Assignment Solution

AFF3111 Assignment

Semester 2, 2012

A Suggested Solution

Issues

1. James Khoo wants to reduce his work commitment to part-time, whilst maintaining his current lifestyle.

Assumptions

1. James wants to cut back his work to, say 3 days per week, and his employer has agreed to this (salary now 3/5 of old salary, i.e., $51,000).

2. He will need around 60% of his former after-tax income to maintain his current lifestyle whilst working.

3. He should salary sacrifice the maximum to his SMSF (without invoking excess contributions tax), and start a TTR to supplement his income.

4. His employer has agreed to hold his SG payments at the level of his substantive salary (i.e., $85,000).

5. All of his superannuation money is from a taxed source.

Strategy

A sensible and very simple strategy to achieve his goal is a Transition to Retirement scheme through which he can reduce his hours, boost his superannuation through salary sacrifice, and save tax whilst working, and supplement his account-based pension income with some Age Pension in retirement.

It is assumed that he will rollover all his superannuation into a non-commutable account-based pension and draw out the minimum (3% of $300,000 = $9,000). Since this is from a taxed source it is received tax free.

If his employer contributes $7,650 as SG payments, then the maximum James can contribute in order to avoid excess contributions tax, is $17,350.

Unless he is prepared to undertake additional risk with his superannuation investments, he will not be able to maintain his lifestyle exactly as at present.

Summary

| Before TTR  | After TTR  |

Salary |  $85,000.00 | $51,000.00 |

Salary sacrifice |   $0.00 | $17,350.00 |

Income from existing super |   $0.00 | $9,000.00 |

Taxable income |  $85,000.00 | $33,650.00 |

| | |

Tax |   |   |

Income tax payable |  $19,397.00 | $2,935.50 |

Medicare Levy |   $1,275.00 | $504.75 |

Low Income Tax...