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Most Australians employees take regular contributions to their superannuation as more or less of a given. However, a new study has shown that for many small to medium business owners, making regular payments to their personal superannuation fund is a rarity few can afford and choose to do. This article outlines the reasons why this is so and how the legal definitions of different business structures ensure that small to medium business owners can do so in full compliance with the law.

Study on Personal Superannuation

A new study commissioned by MYOB shows that the business owners of over one-third of small to medium businesses are not making any contributions to their personal superannuation. Further, approximately 50% of small to medium business owners below the age of fifty have not planned for retirement at all. The primary reason that so many small to medium business owners do not contribute to their superannuation is that after paying overheads and costs, there is little to nothing left with which to make a contribution to their personal superannuation account.

For example, Jada Moxham, aged 26, runs Rapid Boarders, a white water rafting business in Cairns with her partner Leigh Newlan. She notes that business has been slow and that even despite the fact that she and her partner do almost all of the work in the business themselves to keep costs as low as possible, there is never ‘any extra’ to put in their super accounts. However, Ms Moxham ensures that she makes all compulsory superannuation contributions for her employees.

The fact that many small to medium businesses typically wait a long time to receive the payments owing to it from larger entities exacerbates this situation. This delay increases the pressure on the business’ cash flow and mitigates against business owners ever finding money to put into their super fund. Ms Moxham says that her business can wait for up to ‘two or three months’ for payments from some of their distributors. The pressure has become so great that she works casually elsewhere in addition to running her business to supplement the business’ income. This is not an isolated phenomenon.

Research from Veda, one of Australia’s largest credit information and analysis companies, shows that businesses with more than fifty employees were 1.5 times slower to pay invoices as their smaller counterparts. Businesses with a staff of between ten to fifty people usually paid invoices the fastest, followed next by micro-businesses (with between one to ten employees). Similarly, Dun & Bradstreet Business Expectations Survey for the first quarter of 2016 showed that businesses with over five hundred employees paid invoices at an average rate of 52.4 days. The Australian Small Business and Family Enterprise Ombudsman Kate Carnell believes the situation is such that large businesses can be said to treat smaller businesses with ‘contempt’.

Legalities and Super Requirements

In Australia, legislation requires all employers to pay the superannuation guarantee (9.5% of ordinary time earnings) for adult employees who earn $450 or more every month. If the employee earning above this threshold is under eighteen, their employer must make a super payment if they work more than thirty hours per week. As such, many people may find it perplexing that small business owners – who typically work long hours – have a choice whether or not to pay super into their personal account.

The answer lies in the status that the law accords to different business structures. Depending on a business’ structure, any money that a business owner takes from it for personal purposes may not, in fact, constitute wages as per superannuation law.

Businesses that operate either as sole traders or partnerships do not have a legal identity separate from their owner(s). Legally, the business is the owner or owners and vice versa. Because of this, any money that such proprietors take from their business for private purposes (whether regularly or on a more ad hoc basis) is not a wage or income for the purposes of the superannuation guarantee. Rather, they are considered ‘drawings’. That fact means that business owners are not legally obliged to make a superannuation contribution for themselves on the drawings that they make. And many small to medium enterprises in Australia are structured as sole traders or partnerships. As such, they can choose whether or not to make a personal super contribution. Only if an owner failed to make contributions for their employees would they fail to meet all their legal obligations.

However, if a small business has a company structure, the business exists independently of the proprietor. In other words, it is a separate legal entity. In these instances, a proprietor can be both a director and employee of the business. They can, therefore, receive wages which are income for the purposes of the superannuation guarantee. As such, they must pay both income tax and superannuation on such payments.

Key Takeaways

While small business owners may not be legally required to make personal superannuation contributions, there are nonetheless excellent long term financial reasons why they should do so. LegalVision has assisted many businesses with their legal needs. Contact us today on 1300 544 755 or fill in the form below.


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