At present, self-employed Australians are not required to contribute to superannuation. A report by ASFA into Superannuation and the Self-employed in 2016 revealed that compulsory superannuation contributions for employees mean that only 7% have no superannuation, whereas almost one quarter of the self-employed have no superannuation. In the years leading to retirement, only 27% of the self-employed aged 60-64 have more than $100,000 in superannuation, compared with almost 50% of employees .

What is ‘self-employed’?

The ATO has clear guidelines on what a self-employed person is:

• If you’re self-employed as a sole trader or in a partnership, you don’t have to pay superannuation to yourself.
• If you’re a contractor, it depends on your agreement or working arrangements with the company that you’re doing work for. You may pay your own, or you may be eligible for super guarantee contributions from the company. 
• You may own the business, but if it’s a company and you’re considered an employee, you should pay yourself the superannuation guarantee, which is currently 11% of ordinary time earnings.

For more information, see the ATO website.

Why contribute to superannuation?

While it’s tempting to pour every hard-earned dollar back into your business, the reality is that not all businesses can be relied upon to be sold and fund their owner’s retirement. Many self-employed rely solely on their own labour, with no substantial business assets to lean on. That’s where superannuation can come in, providing a great way to plan for your retirement.

A nest egg for retirement 

By contributing to super, you are building a nest egg that will help provide you with financial security and income in retirement. Putting a small amount of money into superannuation regularly can provide financial stability over time, allowing you to focus on growing your business while building a potential retirement income stream in the background. 

But remember, amounts contributed to superannuation cannot be accessed until you meet certain conditions. 

Tax benefits

Here’s a big one: if you’re self-employed you may be entitled to a full tax deduction for contributions made to super.

If you’re self-employed, you can make personal contributions up to the annual cap, which is $27,500 per year for the 2023-24 financial year. These contributions are taxed concessionally at 15 per cent , rather than your marginal tax rates. So not only are the contributions taxed at a lower rate, but self-employed individuals can also claim a tax deduction on those contributions.

To claim a deduction for personal contributions, it’s important to note that:

• Contributions must be made before 30 June to claim them as a tax deduction for that financial year.
• You must notify your fund before claiming a tax deduction using a specific form. Strict time limits and additional criteria may apply. 
• The ATO website has more information about claiming a tax deduction for personal contributions as a self-employed person – search ‘Personal super contributions’ on the ATO site.

In addition to the tax savings from making personal deductible contributions to superannuation, investment earnings are also concessionally taxed within superannuation at a rate of up to 15% rather than your marginal tax rate, which could be up to 47% (including Medicare levy). 

Compounding

Superannuation remains one of the most tax-effective ways to grow wealth. Over time, your contributions can benefit from compounding growth as your investments earn returns on both your initial contributions and any earnings generated. Starting early and contributing consistently, even with small amounts, can significantly boost your retirement savings. 

Diversification

Many self-employed people see the sale of their business as their retirement strategy. But by putting money away into the tax-effective superannuation environment, with investment strategies that can be tweaked over time, you can diversify your investment, reduce risk, AND plan to retire when it suits you. 

How do I contribute to super if I’m self-employed?

Just because you’re self-employed doesn’t mean super has to be complicated! 

• The first thing to do is set up a super account. You can:

1. start a new fund with the majority of superannuation providers; 
2. contribute to an existing fund you may have had when you were an employee; or
3. go down the self-managed super fund route. 

• The next step is to contribute to your super fund. If you receive:

1. ­A wage — set up a regular transfer into super from your before-tax income.
2. Income from business revenue — transfer a lump sum when you have enough cash flow.

With various tax benefits, the flexibility of contribution size and frequency, and having another income source for your retirement, why wouldn’t you be contributing to super if you’re self-employed?