COMPANY NEWSLETTER | March 2023 issue
In this edition:
Prepay the mortgage or make extra super contributions?
Staff shortages: Are employers price takers?
Small business must race to beat instant asset write-off deadline
Should I prepay the mortgage or make extra contributions to my super?
Many people question why they should make extra contributions to superannuation when their spare cash could be used to pay down the home mortgage.
With interest rates rising, mortgage prepayments may appear more attractive, but it is worth considering the benefits of additional super contributions to your overall wealth planning.
Making extra mortgage repayments can be a good strategy to reduce the amount of interest paid over the term of the loan and the number of years required to repay a home loan.
Additional loan repayments result in a guaranteed return equivalent to the interest rate of the loan and is risk free.
Investing spare cash elsewhere would need to generate an after-tax return greater than the interest rate of the loan to be more appealing than mortgage prepayments.
The disadvantage of extra mortgage repayments is the opportunity cost of not investing the cash available. Generally, where the mortgage represents less than 50% of the value of the home, consideration could be given to alternative ways to invest spare cash, such as adding to superannuation.
Extra concessional (deductible) contributions can be a tax effective way to boost an individual’s superannuation balance to allow for a more comfortable retirement. Given restricted contribution limits, individuals need the benefit of time to build up their superannuation balance. In retirement, the most tax effective place for investment wealth to be is within superannuation.
Consider the example of Steve, a professional earning a salary of $200,000 with a home mortgage of $850,000 at a variable rate of 5.67%. Steve has spare cash available each year of $6,000.
If Steve uses the $6,000 each year to make additional repayments on his mortgage ($500 per month) he’ll receive a return of 5.67% and pay down his mortgage four years earlier.
Alternatively, Steve could invest the $6,000 per year into superannuation by salary sacrificing $500 per month. This would result in an annual tax saving of $1,920 including the 15% tax paid on the contribution made to superannuation. This is a 32% return on the $6,000 invested, already putting him ahead of the extra mortgage repayment strategy.
In addition, the investment in superannuation would boost his balance and generate annual earnings. Assuming Steve invests in a growth style portfolio with 80% in growth assets and 20% in secure assets he would likely achieve the hurdle rate of 5.67% a year after-tax over the long-term.
While paying down non-deductible debt should be the priority, it is worth considering the benefits of additional contributions when the mortgage represents less than 50% of the home value. A multi-strategy approach to wealth building can allow individuals to grow both their lifestyle and investment assets.
Things to consider:
Access to superannuation is restricted until at least age 60. Individuals must be prepared for extra contributions to be inaccessible and invested in superannuation long-term.
The annual concessional contribution limit is $27,500 and includes superannuation guarantee paid by an employer, salary sacrifice, and contributions claimed as a personal deduction.
The tax benefit is immediate where contributions are made via salary sacrifice.
Contributions above the annual limit of $27,500 may be possible where the individual has carried forward concessional contributions available for those with a super balance under $500k.
Superannuation contributions rules are complex, so it is a good idea to seek advice on the best strategy for you.
The swings and Roundabouts of staff shortages
Paying handsome salaries has become essential to recruit, but that means staff have a responsibility too.
Whenever matters concerning money come up, there’s an instant switch in most of our brains. We change gears and step into a mental space that considers two opposing sides of a situation.
While salaries haven’t increased greatly over the past decade, but the cost of living has immensely, we have to ponder the ethics around pay and salaries.
Paying employees well is, of course, a non-negotiable; But it must go both ways. Pay people what they are worth but hire employees that are authentically and genuinely invested in the health of the business.
At the end of the day, business owners must position themselves to pay well, or the job simply won’t be done with genuine interest and investment in the outcomes of the business.
Overdue increases
At the same time, the world is seeing wage increases, that perhaps should have happened over the past decade, come roaring into the market now as employees demand higher salaries. Much of this can be attributed to COVID when the tables were turned. Where employers may have previously advertised a position at a certain salary bracket, employees are now arriving at interviews with expectations on what to look for.
Many employees are only interested in work-from-home opportunities and refuse to accept anything else. At the same time, there seems an all-time low interest in taking opportunities because of great work environments, career advancements, healthy workplace cultures, and workplace interaction are on offer. Instead, employees are focused on financial benefits and the flexibility of a hybrid-work environment first and foremost.
How did we get here?
Why are employees demands now entertained, and how have the power dynamic shifted? COVID and it’s restrictions have slowed the influx of skilled workers and students entering the country. Additionally, the fact that Australia had some of the most stringent lockdown regulations in the world has deterred many skilled workers and students that may have entered the country from doing so. This leaves Australian businesses in a battle to find reliable, affordable, skilled staff for their businesses.
In short, the skilled worker shortage is resulting in slim pickings for businesses, and almost zero affordable labour. Workers are asking for higher rates of pay than what many businesses are able to afford.
Where businesses may have found a unicorn previously, a talented youngster willing to work and learn their way up at a low wage, we’re seeing demands for higher pay rates across the board.
Additionally, the work-from-home opportunities have driven the labour prices up across the country, especially in rural settings and small towns where they were traditionally lower. Larger firms are now hiring remotely, giving people in small towns the opportunity to earn higher salaries, applying pressure on firms in those exurban areas.
Name your price?
It’s an employee’s market, as a worker you can name your price. If, as a business owner, you want to get the work done, to a degree, you have to grin and bear it.
The fact is that the cost of living has increased exponentially and workers are responding to that. The downside is that businesses have little alternative but to accept the terms employees are asking.
As a result, prices go up or business profits go down, it requires greater resources and time to find suitable candidates that fit into the company’s budgets and requirements, and we then see the cost of professional services rising, which sets in motion a vicious cycle.
While the current times are not easy, having compassionate, open-minded, and expert guidance can make all the difference for businesses seeking to navigate their way to a prosperous state in their niche.
Small Business must race to beat instant asset write-off deadline
Once the scheme ends, more onerous depreciation rules return from July.
Small business will need to race to beat the cut-off date for the instant asset write-off scheme, or become ensnared in “significant red tape” once more arduous rules came back into force.
The deadline would catch many SMEs unaware, and after 30 June they would need to depreciate any asset over $1,000.
For businesses with a turnover above $10 million, the threshold is $100.
The instant asset write-off (IAW) for small business has been part of the landscape since 2015.
During the pandemic, the government introduced temporary full expensing as part of its support package for all businesses regardless of size.
Now both these popular initiatives, which encouraged owners to invest in their businesses, “Many business owners hoped these initiatives would be rolled forward but the new federal government has different priorities.”
One of the biggest issues were the massive difference between accounting for the occasional big-ticket item of say, $30,000, and doing the same for any asset over $1,000 (or $100 for larger businesses).
“It’s also important to note that supply chain issues mean even if you wanted to access the instant asset write-off, you must ensure the asset is installed and ready for use by 30 June 2023 or you can’t claim it.
If you have concerns regarding asset write off’s in your business, feel free to give your account manager a call and they will be able to privately assist you with advice relevant to your situation.
