Financial Advisers For High Income Earners

The rate for concessional contributions to super is 15%, while your marginal rate is up to 47%. This is one of the most powerful tax strategies available to high-income earners, and most people don’t utilise this to its full potential. For the 2024-25 financial year, the concessional contribution cap is set at $30,000. This includes your employer’s Superannuation Guarantee payments and any salary sacrifice payments, and any other personal deductible contributions you make and claim during tax time.

If your employer is contributing $25,000 via the SG, you have $5,000 of available space in the cap, and you can salary sacrifice this or make a personal contribution and get a tax deduction for it. At a 47% marginal tax rate, this saves you around $1,600 in tax compared to taking this amount in salary alone. This is a substantial amount over a 10-year period with compound returns. To get a detailed explanation of exactly how each type of contribution is taxed, refer to our article on tax on super contributions.

The key here is coordination. Your salary sacrifice arrangement needs to be coordinated with your employer contributions to make sure you are not inadvertently exceeding the cap and incurring additional tax. This is another place where having an adviser who understands super and your tax situation in full context can be valuable.

The manner in which assets are owned is just as important as the assets that are owned. For high-income earners, the difference between owning an investment property in your own name versus a family trust or a company structure can save or cost tens of thousands of dollars every year in tax liabilities.

Family trusts allow you to distribute income to beneficiaries who can receive it at a lower marginal rate. If your partner earns less than you, or if you have adult children earning less than you, a discretionary trust can be used to shift investment income from you to them. There are costs associated with establishing a trust, such as tax returns, possible land tax surcharges, and accounting fees. A trust arrangement needs to generate enough benefit to offset costs.

Companies offer a flat rate of 25% or 30% depending on turnover, which may be beneficial if you want to retain and reinvest profits. However, drawing out cash from a company has its own tax implications. This structure may be more appropriate for some investment strategies than others. Bucket companies, in combination with trusts, may limit your marginal rate of tax on income to 30% rather than allowing it to flow to your 47% marginal rate.

The key to the right ownership structure depends upon your sources of income, your family situation, your investment goals, and your desire for administrative complexity. There is no one answer, and that is precisely the point: there is a need for individual advice from someone who is familiar with the current regulations.

If your income and concessional super contributions combined exceed $250,000, you’ll be subject to Division 293 tax. This is an extra 15% tax on the lower of the two amounts: the concessional contributions you made and the amount by which you went over $250,000. In other words, this tax doubles the tax on some or all of your super contributions from 15% to 30%.

While most high-income earners are aware of the Division 293 tax, few are aware of the strategies to minimise it. You receive a notice from the ATO to pay this tax after you lodge your tax return, and you have a choice of paying from your super or from your cash flow. Paying from your super maintains your cash flow but reduces your future super balance, while paying from your cash flow maintains your super balance but reduces your liquidity.

The opportunity to plan comes in the timing and composition of your contributions. In case your income varies over the years, as is often the case for business owners and contractors with variable bonus structures, there may be years in which your income is slightly below $250,000, and therefore Division 293 taxes do not apply. In higher-income years, some contribution strategy may be shifted to non-concessional contributions or even to investments outside super, where the tax rate may be more beneficial than the 30% within super.

This is one of those areas where a few thousand dollars of good advice saves five figures of unnecessary tax over time. It is also an area where most generalist advisers gloss over the detail, because they’re not dealing with clients above the threshold regularly enough to know the planning angles.

The choice is not necessarily binary. Most people in the higher income bracket should be doing both, and the proportions will depend on your age, your access to contribution cap space, your cash flow requirements, and your retirement goals.

Within super, investment earnings are taxed at a maximum rate of 15% during the accumulation phase, whereas in the pension phase, there is no tax. Outside super, investment earnings are taxed at your marginal rate, which is a maximum of 47%. However, if you have a capital gain held for more than 12 months, you receive a 50% discount. The tax differential is obvious. What may not be immediately obvious is the trade-off: every dollar you invest in super is a dollar you cannot access for 15 or 20 years.

In a scenario where a 48-year-old surgeon with a salary of $600,000 is seeking to maximise his or her superannuation for a comfortable retirement, this is a good strategy. However, if this individual wishes to save for their children’s education, a holiday home in five years, or a liquid investment portfolio in case of a fall in their practice, they must put in place a second wealth creation strategy that is outside of their superannuation environment. These strategies must be integrated with one another and considered together as one plan. Our guide to the best investment options for high net worth individuals examines this in further detail.

High earners tend to accumulate a portfolio without even being aware of it. You could have a superannuation portfolio of $1.2 million, mainly composed of Australian shares, and also an investment property in Brisbane, along with your main residence. This is a portfolio that is highly skewed towards Australia, with a high amount of property and not a lot of international diversification.

True diversification of investment portfolios requires spreading capital across different asset classes that react in different ways under different economic circumstances. Australian and overseas shares, fixed income securities, real property (including direct and listed forms), private equity if appropriate, and cash or cash equivalent securities all serve different functions in a portfolio. The appropriate mix depends on your risk profile and your investment horizon, and how much volatility makes you lose sleep. We’ve written in detail about why this matters in our article on the importance of diversification in investments.

