Retirement
What super contribution strategies can I use if I’m self-employed?
Contribution reserving strategies can be particularly effective for boosting the superannuation of business owners.
What super contribution strategies can I use if I’m self-employed?
Contribution reserving strategies can be particularly effective for boosting the superannuation of business owners.
Most Australians are required to compulsorily contribute at least 9.5 per cent of their salary to a complying superannuation fund. However, self-employed individuals are not required to set aside money to pay super contributions. Many self-employed Australians, on a modest income and approaching retirement age, have not set aside enough money for retirement, and this has restricted their ability to retire. Therefore, it is important to establish a contribution strategy as early as possible, to build super and, importantly, reduce tax.
Contribution reserve strategies
A contribution reserve is simply a ‘suspense’ account as it holds contributions for a short period of time before they can be allocated to the relevant members account within 28 days of the following month of the contribution being made.
Why use a contributions reserve?
Contribution reserves have the obvious benefit of doubling your contribution and allowing you to claim a deduction for the equivalent of double the contribution cap in each financial year. Therefore, you can bring forward the tax deduction from the next financial year to the current financial year – without breaching the concessional contribution caps. This is a win-win where you are able to claim a deduction, minimise your tax and increase your superannuation balance. This is particularly effective for members, with a large capital gain, who are looking to minimise their tax bill.
When to use the contributions reserving strategy?
A contribution can be made to the reserve prior to 30 June – usually after 2 June as the contribution must be allocated to the member account within 28 days of the following month. For instance, a contribution made on 15 June must be allocated to the member account by 28 July.
An example
Jack is a 51-year-old carpenter and a member of ABC SMSF. Jack’s concessional contribution cap for the 2016 year is $35,000. In the 2016 year, Jack made a significant capital gain on a sale of property and is looking to minimise his tax.
On 2 September 2015, Jack made a contribution of $35,000 to ABC SMSF. It would seem that if Jack makes any further contributions, he will exceed his contribution cap for the 2016. That’s where the Contribution Reserve strategy takes effect. On the 15 June 2016, Jack makes another personal contribution of $35,000. Jack can allocate the contribution within 28 days of the following month of the contribution (i.e. July 2016).
Accordingly, Jack can claim a deduction in the 2016 year for $70,000 yet not exceed his concessional contribution cap for the 2016 year. The additional $35,000 will be counted to Jack’s contribution cap in 2017. This is particularly effective for Jack to minimise the large capital gain in the 2016 year and may result in a significant tax saving.
Jack has checked his trust deed to ensure it allows the use of reserves and provides ABC SMSF with the notification of his intent to claim the $70,000 as a deduction.
The example of Jack shows contribution reserves are awesome for the right client at the right time. Contribution reserves can be used to double their deduction in a financial year and increase their superannuation balance. It is important to remember that consideration is provided to the tax benefit provided in the current year as well as the year following the allocation.
How does the 2016 budget affect contributions to my SMSF?
The 2016 budget announcement – if implemented – will have a major impact on contribution strategies for the self-employed. They include:
•reduction in the concessional contribution cap to $25,000 regardless of age;
•carried forward concessional cap for account balances below $500,000;
•all individuals under 75 will be eligible to claim a tax deduction for personal contributions lifetime non-concessional contribution cap limit of $500,000;
•lifetime non-concessional contribution cap limit of $500,000.
The example of Jack the carpenter shows an effective contribution strategy can be used for the self-employed to effectively reduce their tax by claiming a deduction for the contribution made and boosting their super to benefit their retirement nest egg.
Ivan Filipovic, director, Redwood Advisory
RELATED ARTICLES
Superannuation
Superannuation guarantee rate rises to 12 per cent as parental leave changes take effect
The superannuation guarantee rate has increased from 11.5 per cent to 12 per cent from Tuesday, with super contributions also being added to Commonwealth Parental Leave Pay for the first time. Read more
Superannuation
Rest's Sustainable Growth option achieves highest sustainability classification
Rest superannuation fund has achieved the highest sustainability classification for its Sustainable Growth investment option from the Responsible Investment Association Australasia. Read more
Superannuation
Aware Super slashes admin fees for retirees by up to 25 per cent
Aware Super has reduced administration fees for members with a retirement income account by up to 25 per cent and lowered the maximum annual fee. Read more
Superannuation
SuperAPI co-founder criticises Labor's superannuation tax as 'sneaky tax on young people'
The co-founder of SuperAPI has labelled Labor's proposed tax on superannuation balances above $3 million as a "sneaky tax on young people, tomorrow" disguised as a policy targeting wealthy retirees ...Read more
Superannuation
Election policies could reshape Australia's superannuation landscape, expert warns
Competing superannuation policies from Australia's major political parties could have significant implications for investors and retirees, according to a financial expert. Read more
Superannuation
Industry leaders weigh in on concessional super tax as Budget confirms $55bn investment
Changes to the taxation of superannuation earnings and contributions have drawn mixed responses from financial and payroll sector leaders, as the Federal Budget confirms over $55 billion in ...Read more
Superannuation
Call for indexation on super tax cap as $3m threshold draws criticism
A senior executive in the superannuation technology sector has criticised the Federal Government for failing to index the proposed $3 million superannuation tax cap, arguing the measure will unfairly ...Read more
Superannuation
Rest members back calls for fairer superannuation rules ahead of Federal Budget
Rest has called on the Federal Government to implement superannuation reforms aimed at improving fairness across the system, after member survey results showed strong support for a range of proposed ...Read more
