Smart strate­gies for ev­ery in­come bracket

Even on a lower in­come, top­ping up su­per and choos­ing the right as­set al­lo­ca­tion can make a dif­fer­ence to your fu­ture life­style


If you’re earn­ing $40,000 there are a few things you could do to make the most of your money. If you are part of a cou­ple and your part­ner is earn­ing quite a bit more than you, con­sider in whose name the in­vest­ments should be held. When they are held in the lower-earn­ing part­ner’s name the in­come (in­ter­est, rent or div­i­dends) could be taxed at a lower mar­ginal rate.

For ex­am­ple, some­one with an in­come (af­ter de­duc­tions) of $ 40,000pa is likely to be on a mar­ginal tax rate of up to 32.5% (not in­clud­ing the Medi­care levy); if their part­ner earns $90,000pa they are likely to be on a mar­ginal rate of up to 37%. Hold­ing as­sets in the name of the part­ner who is pay­ing less tax will have the ef­fect of boost­ing in­vest­ment re­turns. If you al­ready own the as­set it is very im­por­tant to ob­tain ad­vice be­fore trans­fer­ring as­sets, as there may be tax payable on the trans­fer.

We of­ten hear a lot about neg­a­tive gear­ing but pos­i­tive gear­ing might work for cer­tain peo­ple in this in­come bracket. With neg­a­tive gear­ing, the ex­penses (for ex­am­ple, loan in­ter­est and other costs) are greater than the in­come earned from the in­vest­ment, which means that the in­vestor is in an in­come-loss po­si­tion. Un­der cur­rent tax law, the in­vestor is able to use that loss to off­set tax on in­come from other sources. It’s re­ally only worth­while if the as­set rises in value over time.

Pos­i­tive gear­ing flips this on its head as the in­vestor makes a real profit from very early on with the in­come (rental in­come or div­i­dends) be­ing greater than the ex­penses. The in­come is taxed at the in­vestor’s mar­ginal rate, just like any other in­come. It means that the in­vestor does not have to dip into other sources of in­come or other as­sets to fund the strat­egy. Just as with any other in­vest­ment, it is im­por­tant to un­der­stand the risks – when bor­row­ing is in­volved, the risks of this type of strat­egy are in­creased.

If you’re in­vest­ing in Aus­tralian shares, un­der­stand whether the div­i­dends are franked. Frank­ing cred­its (also com­monly re­ferred to as im­pu­ta­tion cred­its) can be used to re­duce in­come tax or even po­ten­tially be re­ceived as a tax re­fund (de­pend­ing on the in­vestor’s mar­ginal tax rate). In ef­fect, they are a way of pass­ing on the tax paid by the un­der­ly­ing com­pany to pre­vent dou­ble tax­a­tion of prof­its.

For those plan­ning their re­tire­ment, many re­tirees can sur­vive on $40,000pa. This may in­clude a com­bi­na­tion of draw­ing on an in­come stream from su­per­an­nu­a­tion, div­i­dends, rent and/or in­ter­est from in­vest­ments out­side su­per and even the age pen­sion.


1Look at boost­ing your su­per­an­nu­a­tion

In the lead-up to re­tire­ment, try to top up your sav­ings. The fed­eral govern­ment pro­vides ex­tra in­cen­tives for lower in­come earn­ers who con­trib­ute to their su­per. Ex­am­ples of this are:

If your as­sess­able in­come plus re­portable fringe ben­e­fits plus re­portable em­ployer su­per con­tri­bu­tions is less than $36,813 and you make a non-con­ces­sional con­tri­bu­tion of $1000 to su­per, the govern­ment could make a co-con­tri­bu­tion of up to $500. The co-con­tri­bu­tion cuts out com­pletely once your per­sonal in­come ex­ceeds $51,813.

If your spouse’s as­sess­able in­come plus re­portable

fringe ben­e­fits plus re­portable em­ployer su­per con­tri­bu­tions is less than $40,000 and you make an af­ter-tax con­tri­bu­tion to their su­per ac­count, you may be en­ti­tled to the spouse con­tri­bu­tion tax off­set (of up to $540).

2Con­sider as­set al­lo­ca­tion

One of the big­gest mis­takes a cou­ple ap­proach­ing re­tire­ment can make is to be too con­ser­va­tive. While it is im­por­tant to not take too many risks with the pool of money that needs to last through­out your life­time, in­vest­ing too con­ser­va­tively may mean that re­turns are quite low and funds may be ex­tin­guished sooner than would have been the case if a more bal­anced ap­proach had been taken.

3In­vest in your ed­u­ca­tion

Whether it’s a short course, a cer­tifi­cate, a trade qual­i­fi­ca­tion or a de­gree, in­vest­ing in your ed­u­ca­tion and then ap­ply­ing that knowl­edge in the work­force is one of the quick­est and best ways to earn more in­come.

4Get crack­ing on a bud­get

Un­der­stand where your in­come is com­ing from and sort out where it is go­ing. Shop around for bet­ter deals on in­sur­ance, gas, elec­tric­ity, phone and data plans, gro­ceries, etc. If you have a mort­gage, touch base with your lender to see if you are on the best in­ter­est rate it can give you.

5Try not to get into “bad” debt

It can be tempt­ing to bor­row to buy the things you want but can’t af­ford right now – be it those clothes, that sur­round-sound sys­tem, the hol­i­day, the new car. Bor­row­ing for these things can be so easy thanks to credit cards, in­ter­est-free loans, per­sonal loans, etc – but think very care­fully about whether you re­ally need them as they could end up cost­ing you thou­sands of dol­lars ex­tra in the long run. For those with “bad” debt al­ready, fo­cus­ing on re­pay­ing it is usu­ally the most ap­pro­pri­ate in­vest­ment strat­egy.

6Choose ap­pro­pri­ate in­vest­ments

Your in­vest­ment de­ci­sions will de­pend on your time frame and tol­er­ance for risk. For those with a short time frame, cash and fixed in­ter­est (for ex­am­ple, term de­posits) are usu­ally the most ap­pro­pri­ate op­tion. For those with a longer time frame, more growth-based in­vest­ments (prop­erty and shares) may be ap­pro­pri­ate – usu­ally via a man­aged fund – as they pro­vide a more di­ver­si­fied ex­po­sure to the as­set class that re­duces in­vest­ment risk at a lower ini­tial in­vest­ment (some­times as lit­tle as $ 1000).

7Con­sider seek­ing ad­vice

The fees may seem high but a good cer­ti­fied fi­nan­cial plan­ner (CFP) can as­sist you with defin­ing and pri­ori­tis­ing your goals, bud­get­ing, debt man­age­ment, in­vest­ing in the right as­set al­lo­ca­tion/in­vest­ment spread given your goals and risk pro­file, struc­tur­ing your fi­nances for re­tire­ment and po­ten­tially as­sist­ing with Cen­tre­link ben­e­fits. The Fi­nan­cial Plan­ning As­so­ci­a­tion is a good place to start look­ing for a plan­ner and find­ing out more about the ba­sics of fi­nance. See

Cather­ine Sharples-Rushbrooke is man­ager at Ad­vice Ser­vices Aus­tralia. She is a cer­ti­fied fi­nan­cial plan­ner and an SMSF spe­cial­ist.

Bad’ debt could end up cost­ing you thou­sands of dol­lars in the long run

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