Super and the self-employed

PORTFOLIO POINT: Concessional contributions face strict limits because of the tax “generosity”. Do you qualify for a tax deduction for your contributions?

Getting money into super is hard enough, what with the halving of the contribution limits by the government.

And it’s not getting any easier to make those contributions. Particularly if you don’t fit into the “box” of being an employee.

If you’re an employee, then there’s a path to super contributions. Whatever you’re paid as a salary, an extra 9% gets paid into your favourite super fund. That’s the starting point.

The most difficult thing in that case can be deciding how much extra, if any, to salary sacrifice to that fund. That can be complicated, particularly if you’re on a middling to high salary, where you have to balance the 9% with your salary sacrifice contributions to make sure you don’t bust your $25,000 or $50,000 concessional contribution limits.

But there are a different set of rules to follow if you’re self-employed.

For a start, if you are truly self-employed, then technically you actually don’t need to pay yourself any super at all.

(If you are self-employed and paying yourself a salary through your company or business, then you will need to pay yourself Superannuation Guarantee contributions of 9% of your salary.)

And if you’re not employed, it’s technically like you’re self-employed.

Self-employed and tax deductions

The super contribution rules allow for those who are self-employed to claim a tax deduction for contributions to super, up to their concessional contribution limits (the $25,000 or $50,000 limits).

You might think that “self-employed” is a fairly simple concept. (But nothing’s simple in super, as you should know.) Being self-employed comes with a few caveats.

For a start, you pretty much need to be truly self-employed. That is, you can’t be half-employee and half self-employed. The rule on super for this is that you can’t earn more than 10% of your money from being an employee and you can’t be working principally under a contract for your own labour.

What does this mean? Well, if you have a part-time regular job with an employer where you earn more than 10% of your earned income, then you don’t qualify to make deductible contributions from your own business.

And if you’re a contractor who doesn’t really work for anyone else – and the tax office could construe you relationship with them as employer/employee – then you also might not qualify.

In essence, the reason is that you would likely be receiving, or should be receiving, some sort of Superannuation Guarantee payments from your employer. And, therefore, you could also be doing some sort of salary sacrifice for yourself through that employer.

It can be a nasty situation for a small number of people who do earn a portion of their income through what would be considered a salary. And, in many cases, solutions can be achieved through a reorganisation of the way your income is structured from various sources.

Not employed

You can also qualify to make deductible contributions to yourself if you are not employed and/or receive all of your income from investments.

Essentially, there are two ways to qualify under this definition.

You might not be employed at all. However, if you’re not earning a taxable income, it might not make much sense to make concessional contributions. If you’re not earning anything in the way of an income, then it probably doesn’t make sense to be making concessional contributions (where you will be taxed at 15%) versus taking the income, where you might not be taxed at all.

Where “not employed” can make sense is where you are a full-time investor. Full-time investors will be earning income from dividends, rent, distributions and capital gains, etc.

You might not be running your own business, but you are earning your income from your investments. If you fit this category, you can potentially make tax deductible contributions for yourself.

Telling your super fund

If you are making a concessional contribution to your super fund for which you intend to claim a deduction – whether it’s a managed-fund super or an SMSF – you need to inform the trustees so they can take out the required 15% contributions tax.

With most super funds, contributions made by those who will claim a deduction will essentially be treated as “non-concessional” contributions until the declaration to claim a deduction is made. And that declaration needs to be made before you lodge your personal tax return, or the end of the following financial year, whichever comes first.

There can be significant advantage to this, because you can have more of your money working for you for longer. For example, you might have put in your $50,000 contribution in, say, July 2010. The 15% contributions tax doesn’t need to be taken out straight away, as it usually is with the employer superannuation guarantee contributions. So, you can have your whole $50,000 working for you until, potentially, about May 2012 (nearly two years) until just before you lodge your 2011-12 personal tax return.

Once you lodge the intent to claim a deduction with your super fund, then the super fund will deduct the 15% contributions tax.

Last-minute contributions

Warning: The advice that follows will self-destruct in less than 24 hours.

If you still want to make a super contribution, then it’s not necessarily too late for everyone reading this column. The rules state that in order to be able to make a deduction for a deductible concessional contribution, then your super fund must have received the contribution on or before June 30.

Given that most bank transfers happen overnight, that will leave most people with limited, or no opportunities as of the time you read this column. Unless '¦ your SMSF bank and your business/personal bank account are with the same institution. Most banks will transfer between accounts instantly (or pretty close to it). If you are able to transfer money from one account to another with an internal bank transfer, then you should be able to satisfy that condition.

The other possibility would be the old-fashioned way: walking into a branch and depositing the money into an account. Does anybody still do that any more?

Australians only start thinking seriously about retirement after they turn 50, Roy Morgan research suggests. The new research shows 63% of 50–64 year olds say they’ve started planning for retirement, but the average across all age groups is just 34%. Less than half those surveyed (46%) said they felt knowledgeable about their superannuation, and 59% of over-50s said they did. That same number of the over-50s age group used financial planners, compared with an average 40% across the 14–64 age groups. Accounting firm Morrows is reminding the self-employed and unemployed to pay their SMSFs and super funds before June 30 in order to qualify for the 100% tax deduction on their contributions. Provided the member receives no more than 10% of their income as an employee, they can claim the tax deduction up to their concessional limit: $25,000 for under-50s and $50,000 for the over-50s. DIY super administrator Multiport has developed a new gearing product to help SMSFs buy property. The service organises all the loan application paperwork and documentation and costs $2990 to set up. If an SMSF has to be set up first, the cost is $3650. With property investments within SMSFs worth about $65 billion and growing, Multiport chief executive John McIlroy says loans needed to be tailored to clients because the rules around gearing in DIY funds are complex. The Institute of Chartered Accountants in Australia (ICAA) has thrown its support behind the creation of an SMSF auditor register, but doesn’t believe a competency test will raise the quality of audits. ICAA’s head of superannuation, Liz Westover, says the drivers of auditor merit include education, experience and professional scepticism; and, where a register meant the ICAA could tailor specific training and support to SMSF auditors, a test would drive both good and bad professionals out of the sector.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.

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