As a business owner, your focus is likely to be on the operations of your business and its future growth. But what about your future?
Like many business owners, you may be less than disciplined when it comes to paying yourself a regular salary, let alone making contributions to your superannuation.
You may even view the sale of your business as your retirement plan. But the laws have changed, and it’s no longer possible to make large contributions into super. The solution for getting money into super is to begin contributing earlier in your career.
What’s changed and what you need to do
On 1 July 2017, new super laws were introduced. Key changes which may affect you include:
#1: Pre-tax or Concessional Contributions cap reduced to $25,000 per annum.
This means you are only allowed to contribute up to $25,000 of your pre-tax income into super each year. Pre-tax contributions are a tax effective way to save for your retirement as contributions are taxed at 15% as opposed to marginal tax rates which range from the higher rates of 19% up to 45%, depending on your level of earnings. This cap includes any funds directed into your super from employer Super Guarantee Contributions and salary scarifying.
What this means for you
Making pre-tax contributions to your super can make a huge difference as shown in the scenario below.
Joe is 40 years old and has $100,000 in super. His salary is $80,000 per annum and his employer pays 9.5% compulsory contributions into his account. He does not make additional contributions. If Joe retires at 65, his super balance will be approximately $320,000.
If Joe chooses to make an additional $1,000 per month in pre-tax contributions to super, his balance could be more than $595,000. That’s an extra $275,000 in super at retirement.[1] The earlier you start, the greater the results.
For business owners without the help of compulsory employer Superannuation Guarantee Contributions, starting a super contribution discipline is even more important. We can help you with a number of strategies that can help you to manage your cash flow, grow your retirement nest egg and reduce your tax bill.
#2 After-tax or Non-Concessional Contributions cap reduced to $100,000 per annum.
A limit of $100,000 of after-tax funds is allowed into your super each year. The bring-forward rule,
which allows people under 65 to ‘bring forward’ 3 years of Non-Concessional Contributions, has also been reduced to $300,000 in a single financial year.
What this means for you
It’s no longer possible to contribute large amounts of money into super over the last few years of your working life. The only way to get money into your super is by making contributions within the caps (pre-tax or after-tax), if you want to avoid fines or additional tax penalties.
Large sums of money derived from the sale of assets or your business will be affected by the reduced contribution caps and need careful consideration to achieve tax efficiencies offered within super and to comply with the new laws.
#3 A $1.6 million balance transfer cap is now also in place for super funds in pension phase (tax free).
If your super balance has reached $1.6 million, you will no longer be able to make non-concessional contributions.
What this means for you
If you have excess funds in your super, there are a number of ways to reduce your balance. However, there are tax complexities and implications which need to be considered when transferring assets from a pension phase (tax free) to accumulation phase (taxable), so it’s important to seek professional advice.
How much super do I need?
Many business owners have not considered (or have underestimated) the savings they will need to fund their retirement. Without adequate retirement funds, you may well be forced to compromise on your retirement lifestyle.
The Association of Superannuation Funds of Australia (AFSA) Retirement Standard provides benchmark figures to help you understand what a ‘comfortable’ retirement lifestyle costs. A comfortable retirement lifestyle enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, domestic, and occasionally international holiday travel.[2]
It is estimated that a budget of $43,695 per year is required for a single person to live a comfortable retirement. This figure assumes that a retiree owns their own home, is debt free and is relatively healthy.[3] It’s important to understand that achieving a passive income of $50,000 per annum requires a capital base of approximately $1million of income producing assets offering a 5% return.
What you need to do
In a word – plan.
- Plan to contribute to superannuation earlier rather than later in your working life.
- Plan your business cashflow so that you regularly contribute to your own superannuation fund.
- Plan your tax obligations and take action to reduce your tax liabilities by using tax effective structures including SMSFs.
For further information about superannuation including Self Managed Super Funds, please contact Mark Foxley-Conolly on 07 5479 5499 or email info@vbatax.com to discuss your needs.
[1] This is a scenario, not a prediction. Results assume a balanced investment strategy with medium fees. The amount assumes inflation of 2% per annum due to CPI with a further 1% due to rise of living standards. https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/superannuation-calculator
[2] http://www.superannuation.asn.au/resources/retirement-standard
[3] http://www.superannuation.asn.au/resources/retirement-standard
At VBA we specialise in strategic tax advice, offering tax and financial reporting for individual income earners, family businesses, tradies and construction companies.
Victor Bimrose Accountancy Pty Ltd (ASIC No. 1259423) ABN 53 010 957 294 is a Corporate Authorised Representative of Merit Wealth Pty Ltd ABN 89 125 557 002, Australian Financial Services Licence Number 409361.
Mark Foxley-Conolly (ASIC No. 1259421) is a Limited Authorised Representative of Merit Wealth Pty Ltd ABN 89 125 557 002, Australian Financial Services Licence Number 409361
General Advice Warning: This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.
