Sole traders, your retirement lifestyle starts now

Limiting contributions

Going into business for yourself leads many smaller operators to set up as a sole trader, and admittedly there are advantages for the right person. Your business will be cost-effective and easy to operate, you retain all control, and have only basic reporting demands.

Also, as you don't have employees, there will be no payroll tax or workers compensation to worry about. And you'll have no compulsory superannuation contributions to make under the super guarantee rules.

But here are a few salient factors to mull over, especially considering long term lifestyle and how you'd prefer to be able to live in later years. Research from the Association of Superannuation Funds of Australia (see the March quarter 2012 figures here) estimates that a 'comfortable' lifestyle in retirement (at 2012 valuations) requires about $40,297 a year for a single person and $55,080 for a couple (about $775 and $1,060 a week).

So while contributing to superannuation isn't compulsory, it will definitely be a positive move. Putting something extra away when you can is always a good idea to save for your future well-being anyway, and most self-employed people can claim a deduction for contributions made to super (up to a limit) until age 75 (and beyond, from July 2013).

If you have a super fund, or set up a new super account, make sure the fund has your tax file number (see other requirements here). The super fund needs this to be able to accept contributions from you, which will usually be taxed at 15% (which is paid by the fund). Without the TFN your super may be taxed an additional 31.5%.

If you intend to make an income tax deduction claim for your contributions, fill in this 'Deduction for personal super contributions' form and give it to your super fund.

Limiting contributions
The limit on concessional contributions (see below) includes the compulsory 9% that employers have to tip in (just in case you also have a part-time job, for example) as well as extra contributions you can elect to pay for yourself, which are tax deductible as long as you remain a sole trader.

The cap on these contributions was until July 1, 2012 set at $50,000 a year, but it is now $25,000. This is the cap until 2014, when it is expected to be increased to $50,000 again, but only for those aged less than 50 who have less than $500,000 in their fund. However, tip in more than the legislated cap and contributions will be hit with an extra 31.5% tax.

The good news is that as a self-employed person you also have access to the government's co-contribution to super, which means that for every after-tax dollar you put in, the government will co-contribute on a sliding scale. The limit for the government chip-in is $500 (see more about the co-contribution here). The maximum co-contribution is available if your total income is $31,920 or less, but reduces as income increases after that threshold, phasing out completely when income reaches $46,920.

Superannuation will likely to be one of your biggest assets, and will determine what sort of lifestyle you can hope for in retirement. However it is an asset, and in the event of divorce, for example, can be subject to being carved up. See more information on how divorce treats superannuation here.

Reviewed July 18, 2012

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