Your superannuation may be your key to business ownership. But first, you need to know the rules of accessing super for a business.
You have dreams of owning your own business.
Before making the leap, consider comparing the potential wages you could earn as a business owner versus what you currently earn as an employee.
The challenge is that you don’t currently have the funds needed as start-up capital sitting in your bank account. Instead, you have a superannuation fund that contains what you need.
And that creates another challenge.
You typically can’t access your superannuation until you reach the preservation age of 65. Your preservation age is determined by your date of birth. If that’s the case, does that mean you have to wait to start a business with super?
Thankfully not.
There are two ways that you may be able to access your super before you’re 65.
Accessing Super When You’re Below Age 65
There are two main ways to access your super before you turn 65.
The first is if you want to retire and don’t intend to ever return to work. Unfortunately, this isn’t a viable solution if you want to start a business, as that very act still means you’re going to work.
The other option open to you is to use a non-commutable TTR income stream to gain access. TTR stands for “transition to retirement” and it allows limited access to the funds in your super. Typically, you can access between 4% and 10% of the account’s balance per financial year, with 10% being the maximum amount you can withdraw each financial year.
The issue here is that you can’t make further contributions to the account once it transitions into a TTR account.
So, the key question now here is can you start a business with super if you only have access to 10% of the fund?
The answer depends on how much money you have in the fund. It’s also important to keep in mind that you will likely need to pay taxes on any withdrawals you make if you take this option. These withdrawals are taxed at your marginal rate until you reach age 60.
Interestingly, a third option becomes available when you turn 60.
If you leave your current employment once you turn 60, you will gain access to your super. And this applies whether you’re leaving a job or you’re shutting down an existing business. Either way, you’ve ended an employment arrangement and can now gain access to your funds. In this case, super benefits are paid to the person who meets the condition of release. These benefits are paid either as a lump sum or as an income stream, depending on the person’s choice.
You then have the option of using those funds to buy an existing business or start a new one.
And because you’re over 60, you won’t have to pay taxes on anything that you withdraw. This means you can take a lump sum or withdraw the funds as an income stream without having to worry about further expenses.
Unfortunately, there is a caveat to this form of access.
You may wish to make further super contributions to your super when you’ve started your new business. If that’s the case, you can’t access these new contributions until you end your employment with your new business.
How Do You Gain Unrestricted Access to Your Super?
The only way to get completely unrestricted access to your super is to turn 65. This is the previously noted preservation age and reaching it removes all conditions placed on the fund. This means you can use the money you’ve saved for any purpose, including starting your own business.
You should also be able to make any withdrawal without paying tax. As such, this may be the best option if you’re willing to wait until you’re 65 to start a business.
What Type of Business Should You Consider Starting?
This is a difficult question as the answer partially depends on what you want out of your business venture, including the potential profit and profits the business can generate. Considering the financial health of your future business is crucial, as understanding profit and profits will help you assess its viability and borrowing capacity.
However, several sectors typically prove popular in Australia, assuming you have a strong business. These include the following:
- Businesses in the service sector, such as textiles and telecoms, are a large part of the Australian economy. As such, a service business has a higher possibility of succeeding.
- Online businesses often prove profitable. Plus, they come with the added benefit of requiring a low start-up sum.
- Cafes, restaurants, and catering services can also prove profitable. This is a competitive sector, but it’s one where you can make a lot of money if you can differentiate yourself.
When considering these options, evaluate which business is most suitable for your skills, experience, and financial goals to ensure the best chance of success.
Ultimately, the answer comes down to what you want from your business and what you can afford. We recommend speaking to a financial advisor before you try to start a business with super.
Are There Any Risks Involved with Using Super to Start a Business?
As with all business ventures, there are some risks involved if you decide to use your super to start a business.
This is especially the case for those under the age of 65. Accessing your super requires you to make changes to the fund.
For those under 60, those changes mean they can’t contribute to the fund while they’re using it. As a result, you won’t be able to continue saving for your eventual retirement. So you need to feel very confident in the prospective success of your investment.
