Compare super funds for self-employed Australians

In Australia, employers are currently required to pay eligible employees superannuation contributions of 10 per cent of their ordinary time earnings. But self-employed Australians are responsible for their own retirement savings. If you are self-employed as a sole trader or in a partnership, you don’t have to pay your own super, but you can make personal super contributions to ensure you have some money set aside for your retirement.

If you do choose to make personal super contributions, it's important to ensure the super fund has your tax file number (TFN) or they may not be able to accept the contribution and you could face higher tax rates. While you don’t have to make contributions, you can claim a tax deduction on them as long as you don’t breach the annual cap.

If you pay yourself a wage, then you may be required to pay 10 per cent of your pre-tax wage to your super fund – just like any other employer would pay the superannuation guarantee.

Some self-employed Australians avoid paying super to maximise their weekly take home pay. While this may be a valid strategy for some, it’s worth considering the significant benefits superannuation offers, including the following:

• Super contributions that don't exceed the annual cap are taxed at the concessional rate. Say, for example, a person who earns $60,000 a year from their business chooses to contribute $10,000 of their pre-tax income to their superannuation. The $10,000 super contribution will be taxed at 15 per cent, instead of the marginal tax rate of 34.5 per cent they’d pay in income tax and Medicare levy.
• The money put into super will typically earn greater returns than having it sit in the bank, so your savings have the opportunity to grow faster. Just keep in mind you won’t be able to readily access it until later in life.
• You may be able to claim a tax deduction for contributions you make from after-tax income, thereby reducing your taxable income so you pay less tax.
• You may also be eligible for a government co-contribution if you are a low or middle-income earner.
• Superannuation often comes with other potential benefits such as death cover and total and permanent disability insurance.

What are the risks of avoiding paying self-employed super?

If you avoid paying super, you could find yourself in a precarious financial position when you retire with not enough money to live off. By not contributing to your super throughout your career, you would be missing out on the compounding returns that would see your nest egg grow over time. Plus, you wouldn’t be covered by the insurance that many funds offer, unless you have sought out cover separately.

If you’re paying yourself a wage, you may want to consider paying at least 10 per cent of your pre-tax income into super in line with government regulations.

However, what you pay in superannuation will depend on your financial situation, cashflow, and retirement goals. It may be that you make a lump sum contribution when your cash flow allows. It’s a good idea to seek financial advice to ensure you are doing what best meets your needs.

If your gross income is less than $250,000 per annum, you’ll pay 15 per cent tax on your super contributions from your pre-tax earnings. If you earn more than $250,000, you'll be taxed 30 per cent.

Earnings made within super are taxed at a maximum of 15 per cent. If you’re receiving a pension through your super, those earnings are tax-free. If you had that same money outside your super, you would be taxed at your marginal tax rate. The key is not to exceed the annual caps.

There are several ways your super may be able to deliver tax benefits:

Government co-contribution

If you’re a low or middle income earner and make a personal after-tax contribution to your super fund, the government will contribute a maximum of $500 known as a co-contribution. The amount of government co-contribution depends on your income and how much you put in. You don’t need to apply for this – the ATO will determine if you’re eligible as long as your super fund has your TFN. The government co-contribution is tax-free.

Tax deductions

To claim a tax deduction, you need to file a “notice of intent” with your super fund and it needs to be acknowledged before you can claim it in your tax return. Contributing to a spouse’s super does not qualify for a tax deduction. By claiming personal contributions as a tax deduction, you reduce your overall taxable income and cut the amount of tax you pay.

Personal super contributions are amounts you contribute to your super fund that will count towards your non-concessional contribution cap unless you claim a tax deduction for them. If you claim a tax deduction, they become part of your concessional contributions. You can’t claim a tax deduction for your personal contributions AND be eligible for a super co-contribution.

Spouse contributions

If you contribute to your spouse’s super fund, you may be eligible for a spouse contribution tax offset of up to $540 if your spouse’s income is $37,000 or less.

The same rules apply whether you are self-employed or not. Super can only be withdrawn early in limited circumstances. These are:

• Compassionate grounds: These include medical treatment for you or your dependent, making a payment on a home loan or council rates so you don’t lose your home, palliative care and expenses associated with the death of your dependent.
• Financial hardship: To qualify, you need to have received eligible government income support payments continuously for six months AND are not able to meet immediate family living expenses. The maximum withdrawal is $10,000 in a 12-month period.
• Terminal medical condition: Two registered doctors need to certify that you are suffering from an illness that will likely result in death within 24 months.
• Temporary incapacity: Money is usually accessed through the insurance benefits linked to your super account. Payments are made in regular instalments until you’re able to work again.
• Permanent incapacity: Your super can be paid as a lump sum or as regular payments.
• Under $200: If you have a super fund with under $200 in it, you can withdraw that money.
• First Home Super Saver Scheme: Those eligible can apply to withdraw up to $15,000 from any one financial year and up to $30,000 across all years to help save for a first home.

Remember that taking even a small amount of your super now can have a huge impact on your retirement savings down the track. Taking out $10,000 while in your 20s could leave your super balance tens of thousands worse off at retirement. There could also be tax implications when withdrawing early.

Because you aren’t being paid a regular salary by an employer, you can’t salary sacrifice the way others can. However, you may choose to make personal contributions from your pre-tax income to help you reduce your tax bill and grow your retirement income.

There are five key things to consider when choosing a superannuation fund:

1. Performance: Compare the fund’s investment performance over at least five years, taking into account fees and charges. Make sure you’re comparing the same investment option over the same time frame, for example a balanced option over five years.
2. Fees: There’s no escaping them but the lower the fees, the better. Fees are often charged monthly and after any actions you take like switching investment options.
3. Insurance: Look at the insurance cover the fund offers its members including death, total and permanent disability and income protection insurance. Consider the premiums, the amount of cover and any exclusions.
4. Investment options: You can usually choose from a range of options including growth, balanced, conservative, cash, ethical, and MySuper. Your age and retirement goals may help guide this decision.
5. Services: Some may offer services that attract additional fees such as providing financial advice.

A great place to start is a comparison website like RateCity that can do the homework for you.

If you already have a super fund from previous employment, make sure the fund has your TFN and check if they’ll accept your contributions while self-employed.

There are two main ways to contribute depending on how you pay yourself:

1. If you receive a wage, set up a regular transfer into your chosen super fund from your pre-tax income.
2. If you receive income from business revenue, transfer a lump sum payment into your super when your cash flow allows.