For high-earning executives and professionals seeking to optimise their financial strategies, navigating the intricacies of tax savings is crucial. While options may seem limited, understanding the avenues for tax effectiveness can significantly enhance your financial outlook. This article explores key strategies that can help you reduce your tax burden, address common misconceptions, and implement a holistic approach to your financial planning.
Income Tax Savings: Superannuation Contributions and Borrowing to Invest
Superannuation Contributions
For high-earning executives already maximising their tax-effective superannuation contributions up to the current concessional cap of $30,000, there are still substantial opportunities to be leveraged. Particularly for those who have experienced significant income increases or have taken career breaks, there exists the potential to utilise unused concessional contributions from previous years. This strategy not only offers considerable tax savings but also helps in catching up on the compounding benefits missed during periods of reduced contributions.
Superannuation remains one of the most tax-effective ways to save for retirement, yet many executives are not fully aware of the flexibility it offers. For instance, there is often confusion around the age at which superannuation funds can be accessed. Earlier access is pivotal in planning both for pre-retirement tax-saving strategies and for structuring a tax-effective income stream in retirement.
Adding to the strategic use of superannuation is the principle of compound interest, which underscores the value of maximising contributions early and consistently. As explored in Maximising Financial Opportunities: Strategic Year-End Planning for Executives, leveraging compound growth through full use of concessional caps and considering non-concessional contributions can optimise wealth over the long term.
Borrowing to Invest
Another method to consider is borrowing funds to invest in income-producing assets like property, shares, or managed funds. The interest and related expenses incurred in these investments are typically tax-deductible. However, this strategy comes with its risks, primarily the risk of borrowing substantial amounts which may exceed your level of comfort. Thus, it’s imperative to ensure potential tax savings aren’t your primary driver toward making a specific investment.
Tax Effectiveness: Balancing Flexibility with Financial Goals
Tax savings should not just focus on immediate benefits but also on achieving ongoing tax effectiveness. A strategic balance between superannuation contributions, debt reduction, and investing ensures not only tax efficiency but also maintains financial flexibility. For instance, directing all savings into superannuation may seem advantageous due to lower tax rates on earnings and capital gains (ie up to 15% within superanuation, compared with your marginal tax rate which may be 47%). However, if you plan to achieve financial independence before age 60, this strategy might restrict your access to funds when needed. Therefore, a balanced approach that accommodates both short-term needs and long-term goals is essential.
Common Mistakes and Misconceptions in Financial Planning
Superannuation Access
A widespread misconception among executives is the age at which they can access superannuation funds, often confusing it with the eligibility age for the Centrelink Age Pension. While the Age Pension is available from 67, superannuation can be accessed as early as age 60 under certain conditions. Understanding these nuances is crucial in planning your retirement and can be a highly effective tax strategy both pre and post-retirement.
Spousal Financial Strategies
Often overlooked is the financial and tax positioning of a non-working or lower-income earning spouse. Strategies such as making spouse contributions to superannuation or investing in the lower-income spouse’s name can lead to significant tax savings. Equalising superannuation balances and optimising investment holdings across both spouses can enhance your overall financial health and provide more options in retirement planning.
Executives and their spouses must recognise that delaying the implementation of these strategies can lead to missed opportunities, potentially costing more in the long run due to transaction fees, immediate tax liabilities, or less optimal investment growth.
Big picture and long term
Some high earning executives are savvy enough to optimise the structuring of investments to make best use of their lower income earning spouse, by investing in their name. However, without considering the bigger financial picture and taking a long-term view, assets built up in the spouse’s name may become ‘too much’ from the perspective of the level of income tax or future capital gains tax your spouse might pay. Rather considering investment into superannuation earlier, or through another investment structure like a family trust, may have instead been more advantageous and tax effective for the long term.
Next Steps: Take Action Today
For executives aiming to refine their financial strategies and ensure they are making the most tax-efficient decisions, waiting is not an option. Proactive planning and annual reviews can safeguard against common pitfalls and align your financial strategies with your personal and professional goals.
If you need advice about superannuation, tax saving strategies, your executive share scheme and financial planning, please contact James Marshall 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.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth ABN 54 139 889 535 AFSL 357306. This advice is general and does not take into account your objectives, financial situation or needs. You should not act on it without first obtaining professional financial advice specific to your circumstances.
*Please note: For advice and services relating to this matter that 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.
