We’re facing an unusual financial situation due to an unexpected increase in our income this financial year (FY 23/24), plus some ambitious expectations of a new house during the next 12 months.
Based on our calculations this FY, my wife’s taxable income has reached $135k, and my taxable income has reached $120k. This makes us liable for a Medicare Levy Surcharge (MLS) of approximately $3,200, as our combined family income is around $255k with two primary school-aged kids.
Both of us are in our early forties and have a super balance of around $110k each, which is considered low for our age bracket.
If we contribute $70k to super from our savings ($40k for my wife and $30k for myself), we can claim it as a concessional super contribution due to rolled-over unused concessional contributions from the past five years. Doing this would drop my wife’s taxable income to $95k and mine to $90k, resulting in a combined tax refund of approximately $25k. Additionally, we would avoid paying the MLS of $3,200 (Update: MLS cannot be avoided by contributing extra super).
The extra 70k in super will be taxed at 15% and will continue to grow at a long-term average of ~8% and will add a healthy balance to the super when we retire in 20 years.
And we will get private health coverage to avoid MLS next financial year. It will be like breakeven when the health insurance premium is compared to MLS.
Another issue is that my wife wants a new house within the next 12 months. The house price in the area we are considering is around $1.4 million. We have about $600k in savings and offset accounts. We could use $400k for the deposit, take out a $1 million loan, and allocate another $100k for purchase costs and new furniture. If we put $70k into super now and get a $25k tax refund, our emergency cash fund will drop to $55k ($100k - $70k + $25k) in the short term.
We currently have a principal place of residence (PPOR), a detached 3BR house built in 2015, with a current loan balance of $240,000, fully covered by an offset account included in the aforementioned $600k savings. This PPOR could be turned into a positively geared rental, generating around $5k per year after interest and expenses. The current value of the PPOR is around $850k-900k based on similar sales in the area, giving it an equity of around $600k.
Based on our expenses over the past two years, our annual expenses (groceries, entertainment, travel, utility bills, and council rates) are around $60k, excluding the mortgage of the current PPOR.
The repayment on a $1 million residential loan would be around $6,000 per month. This new house would certainly stretch our financial freedom, consuming 40% of our monthly income.
However, one of the most important factors in a married man’s life is to keep his wife happy (“happy wife, happy life”). She is very frugal and does not spend on designer clothing, jewelry, or other luxury items. I believe she deserves to live in a nice house while she can enjoy it. As she says, “What’s the point of living in a nice big house when you’re old, can’t take care of it, and the kids have already grown up and left?”
Two main questions.
Should we contribute 70k to super or not?
Should we sell the current PPOR or not?
Update:
Poll option 1 updated as it is now clear (thanks to ozbargainers for pointing it out) that we cannot avoid MLS by contributing extra Super.
Once it’s in super it’s locked in there for a long time.
So what happens next year when you are in the same position and used up all your roll over contributions?