Super-boosting strategies for small business

For really small businesses, which are generally the self-employed, super can often be last on the list. MICHAEL LAURENCE uncovers some options.

By Michael Laurence

A comprehensive new study confirms a long-held suspicion: the self-employed are dominant among the ranks of Australians with little or no super.

There is a shortfall in the superannuation balances held by businesses at the very small end of the spectrum. The main reason is fundamental. Operators of unincorporated small businesses do not have employers who are compelled to make super contributions on their behalf.

Ross Clare – the author of the report and research director of the Association of Superannuation Funds of Australia (ASFA) – believes the super savings of the self-employed can much depend on age.

“Many younger among the self-employed, those in their 20s and 30s, have next to nothing in super, and their businesses are worth a modest amount,” says Clare. Some older self-employed business owners have, of course, not only large super balances but highly valuable businesses with valuable goodwill.

But, overall, Clare says, “the balance of the self-employed would struggle even to support a modest standard of living in retirement. Often owners of personal-service businesses in particular would be misleading themselves about the value of their businesses [if put on the market to help finance their retirement].” Clare is working on a second report that looks specifically at the super of the self-employed.

It is clear that many of the self-employed are missing out on some great super opportunities. Here are just three strategies for small-business owners with growing businesses to get money into super.

Unincorporated small business

Opportunity: From the beginning of the new financial year, super contributions by the self-employed are fully-deductible for the first time. This should encourage many more of the self-employed to make pre-tax contributions. The contributions are subject only to the 15% contributions tax upon entering the fund.

“This is the most significant change in the simpler super system for the self-employed,” says Sydney consulting tax adviser Leo Hollestelle. “It puts them on an equal footing with employees making salary-sacrificed contributions.”

Fine-print: Previously, the self-employed were treated unfairly by being only allowed tax deductions for the first $5000 of contributions plus 75% of the remainder.

Warning points: Under the simpler super system, the limit on tax-effective deductible contributions – now called concessional contributions – is an indexed $50,000 a year if aged under 50, or $100,000 a year until 2011-12 if over 50. If you overshoot these caps with pre-tax contributions, the excess is taxed at 46.5% – a real sting.

Younger business owners should be aware that super is locked away until their retirement – after reaching 60 (if you are aged under 44).

Lower-income business owners

Opportunity: From the beginning of the new financial year, the self-employed became eligible for the first time to Government co-contributions. Again, it is extraordinary that the self-employed were locked out of this great benefit for lower earners.

“There is no better way to give your super a kick-start,” says Hollestelle. The Government contribution is made automatically – provided you are eligible and make an after-tax contribution.

Fine-print: Under the co-contribution scheme, the Government will contribute $1.50 (to a maximum of $1500 a year) for every after-tax $1 you contribute to super. Couples working together in a small business could, of course, each be entitled to co-contributions.

Warning points: The Government’s maximum co-contribution of $1500 applies if your assessable income is less than $28,980. And the Government’s co-contribution progressively reduces, phasing out completely when your assessable income reaches $58,980.

Spouse working part-time in family business

Opportunity: Maximise salary-sacrificed super contributions for a spouse who works only part-time in your family business. (This strategy is for incorporated businesses, which are not classified in the ranks of the self-employed.)

Sydney tax and super lawyer Robert Richards says this strategy is designed for businesses in which the spouses of the owners work part-time for perhaps a few days a week. The strategy is intended for businesses that are making good money and are looking for ways to legally and simply minimise tax payable by the company, and eventually the owners.

Richards says tax law allows the value of salary-sacrificed contributions paid for part-time employees – even if related to the majority shareholder – to greatly exceed the commercial value of their part-time work.

“Any money salary-sacrificed into super is taxed at just 15% on entering the funds instead of being eventually caught by personal tax rates of perhaps double (that) or more,” he says. The businesses are entitled to a tax deduction for the contributions.

Fine-print: Richards says this strategy works best for couples who work together in a family business, with each maximising their contributions.

Warning points: Only incorporated businesses can make salary-sacrificed contributions for employees. Contributions should be within the annual concessional caps of an indexed $50,000 if under 50 or $100,000 if over 50.

Many small businesses whose income relies on the personal services of a single person are caught by the alienation-of-personal-income rules, with severe restrictions placed on their tax deductions including on salary-sacrificing contributions for spouses.

Richards says the strategy of making large salary-sacrificed contributions on behalf a spouse working part-time is generally only effective for trading companies where the alienation-of-personal business rules do not apply.