Tax benefits from IP and HECS-HELP debt

Hi Guys,

I have a query, I have a HECS-HELP debt of around $10,000

I know that a certain percent is taken out of my salary on a weekly basis to go towards the debt.

When I purchase my Investment property and wish to claim the Tax benefits e.g. deprecation etc. Will this benefit also be taken out of my HECS-HELP debt or will it come back to me?

Appreciate any information.

Cheers

 

Pretty sure your HELP debt repayment isn't impacted by depreciation/taxable income drop associated with negative gearing. You'll have to repay it based on a % of your salary (not taxable income). Accountants to confirm though.

 

Help debts are repaid based on a taxpayers final tax return. The increased PAYG withholding from pay should reflect the expectation of the final tax payments being higher.

Rental losses do not affect the HELP repayments. Help is based on a concept called adjusted taxable income which undoes the tax benefit of neg gearing for some other benefits. So the HELP repayment is unaffected. Lets assume an illustrative example

Fred has a salary of $120,000 and would pay Help repayments of $9600 (8%) on his $15,000 debt. His final tax bill incl Help repayment is $44347. Now lets assume he has a few IPs and a net loss of $60K. Taxable income is now $60K. The total tax bill is $21747. Incl $9600 HELP.

Freds HELP repayment doesnt change and is 8% x $120K either way. But he saves on income tax.

 

Well that explains some of the brutal tax bills I've gotten in recent years. Plus I was also maxing out my sal sac entitlements while working for a PBI.

Ouch.

 

Tisk tisk lol

 

Brilliant! Thanks for the info!

You mention that the adjusted taxable income undoes the benefit of neg gearing, can you elaborate on this a little?

 

Did you read the example? It was pretty clearly outlined if you understand how HELP and tax returns work.

 

I read it but was confused by the word undoes. I now get that he means "undoes" that it still calculates the HELP % on the original salary not the salary after neg gearing.

 

So the example was clear (i think). But how does Salary sacrifice come into it? I work for a PBI and currently salary sacrifice. What impact does this have on HELP loans?

 

Short version is that it increases the adjusted tax rate used to calculate the HELP repayment rate. I think its increased by something close to double the amount being salary sacrificed. I'm surprised the payroll person at your PBI didn't warn you?

I googled quickly to see if there was somewhere that explained it well:

Salary Packaging and HECS/HELP – what you need to know!

 

The $15K your employer can 'pay' you tax free (generally through the reimbursement of expenses) is called a reportable fringe benefit. Reportable fringe benefits get added to your 'adjusted taxable income' which, as @Paul@PFI explained, is used to calculate your HELP repayments. And it's not just the $15K which gets added. The $15K is grossed up by (roughly) the top marginal tax rate to $30,000 (or $31,177 while the 2% temporary deficit levy is in place) and this amount is added to your 'adjusted taxable income'. You generally still end up ahead (as your tax saving should more than offset the additional HELP repayments) but you need to be prepared for the bill when you lodge your tax return as the additional HELP repayments are not factored into the tax withheld for your salary by your employer during the year (unless you make a voluntary upward variation).

If you have a meal entertainment card, this was previously uncapped and not reportable. From 1 April 2016, this benefit is now capped at $2,550 (or $5,000 grossed up) and is reportable (so it will also impact on HELP repayments).

 

FBT issues are treated slightly differently as Dan indicated. . The PAYG Summary shows grossed up reportable fringe benefits ie $31K as Dan says. . 51% of this will be used to factor into the HELP debt issue so only $15K affects HELP...Simple isnt it ?

 

Thank you to @Paul@PFI and @Daniel Taborsky for taking the time to explain this. I think it makes sense to me.

I've just gotten a job with a significant bump in income (for me at least) so this will help with deciding on what I need to do in regards to my meal card and other packaging.

 

Isn't the decision as simple as "max out my tax free entitlements"?

 

Certain types of benefits are not reportable.

You can still be ahead in salary packaging even if you have a resulting higher HECS-HELP repayment.

It pays to make a spreadsheet.

 

Pretty much.

 

Why nickel and dime for?
Pay it off and be done with it, I mean don't create strategies to slide under HELP repayment thresholds. Sooner it's paid, sooner you will have more cash in your pocket per week of your gross pay.. Simple.
Cashflow......

 

To determine this, you would need to compare the rate of indexation of your HELP debt vs the interest rate on non-deductible debt (first) and deductible debt (second). When I had a HELP debt, the indexation was under 3% but my interest rate on non-deductible debt was over 8%. It did not make sense to me to pay extra on HELP when I could use the funds to pay down non-deductible debt. You need to direct your funds where they will have the highest impact.

 

I'm an accountant bud, fully understand the opportunity cost of funds.

 

Then why say "Pay it off and be done with it"?