Source
r/AusFinance•
rscortex

FHSSS and change in marginal tax rate

It seems to me that if your marginal tax rate (MTR) happens to be higher when you withdraw then you can lose out. This is because the tax saving going in is different to the tax paid going out.

As a rough example, say you contribute $10k when your MTR is 32.5%. You reduce your income tax by $3,250 but pay contribution tax of $1,500 so you save $1,750 straight away.

Then a year later, you have ~$8,908 in super ($8,500 + 4.8%, roughly the rate you earn in this scheme), but you pay (MTR - 30%) on withdraws.

If your MTR is still 32.5%, you withdraw $8,730, and with the $1,750 tax saving, you have in total $10,479.

If your MTR is now 37%, you withdraw $8,284, and with the $1,750 tax saving, you have in total $10,034. So you break even?

If your MTR is now 45%, you withdraw $7,572, and with the $1,750 tax saving, you have in total $9,321. So you end up worse off?

Is there something important I'm missing?

Posted Aug 8, 2018, 5:16 AM UTC

314
pandawelch•

If you go from 32.5% (<90k) to 45% (>180k) it's a bit hard to argue you are worse off... Don't forget you may lose other first home buyer concessions at this income level.

Even the third scenario is preferable to taking the $10k as normal taxable income whereby you will have $6750. Your first drawing figures are what you will end up with (~8k) not the 10k+ figures. You pay 17.5/21/30% tax total on your contribution as opposed to 32.5/37/45%

3
fraudsterSee You Next Tuesday kinda guy•

Not that simple. You forgot about the 30% tax offset at withdrawal, you forgot about the maximum withdrawal which doesn't have anything to do with your actual rate of return (say your super returns 100% on your 30k you won't be able to get 60K out...) and blah blah blah...

So like u/ramk88 said, you're really missing stuff... Here's some prescribed reading for you.

2
rscortexOP•

Not sure I follow - I did include the 30% offset, e.g.:

If there was $8,908 eligible to be withdraw, and MTR was 45%, then I pay 45% - 30% = 15% tax, which is $1,336 tax, which means I withdraw $7,572 as stated.

In regards to the "maximum withdrawal which doesn't have anything to do with your actual rate of return", if you are referring to the 4.8% return I mentioned, that is the rough estimate of "90-day Bank Bill rate plus three percentage points" which I thought was what the FHSSS allowed.

It seems likely I'm misunderstanding something but I have read the ATO information, perhaps you can point out the mistake?

1
rscortexOP•

Is it that the tax on withdrawl only applies to the ~4.8% earnings?

2
fraudsterSee You Next Tuesday kinda guy•

Nah, I'm a dork and didn't realise you did. My brain went into automode. You're still incorrect though xD because of a flawed look (bad order of operations). Perform analysis at each scenario and see the following link

I've done the analysis at each individual level without the saving and what each would get, then the scenario with the salary sacrifice taken at each level of tax (ie. no change in MTR) and then I've taken your changes in MTR. Even if MTR rose from 32% to 45% it would be a better outcome.

DISCLAIMER: did this quickly after a long bloody day at work... so I'm happy to accept if there are problems in my mathematics...

4
rscortexOP•

Ah ok I see, even though I wasn't meaning to compare to the non FHSSS path, I see now that's basically what I've done (I was more trying to compare the withdrawal at 32% to 45% MTR). While it is true that increasing the MTR decreases the amount of cash you get, I see that it's not "worse off" in the sense that you don't compare to $10k, you compare ~$7k (as in your calculation). Cheers for your help.

2
flintzz•

lol yea, i'm not sure they thought of this when creating the scheme, but seems like it will impact most when people jump down tax brackets after sacrificing, as it will jump back up the next FY. I wonder how MTR is calculated though, what if you're in between or even lose jobs when you withdraw?

2
rscortexOP•

Haha I hadn't thought of unemployment, I guess you probably wouldn't be buying a house in that case, but what if you were just working overseas? 0% - 30% = ...

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[deleted]•

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0
ramk88•

Is there something important I'm missing?

Yes

-4
rscortexOP•

Yeah I thought so, but what?

1
Stringthis•

You are effectively subtracting the $1500 contribution tax twice.

On the year you make the contribution you have two options: spend 10k pretax and get 8.5k in super or pay the tax and get 6550 outside of super. So just compare your super withdrawal numbers to 6550. So even your 7572 number comes out well ahead.

2
rscortexOP•

Ah yep got it now, cheers.

1