Latest Financial Planning News
Hot Issues
Resources on our site to help you, your family and your friends.
Calls to Review ASIC's Definition of Lapse Insurance
Paperwork bungles lead to $38k in payments
Self-employed? Don't miss out on super
Australian Dietary Guidelines and healthy eating chart (PDF)
Big concessions looking likely for transfer balance limit: ATO
Raft of superannuation measures enter Parliament
US Fed policy: Normalisation begins
What the gig economy may mean for your super
Powerful Budgeting, cash flow and Super Tools available on our site.
Australia's leading causes of death - ABS
Government introduces first home scheme laws
Are young investors wasting their youth?
ATO granted super enforcement powers
The great Australian (retiree) dream
ATO to release further guidance on reserves
A real-world benchmark for SMSF performance
How is your super going, ready for retirement?
Our 'hardest' SMSF tasks
Lack of literacy promotes unrealistic goals
Young investors: Time is on your side
Is your SMSF retirement-ready?
Key Economic Indicators, 2017 - updated
Investors acting their age
ATO locks in details, addresses panic on real-time reporting
Government ‘undermines’ tax system in new moves on property expenses
Articles archive
Quarter 3 July - September 2017
Quarter 2 April - June 2017
Quarter 1 January - March 2017
Quarter 4 October - December 2016
Quarter 3 July - September 2016
Quarter 2 April - June 2016
Quarter 1 January - March 2016
Quarter 4 October - December 2015
Quarter 3 July - September 2015
Quarter 2 April - June 2015
Quarter 1 January - March 2015
Quarter 4 October - December 2014
Quarter 3 July - September 2014
Quarter 2 April - June 2014
Quarter 1 January - March 2014
Quarter 4 October - December 2013
Quarter 3 July - September 2013
Quarter 2 April - June 2013
Quarter 1 January - March 2013
Quarter 4 October - December 2012
Quarter 3 July - September 2012
Quarter 2 April - June 2012
Quarter 1 January - March 2012
Quarter 4 October - December 2011
Quarter 3 July - September 2011
Quarter 2 April - June 2011
Quarter 1 January - March 2011
Quarter 4 October - December 2010
Quarter 3 July - September 2010
Quarter 2 April - June 2010
Quarter 1 January - March 2010
Quarter 4 October - December 2009
Quarter 3 July - September 2009
Quarter 2 April - June 2009
Quarter 1 January - March 2009
Quarter 4 October - December 2008
Quarter 3 July - September 2008
Quarter 2 April - June 2008
Quarter 1 January - March 2008
Quarter 4 October - December 2007
Quarter 3 July - September 2007
Quarter 2 April - June 2007
Quarter 1 January - March 2007
Quarter 4 October - December 2006
Quarter 3 July - September 2006
Quarter 2 April - June 2006
Quarter 1 January - March 2006
Quarter 4 October - December 2005
Quarter 2 of 2006
Articles
Simple super tax appeal
Do Nothing Option A Super Risk
Self Managed Superannuation Fund Update.
Stress test your portfolio before market does
Market Notes - May 2006
Market Update - General - May 2006.
Investment Markets Data - Update to 31 May 06.
A dynamic duo of tax cuts and super
Super Guarantee Contribution Penalties
Splitting Super Contributions
Superannuation highlights from the Federal Budget 2006
Market Notes - April 2006
Market Update - General - April 2006
Investment Markets Data - Update to end April 06.
Budget 2006.
Aged care: the rising cost of getting old.
Property Trusts.
Market Notes - March 2006
Market Update - General - March2006.
Investment Markets Data – Update to end March 06.
A dynamic duo of tax cuts and super
By Robin Bowerman
19 May 2006

In all the excitement about the outbreak of simplicity within the super system the fact that significant tax cuts are due to hit pay packets in little over a month has been consigned to almost footnote status.

The tax cuts will have a much more immediate effect on households because most of the super system overhaul is not due to kick in until July 1 2007. And of course the super changes are subject to "consultation" so we should reasonably expect a bit of fine tuning of the detail once industry has worked through some of the impacts.

For a person on $150,000 the tax cut will put an extra $6200 in their pocket each year. For a person on $80,000 a year the tax cuts will deliver an extra $2050 next financial year or $170 a month. That is a considerable boost in disposable income and is worth the time and effort to think about what you are going to do with it before it gets absorbed into the weekly consumption pattern.

The super changes are at least a year away from taking effect and because most of the big changes are at the retirement stage for most people the real effect will be felt years later. But if you look at the tax savings and the proposed super changes as a package it makes a powerful case for boosting your super contributions using the tax savings.

Consider a single 45-year-old with $120,000 in super already. She wants to retire at 65 but thinks the super guarantee contributions of 9% are not going to get her where she wants to be in terms of income in retirement. She has done a budget and a financial plan and believes she can live comfortably on $40,000 a year in today's dollars.

Assuming an 8% average return from her super fund (after fees and super fund taxes) she would end up with a retirement benefit of $511,000 at age 65. If she were to salary sacrifice her tax cut of $2050 into super then the benefit would climb to $568,000. But probably the most positive impact is that it adds four years to how long that amount is estimated to last in retirement if it is drawn down at her desired income of $40,000 a year.

The peace of mind that you can fund retirement to age 90 is not to be underestimated and that does not take into account any pension entitlements she may become entitled to as the assets diminish.

The overhaul of the tax rates has a lot of other positive impacts outside the straight value of the income tax cuts. The most expensive component of the changes to tax rates was the increase in the level of tax at 15% from $21,600 to $25,000 because almost everybody will get it. But one of the more fundamental shifts is the dramatic broadening of the second highest band that will be taxed at 40% from July 1. Currently the 42% bracket spans $63,000 to $95,000. Once the new rates are in force the 40% rate will apply on all income from $75,001 up to $150,000.

The interesting impact of that is for people who are in that income range who have negatively geared property or share investments to maximise the tax deduction - the deduction amount reduces along with your tax. This also affects the attractiveness of salary packaging items like cars - a common practice for people in that income bracket.

The Treasurer would rightly argue you cannot have it both ways - a tax cut and a tax deduction. But for some people it may be timely to revisit those arrangements and understand the impact of the tax rate changes particularly where items like cars are coming up to the end of a lease or you have your eye on an stylish new model. The tax cuts do not mean that salary packaging is ineffective suddenly; rather it may be less effective for people who were on the top marginal tax rate and now are not. The tax cuts also flow through in a positive way with fully franked shares, making them a more tax effective investment for people on the higher tax rates. Those on the 42% tax bracket will see the effective tax rate on dividend income fall from 12% to 10% while people on the new top tax rate of 45% will now have an effective tax rate of 15% on dividend income after franking credits are taken into account.

 

 

 

 

 

 



22nd-May-2006