Many people make their financial decisions based on their take-home pay rather than their actual earnings before tax. For high earners, 2023-24 personal tax rates can be as much as 45% plus 2% Medicare Levy which is a significant amount of your hard-earned money that won’t be at your disposal.
Tax-effective financial strategies are always important financial planning considerations, especially now as we face the high cost of living, rising home loan interest rates and making more of what we earn.
Tax-effective financial strategies
Tax effective financial strategies commonly include salary sacrificing and contributing to superannuation.
Depending on your circumstances, it may be possible to pay for tax deductible items such as a motor vehicle necessary for your work, using pre-taxed salary. For those working in a public hospital, charity or non-profit, this can be taken a step further with the potential to salary sacrifice mortgage payments.
Salary sacrificing superannuation contributions can provide dual benefits of reducing the taxable salary amount and benefiting from the flat 15% tax rate once the money is inside super.
However, it is important to note, when your income and concessional contributions total more than $250,000pa an additional 15% tax may apply.
Known as Division 293A, the extra 15% tax is added to the existing 15% superannuation tax for the portion of the amount that exceeds the $250,000 threshold.
Further, it’s also worth knowing that once the money is in your super account, any earnings on your super investments are taxed at the maximum 15% rate. Compare this with your marginal tax rate on investment earnings outside super which as noted, may be as high as 45% + 2% Medicare Levy.
It must also be noted, there are numerous rules including annual concessional and non-concessional caps, that must be observed when considering any superannuation strategy. As always, our recommendation is to seek advice to make decisions that are right for you.
Call your lender
The middle years of life (your 30s through to 50s) often present a case of being stuck between a rock and a hard place.
It’s a time when you are busy in your career and personal relationships that bears children and added expenses including substantial debt. While your household income may be high, it doesn’t mean you’re immune to the high cost of living or the impact of rising home loan interest rates.
No doubt you’ve heard media commentary about the benefits of calling your lender and asking for a better home loan interest rate. Generally speaking, lenders don’t want to lose customers, but that’s not to say they are proactive in keeping them either. It’s been widely reported that new customers are regularly wooed with very competitive interest rates and incentives, while established customers battle on with higher interest rates and few benefits.
Put simply if you don’t ask you won’t get.
For busy professionals juggling work and home, committing to the time it takes to make that call is important, not only for relieving immediate home loan repayment pressure, but to enjoy considerable savings over the 30-year life of the loan. If you utilise a broker, ask them to make the call for you.
Use an offset account
If you don’t have an offset account, as part of renegotiating the terms of your home loan, ask how it could help you achieve your home repayment goals.
An offset account is a savings account linked to your home loan balance. When money is deposited into the offset account, it counts towards reducing the loan balance. The home loan interest rate is then calculated on the lower balance which results in less interest payable.
While this can provide a valuable saving in interest payments because it is a savings account separate from your home loan, it also provides flexibility should you ever need urgent access to cash or to withdraw funds for other purposes.
Be financially prepared
When asked about the best time to start a financial plan, most financial planners will tell you 20 years ago. The second-best time is now.
For those with an established financial plan and who participate in an active-advice relationship with their financial planner, you should have some sense of comfort despite feeling the obvious financial pinch of the current situation.
Highly qualified and experienced financial planners, including ourselves at Wealth Fundamentals, go to great lengths to consider and accommodate individual circumstances and address day to day living expenditures as well as achieving medium and long term goals and wealth aspirations in context of inevitable ups and downs that will occur over a lifetime.
While the key is to get advice then stay the course of your financial plan, if you have concerns or if your circumstances change, you should always call your financial adviser to talk through options and implement amendments as necessary.
If you are feeling worried (or annoyed) about your current financial situation, may we encourage you to take action and that starts with getting advice that considers your specific needs. To learn more, please contact Matt Lane or Alec Winter on 07 3720 1299 or email admin@wealthfundamentals.com.au
Lane Moses Pty Ltd ABN 56 092 186 117 trading as Wealth Fundamentals and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.
The information (including taxation) contained within this document does not consider your personal circumstances and is of a general nature only - unless otherwise stated. Wealth Fundamentals strongly suggests that you should not act on it without first obtaining professional advice specific to your circumstances. This information is based on our understanding of legislation at the time of writing. Such legislation may be subject to change. This publication cannot be reproduced in any form without the express written consent of the author.