Super/tax - a couple of quick questions

[Ext User(David Morrison)]

[This is based on my understanding of the situation for 2005/2006. I do
not know how the changes in the recent budget will affect my
calculations.]

I am being made redundant, and am on long service leave until October
23. I have been sacrificing half my salary into super so as to reduce my
tax at my marginal rate in this financial year (42%), and to get a lower
tax rate on the super contribs.

In the next financial year, I am not expecting to earn much wages income
- noone wants to employ a 53 year old IT person :-( The marginal rate
on my remaining wages and my investment income will be 17%. (I will be
living on my tax-exempt redundancy payment.)

Q1. Is there anything to be gained from increasing (or decreasing) the
amount sacrificed?


If the property market looks ok, I may sell an investment property in
2006/2007 while my income is low to minimise capital gains tax. The
capital gain from this would push my taxable income up to around $63000
which is well into the 30% marginal tax rate.

The proceeds from the sale could become a deductible contribution to
super if my wages income is less than 10% of my assessible income. This
will happen if I sacrifice more than 70% of my salary.

Q2. Is it worth making a deductible contribution to super by increasing
my sacrifice, taking into account the low marginal rates I am looking at?

Thanks

David

[Ext User(John Wright)]

"David Morrison" wrote [edited]
>I have been sacrificing half my salary into super so as to reduce my
> tax at my marginal rate in this financial year (42%), and to get a lower
> tax rate on the super contribs.
>
> In the next financial year, I am not expecting to earn much wages income
> - noone wants to employ a 53 year old IT person :-( The marginal rate
> on my remaining wages and my investment income will be 17%. (I will be
> living on my tax-exempt redundancy payment.)
>
You have clearly thought through your cashflow - which is why you are
sacrificing half your salary - that's great. Being so close to 55, you
should look to benefit from the fact that any deductible contribution you
make now is taxed at 15% - and you can take it out tax free (as lumpsum or
pension) after age 60 (assuming the recently proposed budget announcements
are passed), and you can start an allocated pension at 55 when the fund will
pay no tax and on pension you will get a 15% rebate. So this becomes a play
on cashflow - trying to manage having enough to live on meanwhile. After 55,
you can even take out from super over $130,000 tax free (the low rate
threshold), assuming you haven't already withdrawn any, so that will further
help your cashflow. Basicaly, if you are paying 42% marginal tax now, you
save a pile by contributing as much as you can now.

> Q1. Is there anything to be gained from increasing (or decreasing) the
> amount sacrificed?
>
Yes, as described above. Paying a net 15% tax on contribution and no further
tax after this and ability to withdraw after 60 is worthwhile. But you have
to hope the govt doesn't get wise and re-impose tax on pensions and lumpsums
by the time you get to 60 - that is indeed a risk.
>
> If the property market looks ok, I may sell an investment property in
> 2006/2007 while my income is low to minimise capital gains tax. The
> capital gain from this would push my taxable income up to around $63000
> which is well into the 30% marginal tax rate.
>
> The proceeds from the sale could become a deductible contribution to
> super if my wages income is less than 10% of my assessible income. This
> will happen if I sacrifice more than 70% of my salary.

Yes - if you get into higher tax bracket on selling, bring it back down with
a deductible contribution. But there will be a $50K per year limit.

Incidentally, there is going to be increasing demand for good IT skills -
even at age 53 - so in you plans you should not necessarily assume a low
marginal tax rate or making deductible contributions outside salary
sacrifice for the next few years. If you want to work, you most probabaly
will.

Regards - JW

[Ext User(penedo@gmail.com)]

John Wright wrote:
> Incidentally, there is going to be increasing demand for good IT skills -

This question is probably out of the scope of this group but I hope
it'll pass - can you give some background for this statement?

I'm not even 40 now but I'm always on the lookout as to what will
happen to my income options as I get older, and I'm an IT hand too
(unix/internet/java areas).

Thanks.

