Super & sole traders
A question I’m often asked when a client first takes the steps in starting their sole trader business is how do I pay myself and do I need to pay myself super. And there are two simple answers: You do a bank transfer from your business account to your personal account and no!
Currently there is no legal requirement for a sole trader to make contributions to their super fund, just because something isn’t a legal requirement doesn’t mean it should be completely ignored.
If someone were to spend their whole adult life working for themselves as a sole trader, they could retire with no super if they aren’t making the effort to make voluntary contributions. Also, as women in business we need to acknowledge that between 2011 – 2021 the number of elderly women experiencing homelessness' has increased by nearly 40%. With 7,300 woman over 55 recorded as homeless in the 2021 census. Factoring your future financial security into your overall business plan is a must.
What is commonly unknown is that voluntary super contributions are a tax deduction!
Because there are no rules about making voluntary contributions to your super fund there is some flexibility with how you make contributions. There is no fixed schedule in making payments, so you have the discretion of doing what works best with you. You might be the type of person who has enough cash flow in your business to commit to regular Bpay contributing a fixed amount every week/ fortnight/ month or you might be more comfortable assessing your situation in June and paying one fixed amount.
The one most important rule when dealing with super contributions is not to exceed the concessional cap amount. If you also have an employer as well as your sole trader income you need to factor into the compulsory payments they contribute to your super as part of your concessional contribution cap.
Checklist for voluntary super contributions:
The money must be with your super fund on or before the 30th June of be a tax deduction for that tax year. So, if your contribution is with the fund on 28th June 2024 this is a deduction for the 2024 tax year. If the contribution gets to the fund on 5th July 2024 this will be a deduction in the 2025 tax year.
You must notify your super fund of your “Intention to Claim”. I always suggest to people to get this done as soon as you can in the new financial year (July). It must be done before you lodge your tax return.
Once accepted by your fund you will receive an “Acknowledgment Letter”. You can provide your accountant with a copy if they have asked for one. Don’t lodge your return until the letter is received.
The current concessional contribution cap is $27,500. This amount will increase to $30,000 on 1st July 2024.
Case Study
For the tax year June 2024, Kate ran a hairdressing business from home and was employed in a salon one day per week. Kate's overall taxable income was $128,000 and her employer made $1,000 of compulsory contributions into Kate's super fund.
Tax and Medicare levy on Kate's income is $34,987
Kate can put up to $26,500 into her super fund this year ($27,500 concessional cap less $1,000 Employer contribution).
Kate doesn’t have this much money available to contribute but she does have $5,000 set aside. If Kate BPay’s this money to her super fund so it’s received before June 30 and she notifies her fund of her “intention to claim” she well have a $5,000 tax deduction available to her.
Now her taxable income is $123,000 and Tax and Medicare levy on Kate's income has reduced to $33,037.
This means Kate has reduced her tax by $1,950 and has increased the value of her super fund by $5,000
Important take aways
The money in your super fund won’t be available until you reach preservation age currently between 55 – 60 years old. Everyone's financial situation is different, you should take your current situation into account and seek financial advice before committing to large contributions.