Also for those under 60, accessing super at this age also means you have to pay tax on your withdrawals. This may not be desirable, especially as accessing your funds tax-free at the preservation age is one of the main benefits of a super.
Finally, there’s the more obvious risk of business failure. If you borrow money to fund your business, you may still have to pay interest on the loan even if your business is not successful. There is also the risk that if you use your super to purchase business assets, those assets could be lost if the business fails.
According to the University of Technology Sydney, about 30% of businesses fail during their first year. This rises to 50% for the second year and 75% by the fifth year.
A failed business would result in the loss of your super savings, which can place you in a difficult position later in life.
Exploring Investment Options and Income with Your Super
When it comes to using your superannuation to start a business, it’s important to look beyond simply withdrawing funds. Exploring different investment options and income streams can help you make the most of your retirement savings while still pursuing your entrepreneurial goals.
A self managed super fund (SMSF) offers greater flexibility and control over your investments compared to traditional super funds. With an SMSF, you can invest in a range of assets, including property, shares, and even certain types of businesses. This can open up opportunities to invest in online businesses or ventures within the service sector, both of which have the potential to prove profitable if managed well.
However, investing your superannuation funds in a new business is not without its challenges. The rules around accessing your super, especially before reaching your preservation age, are strict. It’s essential to understand how these rules apply to your situation and what conditions must be met to access your superannuation funds for investment purposes.
A transition to retirement income stream can also be a valuable tool, allowing you to access a portion of your super as a tax-free income once you reach the appropriate age. This can provide a steady income stream while you gradually move into retirement or focus on building your business.
Given the complexity of superannuation rules and the risks involved in investing your retirement savings, seeking advice from a qualified financial adviser is crucial. They can help you develop an investment strategy tailored to your goals, ensuring you’re making informed decisions that support both your business ambitions and your eventual retirement.
Ultimately, exploring investment options and income streams with your super requires careful planning, a clear understanding of the rules, and a willingness to seek professional advice. By doing so, you can maximise the potential of your super fund while safeguarding your financial future.
Business Funding and Lump Sum Withdrawals
If you’re considering starting a new business, one of the biggest hurdles is securing the necessary funding. For some, accessing superannuation funds through a lump sum withdrawal can provide the capital needed to get a business off the ground.
Before making a lump sum withdrawal from your super, it’s essential to understand the rules and conditions of release. In Australia, you generally need to reach your preservation age and meet specific criteria before you can access your superannuation funds. Once eligible, you can choose to withdraw a lump sum, which can then be invested in your new business.
While this approach can offer a sense of freedom and flexibility, it’s important to weigh the potential risks. Using your retirement savings to fund a business means you’re putting your future income stream on the line. If the business doesn’t succeed, you could significantly reduce your retirement savings, impacting your financial security in later life.
Tax implications are another key consideration. Depending on your age and the timing of your withdrawal, you may be required to pay tax on the lump sum. Understanding how these taxes apply to your situation is crucial to avoid unexpected costs.
Consulting a financial adviser can help you navigate these complexities. They can provide guidance on the best way to access your superannuation funds, help you assess the risks, and ensure you’re making an informed decision that aligns with your long-term retirement goals.
Ultimately, using a lump sum withdrawal from your super to fund a business is a significant decision that requires careful planning. By understanding the rules, considering the risks, and seeking professional advice, you can make the most of your retirement savings while pursuing your business ambitions.
Do You Want to Start a Business?
If so, you may be able to start a business with super. However, doing so does not come without risks. Plus, you will face several restrictions if you want to start the business before you turn 65.
The good news is that other options exist.
If you don’t feel comfortable using your super for your business ventures, consider taking an unsecured loan instead—or learn more about secured business loans and if they’re right for you.
At Unsecured Finance Australia, we offer loans from $5,000 to $300,000. These loans don’t require collateral and may help you to start a business without risking your super.
To find out more, apply online with us today.