Parliament was in session this week to discuss a solution for skyrocketing energy prices. New legislation has been introduced that is designed to soften the expected 56 per cent rise in electricity prices over the next 2 years. They are looking at capping gas prices and introducing a $3 billion relief plan. This is off the back of new data stating that the number of people struggling to pay their power bills is rising. According to the Australian Energy Regulator, there is an almost 12 per cent increase in electricity customers on financial hardship programs.
Across the pond, Sam Bankman Fried has been arrested weeks after his crypto exchange platform FTX collapsed. He has been charged with eight criminal violations, ranging from wire fraud to money laundering to conspiracy to commit fraud. The fall of FTX sent a massive ripple through the crypto community with Bitcoin currently down 60% year to date.
Smart Money upside #97
Here we unpack the numbers from a recent client we helped, what they were doing with their money when they came to see us, what they chose to do as a result of going through the financial planning process, and the financial impact and upside we helped them achieve. To chat about how to get these sorts of results, you can book an intro chat with us here.
Couple, mid 30’s; household income ~ $230k; total assets ~ $660k; saving ~ $5k annually.
Never taking any real action with their money, fully dependent on their salaries, feel like they have been wasting time and have no idea where to start leading to paralysis.
What they wanted from us / the advice process
How to start investing for themselves and their kids as well as how to make smarter decisions with their money.
What success looks like for them
More confidence and stability with their money, a clear strategy in place that will help them buy their dream home and ideally maintain their current income but cut back on work in the future.
What money strategy they were following before we went through the planning process
No clear structure in place but had a savings target for the month with funds being directed simply into a savings account.
What money strategy they chose to pursue from our planning work
Retaining their existing home and buying multiple additional investment properties, building up a diversified share portfolio, a new easy-to-follow banking structure and a new superannuation strategy.
Key benefits of going through the process
Clear advice and plan around buying investment properties using both existing cash and future income, a new banking structure that makes it easy to track and save, building an investment portfolio that will generate passive income in the future and switching to a low-cost superfund with access to a range of quality investment options.
Value of advice after all advice fees year one: $20k
Year 20 upside after advice fees: $4.6m
If this story resonates you can book an intro call with us here.
Video of the week
Paying tax is a critical component of life, but we don’t want your donation to the ATO to be higher than it needs to be. In this week’s video, I unpack how we helped some clients reduce their capital gains tax bill after selling an investment property from $94K down to $16.5K. Check out the video here.
Learn the tips, hacks, and strategies to help you level up your money game. Pods released last week:
- Money news in human words; Recession upside, joint property, and economy firing
Free online money education to help you invest smarter and create a life not limited by money:
- Master your money mindset in 2023 – January 11, 12pm
- Get money smart in 2023 – January 25, 2023, 12pm
- Buy property smarter in 2023 – February 22, 2023, 12pm
- Build a second income investing in 2023 – March 8, 12pm
- Invest with property equity in 2023 – March 22, 2023, 12pm
Blog of the week: How to use your super to save $7,500 in tax and buy your first home faster
Getting onto the property ladder is tough. The huge growth in property prices in recent years has led to a decline in rates of home ownership across the country.
At the same time, even though the current property market declined, property is still one of the biggest drivers of true wealth, with even after factoring in the current softening of property prices, in the last five years alone the value of all property in Australia has increased by over 47%.
Finding a way to get onto the property ladder is valuable.
Given the challenges around getting into the market, you need to give yourself every advantage. Thankfully, the government recognise the difficulty that surrounds getting into the property market and has put some measures in place to help.
Using them to your advantage can help you buy your first home sooner, and take one of the biggest steps to long-term financial security and true wealth.
Enter the first home buyer super saver scheme
The first home super saver scheme (FHSS) allows you to save part (or all) of your property deposit through your super fund. Because you can contribute to super with pre-tax money, the FHSS can help you build your property deposit faster.
There are some complexities to the rules, and there are a couple of risks that can catch you out if they aren’t well managed. In this piece, I cover the key rules and how you can use them to your advantage.
How the FHSS works
The First Home Super Saver Scheme was established in 2017 to help first-home buyers get onto the property ladder. The rules of the scheme allow you to make extra tax-deductible contributions of up to $50k per person to your super fund and then withdraw this money and the investment earnings generated in super and use this to purchase your first home.
For couples, the benefit can be combined to leverage up to $100k in super savings, giving you a solid deposit for your first home.
The contributions you can use for this are limited to a total of $50k, or $15k in any given year. But because the timeline is based on financial years, if you’re smart about how you plan you can take advantage of these rules quickly.
- June 2023 (FY23 financial year) – you contribute $15k to your super fund
- July 2023 (FY24 financial year) – you contribute another $15k
- July 2024 (FY25 financial year) – you contribute another $15k
- Total contributions of $45k all made within 14 months
This strategy can work well when you’re looking to buy your first home and already have your deposit saved. In this case, you could choose to not use the FHSS and pay your deposit in a regular way. Or instead with a bit of planning a prep, you could use the scheme and save yourself $7,500 in tax in the process.