--P

[Ext User(David Morrison)]

In article <4498c513$0$25130$afc38c87@news.optusnet.com.au>,
"John Wright" <notprovided@something.com> wrote:

Thanks for your reply, John.

> You have clearly thought through your cashflow - which is why you are
> sacrificing half your salary - that's great. Being so close to 55, you
> should look to benefit from the fact that any deductible contribution you
> make now is taxed at 15% - and you can take it out tax free (as lumpsum or
> pension) after age 60 (assuming the recently proposed budget announcements
> are passed), and you can start an allocated pension at 55 when the fund will
> pay no tax and on pension you will get a 15% rebate. So this becomes a play
> on cashflow - trying to manage having enough to live on meanwhile. After 55,
> you can even take out from super over $130,000 tax free (the low rate
> threshold), assuming you haven't already withdrawn any, so that will further
> help your cashflow. Basicaly, if you are paying 42% marginal tax now, you
> save a pile by contributing as much as you can now.

My employer's scheme currently allows a maximum of 50% to be sacrificed.
They are changing to a new scheme on 1 July which will allow up to 100%
to be sacrificed.

After 1 July and keeping 50% sacrifice, my marginal rate will be 17%
which is hardly any different to 15%. (Although Medicare will bump the
17% to 18.5%. Is the Medicare levy payable on super contributions?)

If I sacrifice more, say 100%, then I benefit by the 3.5% difference in
tax rate on the extra amount I contribute to super. Is that correct?

> > If the property market looks ok, I may sell an investment property in
> > 2006/2007 while my income is low to minimise capital gains tax. The
> > capital gain from this would push my taxable income up to around $63000
> > which is well into the 30% marginal tax rate.
> >
> > The proceeds from the sale could become a deductible contribution to
> > super if my wages income is less than 10% of my assessible income. This
> > will happen if I sacrifice more than 70% of my salary.
>
> Yes - if you get into higher tax bracket on selling, bring it back down with
> a deductible contribution. But there will be a $50K per year limit.

Wasn't there going to be a transitional arrangement for people between
50 and 55 that would allow them to put in more for the next few years?

> Incidentally, there is going to be increasing demand for good IT skills -
> even at age 53 - so in you plans you should not necessarily assume a low
> marginal tax rate or making deductible contributions outside salary
> sacrifice for the next few years. If you want to work, you most probabaly
> will.

To tell the truth, I was having difficulty keeping up with all my other
interests and going to work five days a week. In the short term, I am
looking to have a bit more time to myself, and to doing a bit of
consulting on the side. This of course, is self-employment, so I can
still make deductible contributions.

If I get really bored, I could do some contracting. Not sure whether
that counts as being self-employed or not...

Cheers

David

[Ext User(David Morrison)]

In article <1150863891.458807.104060@u72g2000cwu.googlegroups. com>,
"penedo@gmail.com" <penedo@gmail.com> wrote:

> John Wright wrote:
> > Incidentally, there is going to be increasing demand for good IT skills -
>
> This question is probably out of the scope of this group but I hope
> it'll pass - can you give some background for this statement?
>
> I'm not even 40 now but I'm always on the lookout as to what will
> happen to my income options as I get older, and I'm an IT hand too
> (unix/internet/java areas).

The story as I understand it is this:

1. Older people don't fit in with the younger culture at the
organisation.

2. Older people know too much, and can demolish the (younger) managers'
grand ideas. ("When we did that last time....")

3. Because of their knowledge and experience, they want more money than
kids off the street.

4. The modern business view wants things done cheaply and quickly, not
properly. Older people come from the school that says that if you do it
properly, it costs less in the long run.

5. If you employ some kid to write something, you get him to maintain it
while he is around. If he leaves, and the problems get bad enough, you
employ another kid to rewrite it from scratch.

6. What older people do have is experience, and this can be useful in
some roles. But these are not permanent roles - usually it is contract
work, such as project management. Or you can go into management if you
won't miss the technical aspects.

Sorry, a bit cynical here, but mostly true.

