12 popular finance strategies for the 12 days of Christmas

At HPH Solutions, we know people are always interested in the tools and mechanisms others use to get the most out of their money,

In the spirit of the 12 Days of Christmas, we thought it would be a fun exercise to compile a post of the 12 most popular finance strategies we recommended to clients in 2022. Here they are!

1. Carefully considering whose name to invest in

There were many situations in 2022 where we gave careful consideration to the following on behalf of our clients when deciding whose name to put an investment in:

  • Tax rates: The tax rate applied to investment income can vary depending on the tax bracket of the person whose name the investment is in. For example, if the investment is in a high-earner’s name, they may be subject to a higher tax rate on the investment income than someone in a lower tax bracket.
  • Government benefits: Some government benefits, such as the Age Pension, are means-tested. This means the value of an individual’s assets (including investments) is considered when determining eligibility for the benefit. In whose name and in what tax structure (eg. superannuation) an investment is held may affect the eligibility of the person applying for a benefit.
  • Estate planning: If an investment is in the name of the person who intends to leave it to their heirs as part of their estate, it can make the transfer of the investment to the heirs smoother and more efficient.

2. Making use of salary packaging 

Salary packaging is a way for employees to receive some of their salary in the form of non-cash benefits. This can have several advantages for both the employee and the employer.

One advantage of salary packaging for employees is that it can reduce the amount of tax they pay, thereby increasing their net income. For example, an employee might choose to receive a portion of their salary as contributions to their superannuation (retirement savings) account, which may be taxed at a lower rate than their regular salary.

Another advantage of salary packaging for employees is that it can give them access to a wider range of benefits. In some cases, an employer may offer non-cash benefits that are not available to employees who receive their salary in cash. For example, an employer might offer employees the option to receive their salary as contributions to a health care or fitness plan, which could provide access to gym memberships, health care services, or other perks.

For more information on salary packaging, Thomas Sweeney wrote a great article here earlier in the year.

3. Reviewing home loan interest rates

We regularly suggest that our clients review their home loan interest rates, and there are several reasons you should too.

First, interest rates change over time. If you’re not on a fixed-rate loan, your interest rate will increase or decrease depending on the current variable rate. Regularly reviewing your home loan rates ensures if there are savings to be made on what you’re paying in interest, you’re able to access those savings.

Second, your personal circumstances may change over time – things like your income, relationship status or the value of your property. These changes can affect your eligibility for a better home loan rate. By reviewing your rates regularly, you can take advantage of any new opportunities that may arise.

Third, the home loan market is competitive – banks and other lenders constantly introduce new products and offers. By regularly reviewing your home loan rates, you can compare your current loan to new offers and potentially save money by switching to a better loan.

Regularly reviewing your home loan rates can help you save money, keep up with changing market conditions, and find the best loan for your needs.

4. Offsetting your cash reserve against your mortgage

Most of our clients have a cash reserve sitting in a savings account, ready to access in an emergency. Most also have home loans on which they pay interest each month. 

If your cash reserve is not currently offset against your mortgage (i.e. in a savings account linked to your home loan), it’s something you should consider as the interest savings could be considerable. If you have a home loan of $300,000 and $50,000 in your offset account, then assuming it is 100% offset you will only be charged interest on $250,000. At 6%, this represents an interest saving of $250 per month. Keeping these cash reserve funds in an offset account preserves access to the funds while taking advantage of the interest savings on your loan and helping you to pay off your loan faster. 

5. Checking how Health Card income test changes affect you

The government has recently increased the income limit for the Commonwealth Seniors Health Card to $90,000 for a single person and $144,000 for a couple. 

As a result, we’ve reassessed the positions for some of our wealthier clients, especially those with Self Managed Super funds who may not realise they now qualify. (Note: only the portion of the self-managed fund that is in pension mode is assessed). 

So, for example, you can earn $90,000 from work, have $2 million in an account-based pension, and still qualify for the card. Now you get revenge on your retired friends that have been boasting about their reduced shire rates. You might even get a free muffin with your coffee at the cinema. Before getting too excited, though, we must note you generally need to be aged 67 or above for this one. 

