Superannuation is an extremely complicated and misunderstood topic, especially for Trustees of Self Managed Superannuation Funds. For most people earning wages there is an obligation on the employer to contribute super on behalf of their employees. Younger employees especially would really like this to be paid to them rather than put into a fund that they will only access years, in fact decades, later. The purpose of superannuation is, of course, to provide for retirement rather than to rely on the government supporting you in later life.
For people running their own business it probably seems like a contradiction that you pay super for your employees, so the question asked is often ‘why do I have to pay super for myself as I am self employed?’
The answer is that not everyone self employed has to pay super for themselves. Depending on your trading structure the requirements vary. If you are self employed as a sole trader, often referred to as an ABN trader, then paying super for yourself is optional. If your trading structure is that of a Trust and you don’t draw wages, then your only earnings from the business comes by way of trust distributions. Again paying super is optional. If you draw wages from the Trust then you become an employee and wages make superannuation compulsory.
The most misunderstood situation comes with people having a company. By company I mean the name has a ‘Pty Ltd’ in it. A company is a separate legal structure, rather like a person. You would probably be a director. Any money you receive will be in the form of director’s fees or wages. With the company being a legal entity its directors are employed by the company. In this situation you are not really self employed – you are employed by a company. You just own shares in the company. Now we have established you are type of employee your earnings are subject to superannuation.
So, whether you have to pay super for yourself depends on the nature of the income you are earning.
If superannuation is not compulsory for you it is still advisable to consider paying a personal contribution because firstly you are proving for yourself in later life and, secondly, your contributions are tax deductable and the fund only pays 15% tax on them