David

[Ext User(penedo@gmail.com)]

David Morrison wrote:
[ rest deleted for bravity - makes sense to me ]

> Or you can go into management if you
> won't miss the technical aspects.

That's what I'm trying to do but so far not much success (missed a
couple of opportunities in my homeland, and here in Oz haven't got the
opportunity to miss yet) - I might be too technical and less of a
paper-pusher.

>
> Sorry, a bit cynical here, but mostly true.

No need to be sorry for telling the truth.

>
> David

Cheers,

--P

[Ext User(John Wright)]

"David Morrison" wrote [edited]
> After 1 July and keeping 50% sacrifice, my marginal rate will be 17%
> which is hardly any different to 15%. (Although Medicare will bump the
> 17% to 18.5%. Is the Medicare levy payable on super contributions?)

There is no medicare levy on super contributions.

> If I sacrifice more, say 100%, then I benefit by the 3.5% difference in
> tax rate on the extra amount I contribute to super. Is that correct?

Not quite. There is no 17% after 1/7/06, that tax level has been reduced to
15% in the recent budget. So you have nearly nothing (=1.5%) to gain.

> To tell the truth, I was having difficulty keeping up with all my other
> interests and going to work five days a week. In the short term, I am
> looking to have a bit more time to myself, and to doing a bit of
> consulting on the side.

I follow what you are saying. The balance of value of income vs time spent
on oneself tilts as one becomes financially comfortable; a stage comes when
you go from asking "how can I afford to take time off from work" to "how can
I afford to give my time to someone else for money".

Regards - JW

[Ext User(John Wright)]

<penedo@gmail.com> wrote
> John Wright wrote:
>> Incidentally, there is going to be increasing demand for good IT skills -
>
> This question is probably out of the scope of this group but I hope
> it'll pass - can you give some background for this statement?

Oh, I don't have any specific stats or reports to quote - just a gut feel
from all the various articles I read in the press, and from talking with my
IT friends who are still working. For example, just this morning I read an
article somewhere - that the skill shortage in Australia will get worse as
US has massively increased their quota for immigration next year, they will
therefore attract a larger share of skilled resources. There is record
unemployment in Australia now. Business is generally booming all over the
world, and will be reflected in high demand for IT skill for quite some
years.

> I'm not even 40 now but I'm always on the lookout as to what will
> happen to my income options as I get older, and I'm an IT hand too
> (unix/internet/java areas).

One thing I learnt pretty early in my IT career was to ensure that I kept my
skills updated to be marketable outside my present employer at all times;
otherwise you are hostage to their whims for your salary growth and future
prospects. Employers have learnt to keep their costs (read "salaries") down
and still demand higher productivity. IT employers are loath to invest money
to train you - in case you take all that in and then jump ship to another
employer, training is expensive. So you have to manage training if you want
to look after yourself. The only way to ensure job security and some
leverage with your employer is to ensure another employer can employ you.

IT distinguishes itself somewhat from other disciplines - things become
outdated very quickly here. This is both good and bad. For those who have
the ability to learn quickly and adapt, this is good, for no one has more
than a couple of years of experience on anything (in technical areas), and
you can match and overtake others in the skills department very quickly at
any age. But one has to adapt to exploit this.

Regards - JW

[Ext User(P)]

Go do a CISM, PMP or CISSP certification and they will get hour foot in the
door for the next step beyond tech

<penedo@gmail.com> wrote in message
news:1150870590.104668.202140@c74g2000cwc.googlegr oups.com...
> David Morrison wrote:
> [ rest deleted for bravity - makes sense to me ]
>
>> Or you can go into management if you
>> won't miss the technical aspects.
>
> That's what I'm trying to do but so far not much success (missed a
> couple of opportunities in my homeland, and here in Oz haven't got the
> opportunity to miss yet) - I might be too technical and less of a
> paper-pusher.
>
>>
>> Sorry, a bit cynical here, but mostly true.
>
> No need to be sorry for telling the truth.
>
>>
>> David
>
> Cheers,
>
> --P
>