There’s no denying it – running your own business comes with a lot of financial pressures. During the early days of operating, when you’re still trying to turn a profit, sometimes the first pay to be docked is your own.
So it’s easy to see why superannuation is often the last thing on your mind. And this is exactly why it’s so important. If you don’t plan for your own super, no one will – and you run the risk of not having enough money to live on when you retire.
A recent report by the Association of Superannuation Funds of Australia (ASFA) assessing the scale and distribution of retirement savings of the self-employed found that, on average, those who are self-employed and close to retirement age (60–64) have around half the superannuation of employees. In addition, almost one-quarter of self-employed Australians have no super at all.
It’s not too late to start. The government’s co-contribution scheme could be the motivation you’re looking for to boost your retirement savings.
What is the super co-contribution?
If you’re a low- or middle-income earner – that is, you earn less than $51,021 per year – and you want to make a non-concessional (after-tax) contribution to your super fund, then the government will match it.
So, for every dollar you deposit to your super fund out of your take-home pay, the government will co-contribute $0.50 cents (up to a maximum of $500), unless you have claimed your contribution as a tax deduction.
Am I eligible?
To be eligible for the super co-contribution you need to:
- Have made one or more personal contributions to your super account
- Pass the income threshold and 10% eligible income tests
- Be less than 71 years old at the end of financial year
- Have not held a temporary visa at any time during the financial year (unless you are a New Zealand citizen or it was a prescribed visa)
- Have lodged your tax return in the relevant financial year
There are two co-contribution income thresholds:
- Low threshold ($36, 021 for 2016–17)
- High threshold ($51, 021 for 2016–17)
To pass the income threshold test, your total income must be higher than the income threshold for that financial year.
If your income is equal to or less than the lower threshold and you make a personal contribution of $1,000 to your super, you get the maximum co-contribution of $500.
If your total income is between the two thresholds, the maximum co-contribution the government will make will reduce 3.33 cents for each dollar you earn over the lower threshold up to the higher threshold.
To satisfy the 10% eligible income test, you must earn 10% or more of your income from eligible employment, or from carrying on a business, or both.
You can use the ATO’s super co-contribution calculator to work out your entitlement based on your income and work tests.
Allowable business deductions aren’t included in your total income test, either. So, you can keep investing in your business while still taking advantage of the scheme.
Is it worth it?
If you’re self-employed, a tax-free handout of $500 from the government is a great incentive to boost your super.
Let’s think about it in practice. If you earned $35,000 between 2015–16 and made $40 fortnightly contributions to your super fund, you’d receive the maximum government co-contribution of $500 – as long as you met all other criteria. That’s $1,540 extra straight into your retirement fund.
Making a personal contribution is easy – you can do it as a lump sum or in instalments throughout the financial year. And in most cases, the ATO will pay the co-contribution directly to your super fund. Simple.
Want more tax time tips? Read our step-by-step guide for the self-employed.