Thinking of leaving full-time employment to work for yourself?
Today, it’s more common for people to work as freelancers and contractors, which means making changes and managing your own super fund.
Finance expert Anthony Bell shares advice on how to find the right fund and tips for keeping your super on track.
image: au.pfinance.yahoo.com
Firstly a few tax basics. If you are a self-employed person (sole trader) and 90% or more of your income comes from your self-employed activities (i.e. you do not receive a salary/wage from an employer), you can contribute up to $25,000 pa into super and claim a tax deduction in your personal tax return. (You should check your eligibility carefully before claiming a deduction. Visit www.ato.gov.au or speak to your accountant).
If you operate your business through a structure such as a company or a Trust, similarly up to $25,000 pa can be contributed by that entity on your behalf into a superfund of your choosing and the entity can claim a tax deduction for the amount contributed.
Also, any individual can contribute up to $150,000 pa (or $450,000 once every three years) from your their tax earnings (i.e. your personal funds) into super. There is no tax deduction for these amounts as tax has already been paid.
It is important to not exceed these limits as penalty tax rates may apply.
Which type of fund should I put my super with? Broadly there are 3 types of funds;
➢ Public Offer Fund
➢ Industry Fund
➢ Self Managed Super Fund
As the name suggests, a Public Offer Fund is a super fund that is able to accept contributions from the public. There are literally hundreds if not thousands of these offered by large and small financial institutions that offer a wide range of investment choices.
An Industry Fund commonly services employees in a particular industry sector (e.g. HESTA for Health services employees). Fees charged by the Fund Manager can be lower than for Public Offer Funds.
By contrast, a Self Managed Superannuation Fund typically caters for just you and your immediate family. It can have up to 4 members. The big difference with this type of fund is that all members must be Trustees of the fund (or directors or a corporate trustee). This has the advantage in that you can decide (with or without the assistance of a financial advisor) what the fund can invest in, subject to certain overarching restrictions.
This type of fund is very flexible and personalised but imposes significant obligations on the Trustee (i.e. you and your family) to ensure the fund complies with record keeping, reporting and asset management requirements. It will also require an annual Financial Report to be completed and an audit of that report.
In the right circumstances, a self managed superfund can be a great way of building wealth towards your eventual retirement. You will need to consider whether you have or will soon have sufficient funds in super to justify the administration costs of this type of fund.
How do I keep track of my super? If you have super in a range of superfunds which can often occur if you’ve had many jobs over the years, it is usually a good idea to rollover these amounts into a single super fund or a small number of funds. This is where a self managed super fund can come into its own; all your super in one place, controlled by you and more easily managed.
Lost super? If you think you might have money in superfunds that you have lost track of, it is worth using the Tax Office’s tool called “SuperSeeker”. Visit www.ato.gov.au/superseeker.
A Super fund is just a tax structure. I hear many people justifiably complain that their superfund has lost money or declined in value. It should be remembered though that it is still your money, it’s just in a separate tax efficient structure where in most cases you can’t access your funds until you retire.
With some exceptions, you can invest your super in exactly the same types of investments as if you were investing personally. It is not the super fund that has lost money but what it has invested in. You should pay as much attention (if not more) to the investment decisions inside your super fund than you do with your personal investments. It’s still your money, it’s just partitioned away for your retirement.
So which type of fund is right for me and what should it invest in? One thing’s for sure, there is no “one size fits all” best approach. Don’t believe anyone that tells you otherwise. Superannuation is a complex area where you can easily overlook strategies that may reduce the tax that you pay and your costs along the way. It is very important to obtain professional advice, particularly if you are approaching retirement. Many factors must be considered that take into account such things as your personal circumstances such as your asset position, age, employment, risk profile, inheritances and future income needs.
By Anthony Bell
www.bellpartners.com
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