Our approach at Solace Financial is to create investment portfolios through our proprietary Separately Managed Accounts. This means that we create a portfolio that is unique to you as an investor. You own the underlying shares and bonds outright. We can make adjustments based on your tax position and avoid industries that you do not want to own. We manage capital gains in real-time rather than waiting until June and doing what a mutual fund wants to do.

Your concessional contribution cap does not have to be a use it or lose it proposition. Unused concessional cap for the last five years can be carried forward to a future year, provided your superannuation balance was below $500,000 as at the last 30th June, from 1 July 2018.

This is particularly useful if you have had a recent increase in your income level. For example, if you have been working for three years on an income of $120,000 and only contributing the SG minimum, and then you go into a position where you earn $350,000, you could have available to you an unused “cap space” of between $30,000 and $50,000, which you can use in one year by salary sacrificing or making a personal deductible contribution. The tax benefit of this “catch-up” contribution, from 47% to 15% or 30% in a superannuation environment, is substantial. For a broader overview of how all of this fits together, our article options to build your superannuation and lower your taxable income explores this in more detail.

The simplest method for most employees is salary sacrifice. You make an agreement with your employer to sacrifice part of your pre-tax salary to your super. It reduces your taxable income, and you reduce your Medicare Levy Surcharge liability as well, provided you don’t have existing private health insurance. The key thing to watch is your cap. You are taxed at your marginal rate and then penalised with interest on concessional contributions.

The idea of direct control over your super investments is attractive to high earners who desire greater control than a retail or industry fund can provide. You can select the investments and the investment strategy, down to the service providers you wish to utilise. If you are a high net worth individual with a super balance in excess of $500,000 or $600,000, then SMSFs can provide significant benefits to you, including direct property ownership, greater investment options, the capacity to own collectibles or unlisted assets, and potentially lower costs as a percentage of your balance.

However, an SMSF also comes with some serious responsibilities. You are a trustee, which means you are responsible for ensuring you comply with super law, annual audits, actuarial certificates if you have any pension members, and lodging a tax return. The ATO takes SMSF compliance seriously, and if you get it wrong, you will face severe penalties.

The break-even point for the fees varies from case to case, and for a rough guide, an SMSF becomes cost-effective when your combined member balance is more than $400,000 to $500,000. Otherwise, the fixed costs of administration and accounting will erode your returns more than a well-chosen industry or retail fund would. Our detailed guide on whether an SMSF is worth it covers the costs and obligations in detail.

We assist clients in deciding whether an SMSF is appropriate for their circumstances. To some, the benefits of having complete control and flexibility may outweigh the administrative burdens of running an SMSF. To others, a well-managed individual super account may provide the same financial benefits with fewer administrative headaches.

Solace Financial holds its own Australian Financial Services Licence. We are not a franchise or aligned with a bank, and we are not locked into any product provider’s shelf. This is important as it means that all advice we provide is in your best interest only and we are not biased towards any one product provider.

Independence in the Australian financial advice industry is a rare commodity. Many firms claiming independence are still operating through a licensee, which may restrict what they can recommend or take a margin on what they sell. Our AFSL gives us control over our own compliance, our own product list, and our advice process from start to finish. This provides you with a personal service focused on your financial goals.

Joel Carty is a Certified Financial Planner (CFP) and a Chartered Tax Adviser (CTA) with the Tax Institute, and this is a rare combination of qualifications in a financial planning firm, and it makes a difference in what we are able to offer.

The majority of financial advisers understand the basics of tax. A Chartered Tax Adviser has completed a level of education in tax at a postgraduate level and is able to recognise tax planning opportunities where tax law and super law overlap, especially where investment structuring is concerned. In high income earners, where a good tax plan can save them $30,000 to $40,000 per annum better than an average tax plan, being able to do it themselves, rather than outsourcing it to a separate accountant who doesn’t have the complete picture, can be a significant advantage.

This is particularly relevant for clients with complex ownership structures, multiple income streams, investment portfolios, and/or self-managed superannuation funds. The tax implications of every financial decision are assessed in real-time during the advice process.

Our approach to client investment portfolios is to use our own Separately Managed Accounts and not to put them in third-party managed funds. This is a big difference.

With a pooled managed fund, you’re an investor in the units within the fund, and there are thousands of other investors as well. The manager makes decisions on when to buy and sell, and capital gains distributions are made to you at tax time, whether you wanted them or not. You have no control over when these are made, nor can you manage your own tax position.

In our SMAs, you own the underlying securities directly. We can utilise capital losses in your specific portfolio to offset capital gains in other areas, and tailor your portfolio to your unique risk profile and investment horizon. If you wish to exclude specific sectors or add specific themes to your portfolio, that’s possible too without impacting any other client’s portfolio. You can read more about this on our page about our investment management services.