With the super changes due to hit on 1 July 2017 the most extensive we’ve seen for some 10 years, it’s more important than ever to be prepared. That’s especially the case for SMEs, which are too often already well behind the super eight ball.
The fact that SME owners have no compulsory requirement to formally contribute to their own superannuation can be considered either a feature or a flaw.
For SMEs that are highly organised, well established, have strong capital and good cash flow, it can lead to freedom to structure their affairs and secure a comfortable retirement in a way that suits them (and which often includes making super contributions in line with current regulations.)
For many other SMEs, the situation is very different. Personal superannuation contributions can slide way, way, way down the to-do list. Other, more immediate imperatives, like putting money back in to the business, skating through leaner cash flow times, remaining competitive in an ever-tighter economy – tend to take precedence.
As a consequence, we see too many SME owners finding themselves applying for an Age Pension as they hit retirement, despite their many years of hard work, employing others and otherwise contributing to the community and economy.
The good news is, you can make a difference. Being aware of what the new changes mean to you, avoiding traps and instead taking advice on how you might capitalise on them is one place to start. Another is to avoid some of the other common traps we see SMEs falling into, and follow these tips, instead.
Making the most of your super
TRAP: Concessional/Non-concessional cap changes Continual lowering of the employee and non-concessional contribution caps over recent years has all but cut off one of the favoured avenues of SME super planning – to make big lump sum payments “when the time was right”. With that option no longer available, SME owners need to find other opportunities to salt away larger sums in super when they can. And, under the new regime, two stand out.
TIP: Small business CGT concessions apply to those approaching or in their retirement years who are looking to sell their businesses or move their business on. One is the retirement exemption, the other is known as the 15-year asset exemption. Taking advantage of these concessions may allow up to an additional $500,000 from proceeds of the sale of the business to be made into super. There are particular opportunities here for those who have not already taken advantage of such concessions.
TIP Non-concessional contribution from the sale of a principal residence. This allows those retiring to contribute up to $300,000 into super from proceeds of the sale of a home, so long as it has been owned for at least 10 years.
TIP Maximising this year’s contribution or bringing forward the July 2017 payment You can get a short term one-off boost to super by maxing out your cap for this year, even if it means bringing forward your July 2017 contribution. With the concessional contribution caps going down to $25,000 from either $35,000 or $30,000, that spells another $5,000 to $10,000 you won’t be able to contribute again.
TRAP: The new $1.6m transfer balance cap. Under the new regime, concessional tax treatment of super ceases once your balance hits the $1.6 million mark.
TIP: Splitting income, contributions and tax with spouses continues to be a valid way to boost super balances especially with the introduction of the $1.6 million cap. The goal here is to even out the super balances between you and your spouse. This splitting of contributions is especially important if one spouse has taken time off to look after new family and not contributing to superannuation. This is where the working spouse can split up to 85% of their contributions to their non-working spouse to even up their member balances. For example, if there is $10,000 of employer contributions, you can split up to $8,500 of that employer contribution.
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TRAP: Low income leading to low super contribution and potential losses due to tax on super
TIP: Low Income Superannuation Tax Offset (LISTO). From 1 July 2017, the LISTO scheme replace the previous Low Income Superannuation Contribution (LISC) scheme. The intent of the LISTO payment is to offset the tax your superannuation fund pays on your contributions. If you earn $37,000 or less a year, you may be eligible to receive a LISC payment, up to $500 a year, directly into your super fund. Generally speaking, so long as you have a super fund and it has your TFN, you will automatically receive the LISTO. Even the small contribution from LISTO can help cushion you from the impact of a “bad year’, especially in situations where
TRAP: Only making super contributions after a “good” year. This is a particular trap for SME owners who don’t pay themselves a wage and only make contributions when they feel they have enough “spare”. It’s understandable, but a mistake.
TIP: Contribute small amounts each month, or even each week. This way, you keep building your balance even if you don’t succeed in finding a larger lump sum by 30 June. A regular $10, $20, $50 can make a real difference to your ultimate super balance without compromising your bottom line in lean times.
TRAP: Sticking to the bare minimum super contribution. It’s well understood that to have a comfortable retirement, most people will need well over $1 million in super. The current SGC rate is unlikely to deliver that for ordinary incomes earners and, especially, SME owners with minimal taxable incomes.
TIP: From 1 July 2017 you can claim a tax deduction for additional contributions. This is a win on both fronts, boosting your super and saving on tax. It applies to most Australians, including SME owners, who can claim deductions for additional super contributions in your annual tax return so you get the tax benefit now.
TRAP: Leaving super to the last minute and missing opportunities
TIP: Take it slow and steady – and always, always get professional advice. We all know that the sooner you start with super the better, but that’s simply not the reality for many of us, especially SME owners. That’s why if you’re in small business, the absolute best thing you can do to give your balance a boost and set yourself on a path to success is consult an expert who knows the intricacies of the landscape and can guide you to the best solution for your needs.
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