The four main ways a business can be owned and operated are as a sole trader, a partnership, a trust and a company. How a business is owned will not only affect how much tax is paid by the owners, but will also affect how they claim a tax deduction for superannuation contributions.
Q: I operate a small contracting business in the building industry in partnership with my wife. Our kids are finally off our hands, the mortgage is paid off, and I am starting to look at putting money aside for retirement. Can you tell me what is the best way to make super contributions?
A: There are two ways that tax-deductible superannuation contributions can be made by a business owner. Where the business is owned and operated through a company or a trust, which normally means the owners are employed by the business, employer tax-deductible contributions must be made.
When a business is operated as a sole proprietor, or through a partnership such as yours, self-employed contributions must be made. The problem is that the requirements that must be met to be eligible to make tax-deductible self-employed super contributions are complicated.
There are two ways in which a person is eligible to make tax-deductible self-employed super contributions. Under the first method a person must not be eligible to have employer contributions made on their behalf. The fact that the tax deductibility depends on eligibility, and not whether employer contributions have actually been made, can cause some people problems.
This is because in some cases, although a person is operating as a subcontractor and not as an employee, the Australian Taxation Office (ATO) can deem a person to be an employee for income tax purposes. This can mean the business is forced into paying compulsory employer super contributions for the subcontractor.
When a subcontractor is deemed to be an employee they will be denied a tax deduction for any self-employed contributions that they have made. Thankfully for your sake where a business is operated through a partnership, the ATO cannot deem a subcontractor to be an employee for compulsory employer super contributions.
The second method, where someone can qualify for making tax-deductible self-employed super contributions is if their employment income is less than 10 per cent of their total income in a year. This means a person can be employed but still qualify for the tax-deductible self-employed super contribution.
An example of this would be someone who operated their own business for 11 months of the year earning $60,000 in income and then became an employee for one month. In this situation, as long as the employment income earned was less than $6666, they could still make a tax-deductible self-employed super contribution.
As you are operating as a partnership, you could make a tax-deductible self-employed super contribution up to $25,000 each for the 2013 and subsequent financial years. Your next dilemma will be picking the superfund to make the contributions to.
Questions on small business tax or other issues can be emailed to email@example.com.
Tax for small business, a survival guide, by Max Newnham, is available in bookstores and as an ebook.