there are better ways to deploy those funds inside or outside the business. 

The best way to think about non-concessional contributions is as after tax dollars, so it won’t be taxed at 15% on the way into your super account.

Under current provisions you can contribute up to $100,000 in non-concessional payments into super, however after July 1, 2021, that goes up to $110,000 annually.

Similarly, you may choose to exercise the bring-forward rule, which currently allows you to make three years’ of contributions into super ($300,000) without incurring a penalty. After July 1, 2021, the three-year bring forward amount increases to $330,000.

While there are some compelling reasons to maximise your non-concessional payments into super, Leggett warns SME owners to explore the opportunity cost of investing those funds elsewhere.

“Remember, it’s not just about net outcomes, it could also be about what else you could do with that money inside or outside the business,” he says.

Contrary to popular opinion, Leggett also suggests tipping money into the home loan to pay off the mortgage sooner may not be the smartest move financially, especially given where interest rates are right now.

“Be careful not to amortise your debt,” warns Leggett.

“If you’re not too far from preservation age (currently 60, for most taxpayers), you would, most likely, be better to put money into super that has historically delivered close to double-digit returns, than pay off a loan that you’re currently paying off at 2-3%.”

Cheat sheet: Five steps to paying yourself more super

1. Putting your remuneration in the payroll affords you 9.5% in compulsory guaranteed super (AKA concessional contributions) and this is paid at 15% tax as opposed to your marginal tax rate.

2. You can then top up your annual concessional contributions to a maximum $25,000 and also use the catch-up provision to top up to the value of 25,000 for each of last five years’ unused amounts.

3. By keeping your salary under $41,112 you could also benefit from the government’s co-contribution of up to $500.

4. When making concessional contributions beyond the compulsory super guarantee payments made by your business, you must lodge a notice of intent to claim with the ATO, otherwise you will not be able to recover the 15% tax paid.

5. You can make an additional $100,000 in non-concessional (after-tax) contributions into your super annually without penalty, or use the bring forward three-year forward rule to make a lump sum of up to $300,000 ($330,000 after July 1, 2021). These limits will increase from July 1, 2021.