Should business owners contribute to Super? This case study says yes

Are you a small business owner? Do you pay yourself super

If you don’t, you’re certainly not alone. 

Business owners are not obliged by law to pay themselves superannuation if they are not operating under a company structure and paying themselves a salary. This sees many business owners choosing to divert those funds elsewhere. In our experience, they tend to reinvest the funds back into their business to either keep the business going or fund growth.

Alice was unusual in this regard. 

She and her partner Max owned a thriving business and over the years they regularly contributed to their superannuation account. Little did they know at the time, but those contributions would make a huge difference to Alice’s life later on.

Small business owner superannuation case study

As mentioned, Alice and Max’s business was thriving. But then the unthinkable happened – Max passed away suddenly leaving Alice with a business to run at the same time as having to process and live with his loss. 

A General Manager (who was a friend of the family doing their best, as opposed to a truly qualified GM) was brought in to run the business. And while there is a long story here, the short story is, eventually the business found itself with a $10 million bank debt and was forced into bankruptcy.

It was at this point that Alice came to see us. It’s also the point where she became very grateful that she and Max had contributed to super for their entire working lives (even once they became business owners).

Alice had $1.4 million in super and that balance was protected at the time of filing for bankruptcy due to ongoing contributions over the course of her’s and Max’s lifetimes. (It’s important to note here that Alice’s super balance was protected because she had been making contributions for many years. You can’t just throw money into super if you think you’re about to go bankrupt … that will be discovered and clawed back.)

We were pleased to be able to give Alice direction on how her super funds could provide her with a life despite the loss of both her husband and her business.

As a bankrupt person with no dependants, (as was the case for Alice), an individual can only receive an after-tax income of $59,559 before the bankruptcy trustee takes 50c on the dollar over this amount. This ruling extends to pension payments but not lump sum, ad-hoc withdrawals from the superannuation environment. 

This ruling around lump sums, combined with section 116(2)(d)(iv) of the bankruptcy act which says any property purchased using a lump sum paid to a bankrupt person from their superannuation funds is also protected from access by the trustee, allowed Alice to use the superannuation funds to buy a house (instead of having to wait three years).

This allowed her to stop paying $400 per week in rent. She was also able to then live off the remaining money to fund her lifestyle

Alice could have easily gone from being an owner of a thriving business to a bankrupt person starting from scratch in the blink of eye, all because she lost her partner. 

Instead, contributing to super over the years has provided her with both a home and an income at a terribly challenging time in her life.

Could Key Person Insurance have helped here?

Key Person Insurance is something many business owners don’t have as they tend to think ‘this won’t happen to me so I don’t see the need to pay for it’. 

While the point of this case study is to illustrate a situation where contributing to super as a business owner is important, it’s important to acknowledge that Key Person Insurance is something else that could have made a big difference to Alice’s life when she lost Max.

There are two main types of Key Person Insurance:

  1. Buy Sell Cover
  2. Key Person Debt Cover

1. Buy Sell Cover

This is often used when a business is owned by one or more people who are not related to each other. This cover allows the surviving business owner(s) to buy out the beneficiaries of the key person who has passed away. And continue to run the business themselves.

2. Key Person Debt Cover

This is often used when a business is owned by people who are married/partners in life. It allows the surviving partner to pay down any debt owed by the business and gives the business a financial buffer to work with as it tries to keep moving forward.

We would have liked Alice and Max to have Key Person Debt Cover. This would have allowed her to pay down a lot of the business debt when Max died. It would have also allowed her to employ a General Manager with the specific expertise needed to steer the business towards sustained viability.

This information is of a general nature only and has not taken into account your particular circumstances.  Before making any decision to act, you should consider whether the strategies are suitable for your personal situation and needs.

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