You might think that because of your level of financial assets, accessing the Low Income Health Care Card won’t be possible. But that’s not the case.

The main benefit of the Low Income Health Care Card is access to cheaper prescriptions under the Pharmaceutical Benefits Scheme

If you have retired or are working part-time but you haven’t reached the Age Pension age yet, then you still may be eligible for the Low Income Health Care Card. Access to this concession card is subject only to an Income test. Income from Investments is only assessed based on “deemed income rates”, and because these rates are quite low, you can have significant investments/account based pension balances and still gain access to the Card. If you’re on regular prescription medicines, this is worth investigating as it can help reduce your day-to-day expenses.

6. Making use of downsizer contribution legislation changes

Recent changes in legislation have reduced the age for people to make a downsizer contribution to superannuation of up to $300,000 from the sale of a property. Previously you were able to do this from the age of 65. This was changed to age 60 at 1 July 2022 and will further reduce to age 55 from 1st January 2023.

To be eligible to make a downsizer contribution:

  • The property must have been owned in an individuals name, or jointly if a couple, for at least 10 years and during this time, the property must have been fully or partially exempt from capital gains tax (i.e. this was your primary residence for all or part of this period)
  • The property must be in Australia and can’t be a houseboat, caravan or motorhome
  • You can’t have previously made a downsizer contribution
  • You must submit an ATO ‘downsizer contribution’ form to your super fund prior to or at the time of making your contribution. (Not after!)
  • The contribution must be made within 90 days of settlement of the property.

Downsizer contributions don’t count towards your non-concessional or concessional contribution caps. This allows individuals to contribute up to an extra $300,000 into the concessionally taxed superannuation environment without impacting their contribution caps.

7. Adding investment to super if you’re aged 67-75

The recent removal of the work test for people aged 67-75 allows them to add up to $330,000 to their superannuation or pension account. Most people don’t have a lazy $330k sitting in their bank account, but you can also use this opportunity to add investments held outside of superannuation into your account. There can be several benefits to this:

  • Adding the funds to a pension account allows the earnings to become tax-free. Even if you are already under the tax-free threshold, this can be worthwhile as you no longer have to submit tax returns to have franking credits refunded, and the super fund can record future capital gains. 
  • No more record-keeping for you. 
  • There can also be estate planning benefits. In the event of death, the super fund will pay your balance to the nominated beneficiary. In comparison, if you hold external shares, your executor must acquire probate and work through the associated paperwork and phone calls to get those transferred and sold. 
  • Finally, there can also be reduced fees from combining assets into one account and less reporting required to Centrelink. 

8. Making use of Government super co-contribution

Most people worry about not having enough super. Having the government top it up, especially for those on a low income, is a real bonus.

In simple terms, here’s how this works:

  • You expect to earn less than $57,016 for this tax year.
  • You put up to $1,000 into your super after tax. This is what we call a Non-Concessional Contribution (meaning you don’t get a tax deduction for it).
  • When you do your tax, the ATO will match your actual income for the year, check the super contributions list, and if you’ve earned less than $57,016, they will calculate your entitlement and pay it into your super for you (up to half what you put in, to a maximum of $500).

Now that’s a pretty handy Christmas bonus that will help boost your super for your retirement.

As always, there are criteria around this entitlement, including:

  • You must lodge a tax return
  • At least 10% of the income needs to be from paid work. i.e. from working or running a business as a sole trader or partnership, or a residency
  • Total super rules apply 
  • You need to be less than 71 at the end of the financial year.  

9. Making use of carry-forward concessional contributions

Concessional super contributions are contributions made into your super fund before tax. They are taxed at a rate of 15% in your super fund and there is a cap on what can be contributed yearly:

  • From 1 July 2018 to 30 June 2021, the concessional contribution cap for each year was $25,000.
  • From 1 July 2021, the concessional contributions cap increased to $27,500 in line with average weekly ordinary time earnings (AWOTE).

