Finance Your Budget Ask the Expert: Salary sacrificing into super and releasing home equity

Ask the Expert: Salary sacrificing into super and releasing home equity

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Licensed financial adviser Craig Sankey answers your burning finance questions. Photo: TND
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Question: I am in a quandary: To help out my daughter, I was planning to put $5000 into her super fund. However, I was told when I inquired that a better option would be to put the $5000 in her bank account, then have her contribute $100 a week into her fund via her wages. Falling back on the $5000 to make up her loss via the contribution.

Ps Thank you for your comments. Good to have someone keep it simple.

Answer: What a great practical way to help your daughter by contributing to her super fund. This will compound over time to help her build a nest egg for her retirement.

If you contribute $5000 directly to her super fund, this would come from ‘after tax’ money, i.e. you would have previously earned this money and paid income tax on it.

The contribution itself would be known as a ‘non-concessional’ contribution and no tax would be payable on the contribution into super.

The alternative approach, as you have outlined, would be for you to put $5000 into your daughter’s bank account, and have her make salary sacrifice (pre-tax) contributions to super from her pay, of say $100 per week. And to make up for her income shortfall, she could draw money from the bank account.

Let’s have a look at this strategy in a little more detail:

To work out how tax effective the strategy would be, we need to know her taxable income. Generally the higher your income, the more tax-effective salary sacrifice is.

For illustrative purposes only, I will assume she earns between $45,000 and $120,000 (as this captures the majority of working Australians), which would put her in the 32.5 per cent marginal tax bracket, plus 2 per cent Medicare Levy (total tax 34.5 per cent).

So, in this example if she salary-sacrificed $100 to super, she would save $34.50 in income tax.

However, the super contribution tax would be 15 per cent, so $15. That still means she has saved $19.50.

And for that week she would only need to draw $65.50 from the bank account, because she would have $34.50 less in tax deducted from her salary.

Alternatively, she could salary-sacrifice $152 per week into super, save approximately $52 in income tax and draw out the $100 from the bank account.

If she salary sacrificed $7634* into super over, say, this financial year, she would save $2634* in income tax, leaving her $5000 short, which would be drawn from the bank account.

This would result in a net amount of $6489* being invested in super (as the super fund would need to deduct 15 per cent tax from the $7634 salary sacrifice contributions).

So purely from a tax perspective, yes it can be beneficial to contribute to super via this method. However, a few things need to be considered:

  • There is an annual financial cap of concessional contributions of $25,000 (this includes employer SG contributions and salary-sacrifice contributions)
  • This strategy relies on your daughter having the financial discipline of making the regular contributions. If she spends the money in the bank account on something else, then it all goes out the window. If you are concerned about her spending habits you could alternatively set up a direct debit of $100 a week and effectively pay her the $5000 over a year
  • Regardless of which contribution strategy is adopted, please be aware that funds will not generally be able to be accessed until your daughter retires and reaches preservation age, or until she’s 65.

Your daughter can speak with her super fund or a financial adviser to obtain personalised financial advice.

*Note as I do not have your daughter’s income details these figures are illustrative only and based on her being on a marginal tax rate of 34.50 per cent (including Medicare). I have not taken into account the Low-Income Tax Offset, but I have assumed she is eligible for the full Low and Middle-Income Tax Offset.

Question: Hi Craig, my name is Bob, I am 71 and an aged pensioner. My wife will turn 60 next February and is on the disability pension. We own our home but have no super left and have experienced some costly mechanical repairs recently and we are currently renovating and trying to modernise some of our house and property.

Our daughter and three grandchildren also live with us presently. My question is: If we qualify for the Pension Loan Scheme, how do we make purchases or engage tradies if the scheme only drip feeds our needs? Thank you Craig.

Answer: In a recent article we went through Centrelink’s Pension Loan Scheme, which allows individuals who own a property to “top up” their age pension. The overall maximum amount of “top-up” payments is 150 per cent of the maximum rate of age pension.

However, as you indicate in your question, it does not provide the option to take a lump sum, in what otherwise is a highly competitive reverse loan style arrangement.

The scheme has been around since 1985 and I believe for historical reasons only it does not allow lump sums. Unfortunately, there are no proposals currently being considered that would change this.

Therefore, to meet your needs you would either need to save some of your top-up payments from the scheme until you have enough required to meet your lump sum needs, or you could obtain a reverse mortgage (also known as a home equity release loan) through a retail lender.

Reverse mortgages operate by effectively allowing you to access the capital in your home while the lender either takes security over your home or owns an agreed percentage of your home.

When you pass on and/or when the property is sold, the lender will take back what they are owed.

You would need to take into account any estate planning considerations when deciding if this is right for you and your family.

These may provide greater flexibility, but be sure to investigate their interest rates, fees and features carefully as they can be costly in the long run. I strongly recommend seeking financial advice before entering into any contract.

Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.  

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