Im self-employed and have an investment home loan. My personal tax rate is around 37% Would it be more tax effective putting concessional contributions into my super fund and getting it taxed at 15% OR putting the funds into my offset account so I pay less interest on my investment home loan?
Putting Money in Super versus Offset Account
jche6075 on 16/09/2018 - 21:34
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Depends on your long term game (are you actually looking to save on tax (as you not paying at a top rate)? or do you just dislike giving the ATO money?) - I would do an offset account based on your initial background, but there is a lot more info needed to the decision if you thinking tax strategy…
Going the offset account allows you to have quicker access to the funds should an unwanted event occur and you need access to funds almost immediately. Cash is king, and for a self employed individual having it tied up with red tape won’t be great if you think you need short term financing in a hurry.
I tried calculating this, is basic, may be wrong. someone could expand on it.
For every $100, and 5% interest on IP.
1.) in super, get $85 in super, $37 back in hand = $122. Will pay $5 interest next year on that $100 not being in IP offset, so after tax is -$3.15 loss = $118.85
2.) in home loan, $37 in tax = $63. Will save $3.15 interest next year (only $63 went into your offset) = $66.15. Once positive gear will pay tax on $3.15 saved. so may lose $1.16
compound effects not taken into consideration but probably negate each other
If you are confident you will stay employed long time, and property close to being positively geared, i would go 1, but all a risk, as the money is tied up till 60.
Can use unused super caps from previous 4 years, so can do 2 for 1 year, then 1 in 2nd year, or something along those lines.
I believe 1 is better overall, and I do this even with a current mortgage, but it is risky, and may back fire. I keep ample in reserve though
Thanks unclesnake for doing this. I'd not tried it yet but am interested. I'm just trying to clarify:
1.) Where does the $37 "back in hand" come into it? Are you saying you're saving the 37% marginal tax rate? If so, I think you're double-counting it, as it should only be an advantage in #2.
Why does the gearing state of the property matter? If I'm new to my homeloan should I go with 2.) first?
Thanks.
sorry i don't follow your question but ill try answer. I am typing this as if you paid $100 into super post tax, and them claimed on tax return.
1.) the $37 is money you receive back in tax from ATO / or $37 you don't have to pay the ATO, either you save $37
2.) double counting bit i don't understand.
You're double counting with the $85 and the $37 (I think).
For every $100 OP gets but puts into Super, they actually receive $85. That's fine. But there's no extra $37 in savings - that's already counted in the "OP would have gotten $63 but got $85 instead" part, which is itself part of "OP gets $85 out of the $100" part originally.
For clarification, if you were to do the converse, for calculating the "put into offset" option, to apply the same logic you would have to add in "$15" for the "$15" OP saves in taxes he would have paid to put that money into super instead. Which obviously doesn't make sense either.
To tweak your calculations a bit, for every $100 OP gets (assuming 5% mortgage rate):
Super: net +$85 into super.
Offset: $63 into Offset, save $3.15 in interest, net +$66.15. (This isn't exact - less interest expense on an investment property means less to claim against rental income too.)
But then Offset a/c funds are more flexible and better for liquidity.
Best to consult a financial planner / accountant for the best way forward;
However a couple of thoughts;
You didn't mention your age; so it is worth remembering that anything towards superannuation will be locked in until your preserved age (there are exceptional circumstances where you can access this before though).
You didn't mention your current residential situation; are you living in your own home - is it paid off?, renting, parents, with partner etc? If any of these situation affect what else you would do with your 'excess' monies. If you live in your own home but still have a debt of that, best to service that debt as fast as you can because you can't offset those costs elsewhere, unlike an investment property can.
You didn't mention your "family" situation; married? single? (dependent) kids? etc as this again may affect your decision where to send your 'excess' monies to e.g. you think you might want to start a family, so having "liquidity" is a bigger concern if you are planning children (school fees etc)
There's a start….
Max out your super contribution every year as self employed.
Just remember that once you lock it up in super it’s locked away until you retire. So it’s not as flexible as other assets. So if in 10 years you need cash for that rainy day or want to buy a bigger house etc, it may not be very convenient if locked away in super.
Speak to an accountant to do the sums for you.
Whenever you think about putting it in super, remember that there's over a 1/3 chance that you won't even make it to 67.
1.) super age is 60
2.) you can access it if you become terminally ill
3.) if you die your wife/husband and children will be grateful.
4.) there is a 2/3 chance you will survive and have little super.
Your balance can drop 50% in the next GFC and take 10 years to recover
Not sure what investment option from a fund you are referring to. Many of the default investment options (Balanced) dropped 10-20% in 2008 (calendar) and then within two calendar years, recovered the percentage lost in the downturn.
Or you could move it to cash before that happens, then buy tonnes of shares when it is at the bottom.
Your property could also drop as well.
@unclesnake: why the down vote. its a strategy you can do within your super
if you have a good super fund or smsf, you can even chose the shares you buy
1.) super age is 60
Only if you're declaring you're retired. Otherwise 65.
I'd imagine this will only increase with timehttps://www3.colonialfirststate.com.au/firsttech/guides.html
Page 106 for age access of Super
Technically, it can be 55 depending on the date of birth. Super can be accessible once you reach your preservation age (Page 105 Section 9.2) for those who wish to implement a Transition to Retirement Strategy. Page 132 will provide some light reading especially if anyone is finding it hard to sleep.
I'm not denying anything you've said, I'm just saying that's something you should be aware of when putting your money away for such a long time.
Super is way more tax effective, 12% return versus 2% for paying off investment loan.
However, trade off is no access to this money until 60 and retired. If you are over 40 I would be playing the super long game but if you are younger then I would lean towards keeping your money accessible and flexible.
Maybe someone can give more insight on this. Once 60 can we actually access all the money in super as a lump sum or could it be that they decide to give monthly payouts only?
At present you can, but I feel the latter will be the rule eventually
Super any day of the week if you are ok for money to be locked away for awhile !
Super – $ taxed at 15%
Draw as Income – $ taxed at 37% + 2% Medicare Levy + Less Interest Paid for Invesment Home Loan means Less Deductions
OP asked which option is more tax effective so Super will be a better option based on tax effectiveness.
However, there’s a lot of other factors OP will need to consider for eg the net amount of savings in tax and is locking the money away worth it, how long before you can access super, will you need the $ for cash flow/business expansion/changes in circumstances etc
I'd go with offset - provides you immediate benefits and the "interest" it generates isn't taxed.