You can also choose to save your home deposit through super more slowly if it works with your strategy. For example, you could contribute $5k each year through your 20’s, then by the time you reach age 30 you’d have a total of $50k (plus your investment earnings) you could withdraw to buy your first home.
When you make the contributions to your super under this scheme, if they’re done pre-tax i.e. you claim a tax deduction, they’re taxed in your super fund at a rate of 15%. When you withdraw funds from your superannuation, the money is taxed at your marginal tax rate less a 30% tax offset.
It gets a little complicated, but the implication is that you’re essentially saving an up to an additional 15% of any amount you contribute. Based on the FHSS cap of $50k, this 15% tax saving equates to $7,500 (per person) – a decent chunk of change that can be a big help for someone just about to enter the property market.
What are the risks?
There are two main risks with this scheme. Firstly, because the assumed rate of return is positive regardless of what actually happens to your investments, if your fund investments go down you can withdraw more than the money you put in. This can deplete your super savings and put you behind the curve.
The second big risk comes for younger people in particular if your income and marginal tax rate increases over time.
How the FHSS tax works is as follows:
- When you contribute, you receive a tax deduction at your marginal tax rate and your super fund pays tax at the super contribution tax rate of 15%, meaning the total benefit is your current marginal tax less 15%
- When you withdraw from the fund, the withdrawal is taxed at your current marginal tax rate with a 30% tax offset
If your marginal tax rate at the time of your contributions and withdrawals is the same, the total benefit to you will be 15%. But if your marginal tax rate is higher when you withdraw the funds, the benefit is reduced. In fact, it can be lost altogether and you can end up behind.
Consider this example:
- Your marginal tax rate when contributing to the scheme is 19%, meaning the benefit to you of contributing is (marginal tax rate – 15%) 4%
- Your marginal tax rate when withdrawing under FHSS is 47%, meaning the tax applied on the withdrawal is (marginal tax rate – 30%) 17%
- The result is that you end up paying an additional 13% tax on this money, based on total contributions of $50k this would be $6,500 in extra tax
You can see that it’s possible to wipe out the tax benefit and leave you with a tax bill to boot. This can work to your advantage if your tax rate is on the way down, but for younger people, it’s more commonly the other way around so you need to plan carefully.
On the flip side of this risk, there’s also an opportunity if your tax rate is lower in the year you withdraw under the scheme. This can work well for someone who is taking time out of the workforce or working in a reduced capacity, like when starting a family or starting a business.
I’ve unpacked an example of this in action here:
- Your marginal tax rate when contributing to the scheme is 47%, meaning the benefit to you of contributing is (marginal tax rate – 15%) 32%
- Your marginal tax rate when withdrawing under FHSS is 19%, meaning the tax applied on the withdrawal is (marginal tax rate – 30%) 0%
- The result is that you end up saving 32% tax on this money, based on total contributions of $50k this would be $16,000 in tax savings
There’s a strategic opportunity to save some serious tax and build your property deposit faster if the stars align with your strategy.
The first home super saver scheme can help you build your property deposit faster through super, saving a heap of tax in the process. But the rules are complicated and the strategy does come with risks that are important to manage
Given you’re talking about large numbers, both in terms of the property deposit you’ll ultimately save and the property purchase you’ll then make, take the time to understand the rules and consider getting some good professional advice to make sure the strategy actually works for you – the results will be worth your investment here.
To your success,
PS: Pivot Wealth exists to help people invest smarter to create a life not limited by money. If you want help to make your next steps easier, you can book a 10 minute, no BS chat with us here.
I know you’re smarter than someone that would need me to write the words that come next, but our compliance peeps are real hard asses so here we go… This information is not personal advice, poetry, or a map to where Jimmy Hoffa is buried. It may only be regarded as general advice and shouldn’t be considered something worthy of inclusion for Donna Hay’s next cookbook or the Archibald prize. This is actually just an email communication that has been sent to a bunch of people and doesn’t even have your name on it. Your personal objectives, needs or financial situation have not been considered when preparing this email, but I want you to know that I have spent a lot of time thinking about the Venn diagram intersection of poetry, landscaping, and essential oils – if you’re fascinated by this same phenomenon please reply so we can compare notes. You should consider the appropriateness of any general advice we have given you, regarding your objectives, financial situation and needs, and if necessary, seek advice before acting on it. You should also consider other people when getting on and off public transport, smiling more, eating healthy, and listening to your mum when she tells you that you’ve been working too hard. Where the information relates to a financial product, you should obtain and consider the relevant product disclosure statement before making any decision to purchase that financial product. Where the information relates to a hilarious joke I’ve made, you should consider belly laughing deeply. Worth noting also that past performance is not a reliable indicator of future performance when it comes to investments, and definitely not when it comes to the Wallabies. Financial services guide. All jokes aside and just to be clear, this information may only be regarded as general advice. Your personal objectives, needs or financial situations were not considered when preparing it. You should consider the appropriateness of any general advice we have given you, regarding your objectives, financial situation and needs, and if necessary, seek advice before acting on it. Where the information relates to a financial product, you should obtain and consider the relevant product disclosure statement before making any decision to purchase that financial product. Past performance is not a reliable indicator of future performance.