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19.08.2008Should I add to super or pay off debt?


Further, care must be taken to ensure that you do not exceed your concessional contributions cap by undertaking a salary sacrifice strategy. Your cap is made up of total of all employer contributions (including salary sacrifice and superannuation guarantee) and any personal deductible contributions for the financial year. The cap is $50,000 (indexed) per financial year for individuals under age 50.

A transitional cap of $100,000 per financial year (unindexed) applies to individuals who are age 50 or over at any time during a financial year during the transitional period (up until 30 June 2012). 

So, from the sensitivity analysis we conducted, it could be surmised that:

  • The gearing strategy performs relatively better, notwithstanding the increased risks associated with the gearing strategy, under lower interest rates, higher investment income and lower Marginal Tax Rates (MTRs).
  • The superannuation salary sacrifice provides better results in the event of higher interest rates and higher MTRs.
  • In a post 30 June 2007 environment where withdrawals from super are tax free after age 60, salary sacrifice to super contributions have enhanced their relative attractiveness versus borrowing to invest.

Assumptions:

  • The investment in either alternative is a share-based unit trust with a gross income return of 3.0% (70% franked) and capital growth of 5.5%
  • Gross interest expense is 8% pa
  • Super benefits are taken after age 60 as a lump sum tax free
  • All net of tax income distributions are reinvested to purchase additional units in the share trust.
  • At the end of the period, all share trust units are sold, Capital Gains Tax (CGT) is paid, based on the same marginal tax rate, and loans repaid. The balances are then compared with the after tax results they would have achieved via the superannuation salary sacrifice alternative.

Disclaimer: This article is general in nature and is not intended as investment advice. Readers should always seek further advice before making any financial decisions.

Jeremy Gillman-Wells is an Authorised Representatives of AMP Financial Planning Pty Limited | ABN 89 051 208 327 | AFS Licence No 232706.

If you have any planning-related questions, please contact the editor and we'll get one of our experts to answer your query.

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