Repay debt, contribute to super or invest your surplus cash

If you have surplus cash, you might be wondering what to do with it.  Your options might be to contribute to your super fund, pay down your mortgage or maybe you’d like to consider investing in shares?

For many high earning executives, tax will also be a significant consideration.  Here we overview different scenarios for taking an overall approach to using your surplus cash so it may benefit your overall personal prosperity.

Debt or Super
For high-earning executives with incomes over $200k pa, this generally means a tax rate of 47% (inclusive of 2% Medicare Levy) and when it comes to paying your debt that means using after-tax money.

If you are earning $200k your super guarantee payment is currently 9.5% which is approximately $19k.  With the concessional contribution cap currently at $25k, this provides an opportunity for you to contribute $6,000 of any surplus income you may have to your super fund where it will be taxed at just 15%.

The above examples do not include any position tax from division 293A.

For younger executives who are many years from retirement and who can both comfortably manage their home loan and additional contributions to super, there is opportunity to enjoy a valuable tax saving boost to super that will further benefit from compounding interest over the years.

However… if you need extra cash at some stage in the future, you won’t be able to retrieve it.  If access to your cash in the future is important, it may be better to pay any surplus income into a home loan offset account.

An offset account is linked to, but separate from, your home loan.  While it will ‘off set’ interest payable on the home loan balance, it also provides ready access to your cash should you need it.

The key benefit of an off-set account is flexibility. For example, funds may be accessed from the offset to purchase a new home when the existing home is retained as an investment property. The existing loan becomes tax deductible.  Whereas funds redrawn using a loan redraw facility for the same purchase, are not tax deductible [1].

Debt or Invest
While those with a home loan may be happily enjoying record low interest rates those with money in a savings account are not.

While generally speaking reducing your home loan debt reduces your risk, increasing your debt to take advantage of the low capital cost of money and using it for to invest in shares that could return 7% or 8% in returns, may be a better option than using your surplus cash. [2]

Home owners in a strong low net debt position or with a large amount of surplus cash in an offset account have additional opportunities from a tax position.

For example, if you were considering using cash to invest, a separate loan account against your home could be established (rather than using your existing home loan or cash).

Using your separate loan account for tax deductible investments such as purchasing an investment property, allows you to claim a tax deduction for interest on the new loan.

Consider this scenario:

Jason has a home loan with $400,000 owing and $300,000 in an offset account. He is considering investing $50,000 of his surplus cash over the next 12 months. But rather than using the cash to invest, he could increase his home loan facility limit by $50,000 and establish a $50,000 second loan account on his home and use that to invest. The interest on the second loan is tax deductible as it is used for an investment purpose.  Jason can also add surplus cash to his offset account. At the end of the year, he will have $350,000 in offset to his $400,000 non-tax-deductible home loan with $50,000 drawn from his second loan which is tax-deductible.  As opposed to $300,000 in an offset account and an equivalent $50,000 investment, which has no tax-deductible debt.

However… in this situation borrowing extra money or drawing surplus funds from your home loan redraw facility or offset account will increase your risk. Market ups and downs are to be expected. There are no guarantees and you should expect negative returns at different times. However, playing the long game has historically resulted in a general upward trend. Even so, when investing you need to consider your personal circumstances and your need for access to your cash.

Your next steps
Consider your short and long-term goals, you day to day living expenses, when you hope to retire, and how you feel about home ownership in context of your career which may involve transferring to different locations. Consider your tax situation including your income tax rate and if you have surplus money in a low interest savings accounts and how taking a more proactive approach to your surplus cash could may a positive difference to your personal prosperity.

To find our more, please contact Brett Cribb on (07) 3007 2080 or email contact@executivestrategies.com.au

Executive Strategies is a specialised information hub for executives and senior manager who may have founded their own business or who work for growing private, ASX listed companies or government businesses.  Its purpose is to provide access to specialist advisers and information that addresses the often-complex issues affecting their personal prosperity.

Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth ABN 54 139 889 535 AFSL 357306. This information does not consider your personal circumstances and is of a general nature only. You should not act on it without first obtaining professional financial advice specific to your circumstances.

*Please note: As advice and services relating to this matter are not offered under the Fortnum Private Wealth AFSL, in accordance with our collaborative advice model, when required, such matters are referred to appropriately qualified professionals.

[1] See the Case Study in our earlier article “Home loan redraw or offset account?”

[2] Mercer Market Indicator Report Jan 2021