Planning your retirement for the self-employed

SMSF technical expert and columnist for The Australian newspaper
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Superannuation for the self-employed is a voluntary affair – no one forces you to make regular super contributions.

As a result, anyone in small business has a number of issues to consider about the management of their retirement assets.

Timing your contributions

The first issue is the timing of contributions. Anyone who operates as an employee, for example via a small corporation or via a labour hire arrangement, probably has compulsory employer super contributions being made for them quarterly. But how often should you contribute if you’re self-employed?

As the management of cash flow is very important for every small business. Often all other super contributions are dealt with near the end of every financial year and a quick trip to our accountant with our trading accounts and a review of our current bank account balance generally goes a long way to determining what super contributions a small business can afford for the proprietors every June year-end.

Since July 2007, every super investor has also had to think carefully about the contribution caps and the impact of excess contributions tax. These caps are no different for small business owners.

Selling business assets

If super isn’t affordable in any year, then many small business people hope that when they retire, the sale proceeds from their business will go some way to providing their retirement assets.

The Howard Government’s small business capital gains tax (CGT) concessions, which were first introduced in 1997, have been of great assistance here. It is true that these concessions are insanely complicated and expert assistance must be sought before attempting to use them. The good news is the ALP Government doesn’t appear to be moving to repeal these concessions in one of their regular bouts of legislative class envy.

However, getting the proceeds of the sale of a small business or a small business asset into super is a tricky financial planning exercise because there are several special contribution caps which have to be considered.

In effect, small business people have at least two sources of potential retirement assets – their business and their super funds. Many people will fondly remember when the assets held in the super fund were often business assets, but the ability to do this has fallen away since 1992 after restrictive regulations were introduced.

The introduction of super gearing is going some way to re-introducing the use of some small business assets, especially business premises. You can read more about on super gearing strategies on our website.

Tax deductions

One area that the self-employed must be very careful about is how to access a tax deduction for their super contributions. We’ve discussed the seven key steps here. But it’s important to note that many people don’t seem to worry about their super fund exchanging written documentation with themselves. If only accountants would insist on seeing this documentation before claiming a personal super tax deduction on a person’s tax return, a great deal of hassles for super administrators would disappear!

It has often been argued that super should be made compulsory for sole proprietors. According to the latest Australian Tax Office statistics (for the 2008/09 financial year) there were about 1.75 million taxpayers who earned income from a sole proprietor business, but only 193,000 people claimed personal super contributions as a tax deduction.

It’s important to note that not all of the people who claimed these super contributions as a deduction may have been running their own business because this deduction is available to other taxpayers.

But one could conclude from this that many small business people have no faith in the super system and are relying on their private savings, including their business, to give them income in retirement.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Also in the Switzer Super Report

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