I am a single male with no dependents who will turn 60 in October. I work full time, earning $119,500. I have about $360,000 in superannuation, some shares worth about $70,000 and $20,000 in cash. On the other side of the ledger, I have two loans secured against my house - the mortgage of $175,000 and another of $7000, which was to buy a car and will be paid off in a year. My strategy in the past few years has been to salary sacrifice as much as possible and pretty much have the bigger loan on an interest-only basis with a view to building the super up as much as possible, so that when I am 65? I can retire, pay off the house and live on the super and a part age pension. With this in mind, I have been paying about $45,000 a year into super (including my employer's 9 per cent). With the budget changes I will have to reduce the salary sacrifice what do I do with what will now become take-home pay? Should I make after-tax contributions to super or pay down the mortgage? The latter seems to me to be the better course as I understand
I effectively earn that interest rate (about 7 per cent) and there is no guarantee I will get that return from my super fund. R.M.
Quite right. The advantage of super is that you pay only 15 per cent tax on a salary-sacrificed contribution and then 15 per cent tax on any income earned. Let's say you have been wisely using term deposits or cash earning about 4.5 per cent which, after tax, reduces to about 3.82 per cent. In simple terms, for every $100 of gross pay sacrificed, $85 ends up in the fund earning $3.25 a year, if interest rates remain constant.
On the other hand, after you make a $25,000 salary sacrifice in 2012-13, your remaining salary of $94,500 will cost you 25.94 per cent in tax. Let's say you place the net $74.06 remaining from a $100 gross amount into your mortgage. There, if your mortgage rate is, say, the standard CBA rate of 6.8 per cent, it will save you $5.04 every year. This is mathematically equivalent to an interest rate of 6.8 per cent after tax. Break-even occurs after a little more than five years in this example.
Basically, super is most rewarding if you are in a high tax bracket and super funds are earning high rates of return. If you are in a lower tax bracket and super is earning low rates of return then, again mathematically, paying off the mortgage can be a better option. In terms of behaviour, I like to focus on both avenues of long-term saving because, when money ends up in one's wallet, there are so many fun things to do with it, other than paying off a mortgage!
Apart from your $25,000 salary sacrifice this year, be sure to have all income directed into a mortgage offset account and use a low-cost 55-day credit card for expenses in order to maximise the amount of days your money can remain in the offset account. Remember that both your mortgage and your offset "interest" are calculated daily.
A QUESTION OF SUB-DIVISION
I purchased an old house on a big block of land in 1981 in Sydney and my wife and I lived in it for three years. In 1984 I built a new house on the front of the block. We lived in the new house for 11 years and leased the old house. In 1995
I subdivided the block and sold the new house. I then built two new townhouses on part of the old house. My wife and I still live in one of the townhouses and lease the other one. The townhouses are still on the one title. What would be my capital-gains tax liability if I decide to sell one or both? Is there any benefit if I made my wife a joint owner? What cost will be involved? F.H.
Basically, you have a pre-1983 block of land on which you have built post-1985 townhouses. Since you have lived in one of them since it was built, this is your principal residence and is free of capital-gains tax on sale, assuming you have not claimed any other residence.
The other townhouse would be seen as a separate post-1985 asset, subject to CGT (even while the land on which it stands is not), and its cost base would be the cost of building it.
I am not a registered tax agent, as
I have often mentioned, so be sure to talk to your tax accountant.
RETURN TO THE ATO
I am a single retiree, living off my super, a pension and CBA dividends. This month I will realise a 10-year investment in the form of shares and there will be a modest capital gain which, added to my dividends, will take me over the tax threshold. My imputed credits will cover any indebtedness to the ATO, but my question to you is will I have to
file a tax return? Most years
I just claim back the tax credits, but as the CGT rate is calculated on one's tax rate, I am at a
loss as to what rate I would have
to use to calculate my indebtedness. H.W.
Your assessable income is determined by adding 50 per cent of your capital gain (since you held the asset for longer than 12 months) to your other taxable income.
