Should You Contribute Money to Superannuation?
Many successful business owners make more money reinvesting cash flow into their business than any other comparable investments. So if business owners get a much better return from their business for any money they invest in it, why would they consider placing funds in superannuation?
Successful businesses generate more than fifteen percent on invested capital annually. If this is your business, where for every dollar invested you get a return of fifteen percent or more, why would you want to invest in superannuation where conservative forecast annual returns are around five percent for the average fund currently.
The problem with returns from a business is that the fifteen percent good businesses generate isn’t guaranteed year after year. Even if the economy is doing well as Australia’s has done for 25 years, it doesn’t mean that every business has succeeded over the same period. As things change fifteen per cent returns could fall or end up going negative. If every business grew cash by 15 percent a year, after a few decades many small businesses would become large ones. The reality is only about 17 percent of businesses generate more than $2million a year in revenue. This underlines the fact that most businesses don’t grow revenue at fifteen percent a year for decades on end.
Putting all your eggs in one basket is risky as well. What if your business doesn’t have any sale value? It instead purely generates income and when you retire you shut the doors and there is nothing to sell. If this is the type of business you are in then not putting money into superannuation is unwise. While successful business owners work they earn more money than the Age Pension will provide. So it makes sense to save and invest to either avoid relying on the Age Pension or to supplement it with other investment income. The reality is that the bulk of retired Australians rely on the full or part Age Pension to meet expenses in retirement.
The full couple Age Pension at the moment provides annual income of $34,400. Whereas according to the Association of Superannuation Fund of Australia (ASFA) a comfortable retirement income for a couple is nearly $60,000 pa at present. So how do you as a small business owner make up this gap? This is where contributions to superannuation can help. As soon as you earn income of more than $50,000 per annum your average tax rate is more than 15%. Any money you place in superannuation is taxed at 15%. For those earning income of more than $250,000 pa the tax rate rises to 30% from 1st July 2017. You save tax by placing money in superannuation.
Any money you place in superannuation is also protected from creditors, unless you placed funds in superannuation to deliberately defeat creditors. So there’s another good reason to reduce your risk and invest some money outside the business.
Therefore it is well worth putting money into superannuation due to the tax savings, the need to cater for your eventual retirement and to save some money outside your business even if it is very successful right now.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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