For executives, job promotion brings increased salary and what’s not to love about that? Financial reward for a job well done is certainly good reason to celebrate, but there’s also the spectre of the ATO enjoying more of your reward than you. Interestingly, for some high earners, the more money they have, the more they spend as their high income often qualifies them for loans for homes, cars and boats that must be repaid.
We’re not suggesting you shouldn’t enjoy your money. Without the pleasure of being able to spend on yourself and those you love to create your lifestyle of choice, there’s really no motivation to work as hard as you do. This article serves to simply draw your attention to how you can make the most of the extra money that comes with each job promotion.
Executive Share Scheme (ESS)
Executive Share Schemes are inherently complex, and if your promotion includes a new scheme there may be other rules (and even more complexity) that must be observed. For example, your job promotion and remuneration package could include parcels of management awards or performance awards.
For others, who may have a long established schemes, an increase in your salary could include the granting of more shares as a percentage of that salary increase.
Undoubtedly, your ESS can bring considerable financial reward, but there are unyielding tax compliance and vesting requirements. To avoid paying more tax than necessary or being stung by penalties inflicted by the ATO for non-compliance, you will need to actively manage your tax obligations or get someone to do it for you.
Salary Sacrifice
The salary increase that comes with job promotion could push your annual income into a higher tax bracket. That could mean a substantial amount of your hard earn cash going to the Tax Office.
Salary sacrificing may help.
Topping up your super via salary sacrifice has two advantages – it reduces your assessable income and it boosts your retirement savings.
In super, your concessional (pre-tax) contribution is taxed at 15%, whereas your marginal tax rate could be as much as 47% (including 2% Medicare Levy).
If you already salary sacrifice to super, it is important to be aware of how much you contribute each financial year, so you avoid exceeding the annual concessional contribution cap of $27,500. As you would expect, exceeding the cap can result in penalties from the ATO.
Superannuation
Speaking of super… If in recent years you have contributed less than your annual contribution cap amount, you might be able to take advantage of catch-up contributions. That is, you can make good use of your extra cash thanks to your job promotion to contribute the ‘unused’ cap amounts for the past five years to ‘catch-up’ and maximise your super contribution entitlement. However, some restrictions do apply, and you should seek advice from a financial adviser to confirm you are eligible to take advantage of this provision.
Debt management
Getting on top of your loan is usually a sound financial strategy, especially if your loan arrangements include either a redraw or offset account facility that can allow you to access the extra repayments should you need that money for something else.
Consider your Personal Risk
Over the course of your career, you will likely enjoy a number or promotions and a number of pay increases providing you with what can be a very high level of income and expensive lifestyle to boot.
But what would happen if you could no longer work and the money stops?
You will still have debt, day to day expenses and financial obligations you will need to meet.
If you suffer illness or injury, Income Protection Insurance can pay up to 70% of your usual income.
If you already have income protection insurance, you’ll need to advise your insurer so your cover keeps pace with your earnings.
But it’s not only Income Protection insurance you need to consider. Life, Total and Permanent Disability and Trauma cover all need to be considered so you, and those who depend on you, can be financially protected should your health take a turn for the worst.
Your next steps
Consider your next job promotion reason for a financial review that will explore how your increased salary can be put to best use.
As a financial planner and ESS strategist specialising in financial planning for high earning executives, professionals and business owners, please give me a call if I can help you to better understand or manage your financial opportunities.
Please call Executive Strategies on +61 7 3007 2080 or email contact@executivestrategies.com.au
Executive Strategies is a specialised information hub for executives and senior managers 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.
James Marshall is the 2021 ifa Holistic Financial Adviser of the Year
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decision.
Please note: Tax advice and other services not offered under the Fortnum Private Wealth AFSL are referred to appropriately qualified professionals.