You will need to lodge a tax return if, in your case, you (a) had tax withheld from payments made to you or (b) you received an Australian government pension and your "rebate income" (explained below) was more than $30,451, as you are single.
Your rebate income is the sum of your taxable income plus, in your case, any of the following amounts: any deductible personal superannuation contributions, plus any net losses from financial investments or rental property. (There are more inclusions for people in different situations.)
Other readers, in different circumstances, can discover if they need to lodge a tax return by reading the instructions at ato.gov.au/content/00314024.htm.
Alternatively, they can also Google "ATO do you need to lodge a tax return? 2012".
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1300 780 808 pensions, 13 23 00.
Frequently Asked Questions about this Article…
Should I make after-tax contributions to superannuation or use the money to pay down my mortgage?
The article says it depends on your tax bracket and expected super returns. Super can be very tax-advantageous if you’re in a high tax bracket and your super fund earns strong returns, because concessional contributions and earnings are taxed at 15%. If you’re in a lower tax bracket or super returns are low, paying down the mortgage can be the better mathematical choice. The piece suggests balancing both goals for long‑term saving and recommends adjusting strategy when salary‑sacrifice caps change.
How does salary sacrifice into super compare to the interest savings from paying off a mortgage?
Using the article’s example: after a $25,000 salary‑sacrifice in 2012–13, additional gross pay sacrificed is taxed differently than take‑home pay. For every $100 of gross salary sacrificed, $85 ends up in super and might earn about $3.25 a year (based on assumed returns). By contrast, putting the after‑tax net of a $100 gross amount into a mortgage (using the article’s tax and mortgage examples) can save about $5.04 a year if the mortgage rate is 6.8%—which equates to about a 6.8% after‑tax benefit. Break‑even in that example occurs a little more than five years. The takeaway: compare your marginal tax rate, expected super returns and your mortgage rate.
What is a mortgage offset account and how can it help maximise my returns?
A mortgage offset account is a transaction account linked to your mortgage where deposits reduce the daily interest calculated on the loan. The article recommends directing all income into the offset account so your loan interest is calculated on a smaller balance, effectively earning you the mortgage interest rate tax‑free. Because mortgage and offset interest are calculated daily, keeping money in the offset account as long as possible increases the benefit.
How can using a 55‑day credit card work with an offset account to boost savings?
The article suggests using a low‑cost 55‑day credit card for expenses while directing income into your mortgage offset account. This approach keeps your cash in the offset account longer (because you delay paying expenses), maximising the number of days your money reduces loan interest. Since both mortgage and offset balances are calculated daily, this timing can improve the effective return from the offset strategy.
How are super contributions and earnings taxed inside superannuation?
According to the article, salary‑sacrificed (concessional) contributions are taxed at 15% on entry to the fund, and most earnings inside the fund are also taxed at 15%. Those tax advantages are part of why salary sacrifice can be attractive for higher earners if fund returns are strong.
If I subdivided a pre‑1983 block and built townhouses, which part is subject to capital gains tax when sold?
The article explains that if you have a pre‑1983 block on which you built post‑1985 townhouses, the dwelling you live in is your principal residence and is typically exempt from CGT (provided you haven’t claimed another residence). A separately leased townhouse built post‑1985 is treated as a post‑1985 asset subject to CGT, and its cost base would be the cost of building that townhouse.
If I realise a capital gain from selling shares and I get dividends, will I need to lodge a tax return?
The article states you must add 50% of a capital gain to your assessable income if the asset was held longer than 12 months. You will need to lodge a tax return if you had tax withheld from payments to you, or if you receive an Australian government pension and your ‘rebate income’ exceeds $30,451 (for a single person).
What is meant by ‘rebate income’ and how does it affect whether I must lodge a tax return?
The article defines rebate income as your taxable income plus certain additions relevant to your situation — for example, deductible personal super contributions and net losses from financial investments or rental property in the described case. If you receive a government pension and your rebate income is above the specified threshold ($30,451 for singles in the article), you must lodge a tax return.
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