Whether or not to invest in superannuation remains a topic of much confusion for business owners, particularly due to significant losses incurred over the last few years, and changes in legislation to tax benefits around contributions.
The benefits of investing in superannuation, provided the tax rate on the income is more than 15%, is that the total of money invested is greater, because it is tax deductable.
For example, if you have $10,000 of income and are taxed at 38.5%, you will have $6,150 to invest after tax. If you can structure your affairs so you can claim a tax deduction for contributing the same $10,000 to superannuation, you will have no tax to pay on this $10,000, and the super fund will pay tax of 15%, leaving you with $8,500 to invest within super.
By investing the same amount of income in superannuation in a tax efficient way via concessional (tax deductible) superannuation contributions, instead of investing it outside of superannuation, you will significantly increase the after-tax value of this same amount of income invested. This is a result of the compounding effect of a greater amount of capital invested due to tax savings.
Many business owners and self employed are hesitant to make voluntary payments to their superannuation funds before the end of this financial year because of the significant and well-reported losses incurred to funds following the Global Financial Crisis.
The truth is that superannuation is not necessarily a better nor worse investment opportunity than cash, property and shares.
The reason is that superannuation funds are invested back into these exact same three asset groups. The key here is not necessarily the types of assets but the investment strategy and performance of the fund investment manager that impacts on the return. You need to make sure that your superannuation investment strategy is aligned to your overall goals and objectives, and you pay the same attention to it as you do to your other assets.
Tax deductions can apply to superannuation contributions up to $25,000 per annum (or $50,000 for those over 50), and the payment of funds from superannuation funds are tax-free after age 60.