Making the most of excess income – An HPH Solutions Case Study

One of our clients, Frank, is a 58-year-old doctor with an income of $555,000 a year and net wealth of $7 million. His current workload sees him at 20% of full-time equivalent (FTE) in the public system, and 60% FTE in the private system.

Frank is like many of the high-income medical professionals we are financial advisors to. He loves his work so he works a lot and spends far less than he could. This sees a large portion of his disposable income going unspent. Frank told us he knew that built up cash could be working harder for him elsewhere, but he just wasn’t sure where that ‘elsewhere’ was.

Here are the recommendations we made to Frank.

1. Move $300K into super

For clients in their mid to late 50s, we usually recommend maximising the funds they have invested within super. Since restrictive contribution limits apply to super, when clients (like Frank) have a significant pool of assets outside of super, we devise a contribution strategy over multiple years to get as much into super as possible. These funds will eventually fund a tax-free pension income stream in retirement.

Making a non-deductible contribution of $300K into super would significantly boost Frank’s retirement savings, where earnings are only taxed up to 15% in super and tax-free in pension. (This is substantially lower than his current marginal tax rate of 47% (including Medicare) and will help maximise this money’s growth.)

2. Make use of salary packaging

The public health system offers its employees the chance to salary package tax-free amounts towards general living expenses as well as meals and entertainment expenses. Employees are also able to salary sacrifice their income to superannuation.

Frank has the added benefit of having a GESB West State Super Account. (This fund was closed to new members in 2007 and is irreplaceable.) West State is unique it that it is an ‘untaxed fund’ where tax on contributions is deferred until funds are accessed (via rollover or withdrawal at retirement). This enhances compounding investment returns for members as they can generate returns on the deferred tax amount. Deductible (pre-tax) contributions to West State are not capped at the standard annual limit (currently $25,000), but are instead counted towards a lifetime limit (currently $1.515M).

Given Frank’s high disposal income, we recommended he maximise tax-free salary packaging benefits and salary sacrifice a significant portion of his income ($1,500 fortnightly).

3. Release excess concessional contributions

Contributions to GESB West State are counted towards the general cap of $25,000 per annum that applies to Frank’s other standard ‘taxed’ superannuation fund.

The recommended salary sacrifice in addition to private practice employer contributions received by Frank’s ‘taxed’ superannuation fund means Frank’s total contributions would breach the cap, requiring additional tax payment. This tax can be paid personally or from a superannuation account. In Frank’s situation, we recommended he pay the tax from his ‘taxed’ superannuation fund given the deferred tax treatment on all investment earnings enjoyed by GESB West State accounts.

Net benefits

The net benefits (results) of the above strategies are:

  • An extra $300K in retirement savings that is now more tax-efficient and compounding in value year on year.
  • Yearly tax savings as salary sacrificed funds are not taxable at the maximum tax rate of 47% but are subject to a deferred tax of 30% within super (30% rather than 15% applicable to individuals earning more than $250,000 per year).
  • Maximising the value of funds invested in the ‘untaxed’ superannuation account, enhancing Frank’s returns over time.

Given clients like Frank have little trouble funding their current lifestyles, our main goal for these clients is to maximise their future wealth. We are confident the recommendations we have made for Frank will set him up beautifully for retirement whether that happens in two years’ time, or ten.

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