While there are any number of areas that need to be considered when setting up a franchise business, including choosing the business structure, understanding the legal and tax requirements, and hiring staff, one area that shouldn’t be overlooked right from the beginning is the superannuation obligations of business owners.
For any business owner, there are two components to superannuation, both of which are governed by specific rules and regulations:
- the business’s superannuation obligations to its employees
- the business owner’s own superannuation entitlements.
EMPLOYEE SUPERANNUATION
Superannuation guaranteed contribution
Businesses are required by law to pay superannuation contributions every quarter to its employees. This includes anyone aged between 18 and 69 years who is working on a full-time, part-time or casual basis, and earning more than $450 a month (before tax).
The minimum amount to be paid (known as the superannuation guaranteed contribution, or SGC) is nine percent of each employee’s gross earnings.
All SGC payments must be made to employees’ superannuation funds within 28 days of the end of each quarter. So the next due date for SGC payments, for the January to March quarter of 2013, is 28 April 2013.
This payment must be processed by the superannuation fund by the 28th of the month, not simply received by that date, so SGC payments should be made at least two or three days before the due date.
Super fund choice
All employees have the right to choose which superannuation fund their contributions are paid into. Therefore, as soon as an employee joins the business, they should be asked to provide the details of which superannuation fund they wish to use, including account number, account name and tax file number.
For those employees who don’t nominate a particular fund, business owners should nominate a ‘default’ superannuation fund (see below), and make the SGC into this fund on behalf of those employees.
MySuper
From 1 July this year, a new superannuation option known as “MySuper” will be introduced, which will be the compulsory default fund option for everyone who hasn’t chosen a specific fund or specific investment option.
This means that while superannuation fund providers can continue to offer their own specific fund options, such as balanced or high growth funds, they must also offer a MySuper product if they wish to accept default contributions.
Employers must use the MySuper option if they are making contributions to a default fund on behalf of employees who have not nominated another option.
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Penalties
If employers don’t pay the SGC by the due date each quarter; if they don’t pay the full nine percent; or if they don’t pay the contribution into an employee’s chosen fund, they must lodge a super guarantee charge statement and pay a penalty charge to the Australian Tax Office.
This charge is the amount of super that needs to be repaid to the employee plus an additional interest at 10 percent a year, and an administration fee of $20 for each employee every quarter.
BUSINESS OWNER SUPERANNUATION
SGC obligations
If the franchise business has been set up as a sole trader, business owners are classified as self-employed and are therefore not required to make super contributions on their own behalf.
However, if they are an employee of the business, and receive a salary, they must make SGC payments on the same basis as any other employee. The same penalties will apply if they fail to do so.
Other benefits
Even those who aren’t obliged to pay themselves superannuation should consider the benefits of doing so.
Those who are self-employed can choose to make tax-deductible superannuation contributions for themselves up to age 75 if they are still working. This is the most tax-effective way to save money for retirement.
To qualify as self-employed, no more than 10 percent of total personal income can come from an employment source, which includes fringe benefits and employer super.
Another benefit of superannuation is that it is a good way to receive money from the business in a tax-effective manner. Superannuation contributions are only taxed at 15 percent, while salary, bonuses and even dividends may be taxed at a higher rate.
A third consideration is that holding certain insurances through superannuation can be very tax-effective, as the insurance premiums are basically being paid through pre-tax income. Life insurance, total and permanent disability insurance, and income protection insurance – all very useful for business owners – can be held through superannuation.
Holding insurance through superannuation may also be cheaper as superannuation funds purchase insurance policies in bulk, and can pass cost savings onto fund members.
A fourth consideration is that a superannuation fund may be able to own commercial property – such as the premises from which the business operates. The business then pays rent to the super fund. This is a tax-effective structure and can help with financing the business.
Finally, superannuation provides an excellent form of asset protection. Generally speaking, assets accumulated in superannuation through normal contributions cannot be claimed by creditors – a useful form of asset protection for business owners.
Therefore all business owners should think carefully about paying themselves superannuation contributions, even if they don’t pay themselves a full salary while the business is in start-up mode.
Michael Hutton is head of wealth management at accountants and business and financial advisers HLB Mann Judd Sydney