A budget lock-up is an odd place. It’s an intense, deeply insular environment, where the only source of information is the government. Phones are handed in at the door, and no connections to the world outside are permitted until the lock-up ends at 7.30pm.
The penalty for smuggling any information out before 7.30pm is up to two years in jail. A lock-up is a different sort of prison – one with more sociopathic cellmates and worse coffee, probably. (Sorry to go on about the coffee, but seriously.)
The upshot is that there’s little opportunity to bounce ideas around – Treasury officials, for one group, are not paid to express their opinions to the media – or get a variety of interpretations of what certain measures mean. Everyone talks to everyone else, and everyone else has also talked to everyone else … and so on.
Plus, there’s a deadline to meet and only six hours to get through some fairly weighty documents. So, unsurprisingly, some of the best analysis happens in the days, and sometimes weeks, following the actual event. And often the best analysis covers far more than just the hard numbers. For example, what follows are some insights into how to seize the an opportunity the new First-Home Super Saver Scheme provides.
Rob Lavery, technical manager at knowITdigital, says a measure like the first-home super saver scheme (FHSSS) is a gift-wrapped opportunity for financial planners to engage with the adult children of existing clients.
For this cohort, superannuation is a bit of a yawn. It gets deducted from their earnings every payday, but retirement is a long way off, they’ve got other things to do, and their engagement with super is low. But if superannuation all of a sudden becomes a step on the pathway to home ownership, then that’s a whole different ballgame. And who better to offer them some help and guidance than the planner their parents already know and trust?
It’s often said that the cost of advice is only an issue when the advice is perceived to have no value, so the trick is to pitch an opportunity like the FHSSS so that the value of the advice is obvious. How about a $10,000 tax savings – would that get someone’s attention, even a 20-something couple’s?
That’s what Lavery estimates a couple could save if they are well advised on the FHSSS.
The tax argument
A client may contribute up to $15,000 a year (which is included in their existing contribution cap), and up to $30,000 all-up over their lifetime. In an FHSSS, tax is paid at 15 per cent on contributions. This means 85 per cent of the pre-tax contribution is put to work within the fund, earning a deemed rate of return equivalent to the 90-day bank bill rate plus 3 per cent.
When the money is withdrawn, tax is paid at the client’s marginal tax rate, minus 30 per cent. Lavery’s calculations show what happens for clients across three marginal tax rates.
Regular saving vs salary sacrifice under FHSSS
| $1000 of salary saved for deposit– no salary sacrifice | |||
| Marginal tax rate (MTR) plus Medicare levy of 2 per cent | 34.5 per cent | 34.5 per cent | 47 per cent |
| Tax if taken as salary | $345 | $390 | $470 |
| Amount of pre-tax salary left in savings for deposit | $655 | $610 | $530 |
| $1000, salary sacrificed under FHSSS | ||||
| Marginal tax rate (MTR) plus Medicare levy of 2 per cent | 34.5 per cent | 34.5 per cent | 47 per cent | |
| Tax if salary sacrificed (15 per cent) | $150 | $150 | $150 | |
| Amount of pre-tax salary in super for deposit | $850 | $850 | $850 | |
| Tax offset of withdrawal ($850 x 30 per cent) | $255 | $255 | $255 | |
| Personal tax on withdrawal ($850 x MTR) | $293.25 | $331.50 | $399.50 | |
| Amount of pre-tax salary left as savings for deposit
($1000 less contributions tax less withdrawal tax plus withdrawal offset) |
$811.75 | $773.50 | $705.50 | |
| Total tax benefit for $1000 of salary | $156.75 | $163.50 | $175.50 | |
| $30,000– salary sacrificed under FHSSS | |||
| Marginal tax rate (MTR) plus Medicare levy of 2 per cent | 34.5 per cent | 34.5 per cent | 47 per cent |
| Total tax benefit for $30,000 of salary | $4702.50 | $4905 | $5265 |
Lavery’s example above is for one client. For a couple, the benefits are doubled, which is where the $10,000 tax-saving figure comes from (assuming the couple each contributes the maximum $30,000 allowed under the scheme). And that’s before the potentially greater investment returns inside super are factored into any decisions.
He says there are other advantages as well:
- With more money invested due to less tax, returns compound from a higher base.
- Returns taxed at 15 per cent in super, returns outside super taxed at MTR
But what the government gives with one hand, it takes away with the other, and Lavery says advisers also need to consider some potential disadvantages to the scheme, including:
- A withdrawal amount may push a client into a higher marginal tax bracket in that year
- Only a capped amount of earnings can be withdrawn – excess earnings will remain in the fund
- The client’s money is not as easily accessible as if it were in a bank account – although the flipside is enforced savings discipline.
So those are the hard numbers, and a good place to start to explain the potential benefits of the FHSSS. Lavery says there are other opportunities for advisers as well. Once you’ve got their attention, pitch the opportunity so it’s the start of a journey to bigger and better things for you and the client alike. Lavery’s thinking goes like this.
- At the time of the first FHSSS discussion, offer basic superannuation fund advice. Are they in the best fund or even one that’s appropriate? If they’ve been unengaged with their super, there’s a chance they haven’t even considered this. And are they using super as effectively as they could be?
- Offer some advice on basic insurance. Are they aware of the insurance in their super fund? Are they adequately covered? What are their options and alternatives?
- Some time after July 1, 2018, the client will want to withdraw the FHSSS contributions and (deemed) earnings to contribute to a property purchase. Offer some advice on setting up debt efficiently, along with a review of life and other insurances.
- If all goes well, at some point they will outgrow the first home – particularly if children have arrived on the scene – and will need to trade up. Offer to review loan options and insurance. Are they saving for other goals now, like a child’s education?
The point, Lavery says, is that a discussion about the FHSSS with the children of your existing clients could be just the start of a new relationship, and a chance to reinvigorate your practice’s client base, particularly if your existing clients tend to be older and moving into (or are already in) retirement.
“The bottom line: the advice is worth the cost,” Lavery says.