Carry forward concessional contributions are a way to contribute more to your super fund than the annual cap amount without paying more tax. To do this, you need to meet two conditions:

  • Your total super balance at the end of 30 June of the previous financial year needs to be less than $500,000
  • You need to have contributed an amount below the concessional contribution cap in one or more of the previous five years,

The amount of unused cap amounts you can carry forward will depend on the amount you have contributed in previous years, starting from 2018–19. You can use caps from up to 5 previous financial years, including when you were not a member of a super fund.

The oldest available unused cap amounts are used first. For example, unused cap amounts from 2018–19 would be applied to increase your cap first before unused cap amounts from 2019–20.

Unused cap amounts are available for a maximum of 5 years and will expire after this. For example, a 2018–19 unused cap amount that is not used by the end of 2023–24 will expire.

Here’s a good case study from Zacary Leeson that illustrates the power of this strategy if it’s available to you.

10. Using super when there’s an age difference between partners

Having a younger partner can help boost your Age Pension benefits. Superannuation balances are not counted in the assets test until you attain Age Pension age. When both of you are retired, you can boost the elder partner’s initial Age Pension by moving assets into the superannuation account of the younger partner.

Alternatively, if, as a couple, you want earlier access to your combined superannuation, perhaps to repay debt, then you can consider moving superannuation to the account of the elder partner.

Note that moving superannuation balances between spouses is a little more complicated than a simple transfer between accounts. It involves withdrawing from one spouse’s account and then contributing to the other spouse. There are rules that govern when and how much you can withdraw, as well as how much you can contribute. And there can also be tax consequences. If there is a significant age difference between you and your partner, it really does pay to get professional advice.

If you’re planning far enough ahead, you can also investigate the alternate strategy of splitting your annual superannuation contributions to your spouse (see next item).

11. Superannuation contribution splitting with your spouse

Spouse super contribution splitting is when you opt to transfer concessional contributions from your superannuation account to your spouse’s super account. This is permitted within the spouse-splitting contribution rules.

You can split up to 85% of the concessional contributions made into your superannuation account within a financial year, provided your spouse is either:

  • Aged lower than their superannuation preservation age or
  • Aged between their preservation age and 74 and not retired.

Two of the benefits of this are outlined in item 10 above:

Older spouse

If you have an older spouse who may be eligible to access their superannuation before you, you may consider spouse-splitting some of your contributions to them so that this portion of your retirement savings becomes accessible sooner.

Younger spouse

If you have a younger spouse and would like less of your overall wealth assessed for Centrelink entitlements or other social security purposes, you might consider spouse-splitting some of your contributions.

Two other benefits include:

Remain below thresholds

Spouse-splitting contributions may help your super balance remain under certain thresholds, such as the $300,000 work-test exemption threshold, $1.7 million transfer balance cap, or $500,000 catch-up contribution limit.

Protection against legislative change

Spouse-splitting contributions can help equalise account balances between you and your spouse. This can be good practice to protect against potential future changes in legislation targeting higher account balances.

12. Investing in insurance bonds

A strategy that often suits young, high-income earners is investing in insurance bonds.

Bonds have tax paid on investment earnings at 30% (the current life company tax rate) within the bond. This is the maximum rate of tax applicable to investment earnings or capital gains (although the actual rate may be lower depending on the level of imputation tax credits generated from the underlying investments applied).

A tax file number is not required, and the income does not need to be declared as no distributions are made during the bond’s life. Your investment benefits from the power of compounding as earnings are re-invested on an ongoing basis.

As a general rule, investment/insurance bonds can also be cashed in tax-free once the holder has kept it for 10 years.

If withdrawals are made before the 10-year period, a tax offset is applied to any applicable tax that may need to be paid.  For specifics, read the Product Disclosure Statement (PDS) carefully and seek financial advice if anything is unclear before making the decision to invest.

If you earn over $180,000 and invest in your own name, tax is applied to the investment income at a rate of 47%.  Using an investment bond is less tax effective than super, but a better result than investing in your own name.  The advantage over investment through super is the ability to access it if need be. You might need to access it in an emergency/ change of circumstances, or you might have it as part of a long-term plan to retire before you are old enough to access super.  

Disclaimer: Information presented in this article is of a general nature only and has not taken into account your particular circumstances. Before making any decision to act, you should consider whether the strategies are suitable for your personal situation and needs.

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