Salary Packaging, HECS debt, adjustable income and shares

Discussion in 'Share Investing Strategies, Theories & Education' started by Elle__, 12th Apr, 2017.

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  1. Elle__

    Elle__ New Member

    12th Apr, 2017
    Am looking for some advice. I am 28 years old, currently saving for my first home by myself.

    I work in a Public Hospital in VIC and in the last Fringe Benefits Year, I salary packaged 9k.

    I am thinking of accelerating the new Fringe Benefits Year allowance of 9k to the maximum possible before the End of Financial Year. This would mean I will have salary packaged 18k in the 2016-2017 FY. This would increase my adjusted income to around 70k (18k x 1.88 + $36k which is my YTD taxable income). The 1.88 I just found online somewhere relating to adjusted income.

    I have a HECS-debt, so if I decide to package the accelerated 18k, my adjusted income requires a higher HECS repayment than if I just packaged the 9k over the entire FBY.

    My question is, if my employer has put aside 6.5k tax of mine already, will this go towards my HECS debt? And anything left over to ATO, and will I be left with a bill?

    I also have about 7k worth of shares in ASX. I don't know when to cash these in - will it be added to my income? How much tax do I pay on it?

    The whole point of this is I think it is better to have this cash in the bank gaining compound interest, the sooner the better, so I have more to save for my deposit.

    Thank you! Elle
  2. Hodor

    Hodor Well-Known Member

    18th Jun, 2015
    You will pay tax on any capital gains, or you can claim a capital loss if the value has decreased.

    Interest rates are around 2-3% in the bank from what I have seen. High quality shares should be compounding better than that (although there is more downside risk). The average yield (dividends) on Aussie shares is currently around 4% with some prepaid tax (franking credits). Interest in the bank requires you pay tax at your marginal rate.

    Think about what the money is for and when you need it. The share market is a far more effective compounding tool than a bank account.

    Salary packing reduces your taxable income so there will be less tax withholding, it also increases your income for repayment purposes with HECS. By salary packing most people are better off (including those with a HECs debt), because less tax is withheld you may find you owe money come tax time.

    What you owe = Assessable income * marginal rate(s) + HECs repayments - prepaid tax

    Here is an example from a salary packing company.
    Salary Packaging with a HECS/HELP debt - Maxxia
  3. Simon Hampel

    Simon Hampel Founder Staff Member

    3rd Jun, 2015
    Hi Elle - welcome to InvestChat!

    Yes, when you sell - the capital gain (ie net sale proceeds after any brokerage minus cost base) will be added to your income at tax time. It's not a separate tax - it just increases your taxable income as if you had earned it as salary.

    However, if that number is negative (ie your net sales proceeds were less than your cost base), it will first be used to offset any capital gains you made during that financial year, and any remaining loss will be carried forward to offset against future capital losses. It won't decrease your taxable income.

    What is your timeframe for wanting to buy a house?

    Do you have any other debt other than HECS?

    While bank interest rates are abysmal right now and you would generally expect the share market to show much better returns - there is a very real chance of capital loss from holding shares.

    If your investment timeframe is only a year or two I would be very reluctant to park my money in shares when you have a specific goal you are "saving" for. The last thing you want to have happen is for all your hard work be lost because the sharemarket takes a dip just before you are ready to buy.

    It's all about risk management. Yes, the returns are likely to be higher in the sharemarket - but the risk of negative returns is far too high over a short timeframe to justify.

    If you're looking at 3+ years before you'll be ready to buy, it's a bit more difficult to judge the risk.

    If you only hold one or two shares, I'd say the risk of significant capital loss is too high, even over a slightly longer period. I'd want to have a diversified portfolio (eg via an ETF or managed fund) - but even then you are still subject to market fluctuations.

    If the timeframe is less than a year, I'd be looking at trying to pick the best time to sell your shares and then just hold the cash for your deposit. Look for the best paying high interest savings accounts or term deposits that fit with your timeframe to get at least some benefit.

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