The Power of 2

Example – The power of ²

The long-term benefits of spouse contributions and Government co-contributions

Let’s take David and Michelle’s situation as an example. David has established a Plum ESP account on behalf of Michelle.

David

40 years old
Works full-time and earns $80,000 p.a.
Receives a year-end bonus of $5,000

Michelle

40 years old
Works part-time and earns $10,000 p.a.
No other taxable income

David pays tax* on his $5,000 bonus at his marginal tax rate (leaving $2,925).
$1,925 is contributed into Michelle’s ESP account by David – a spouse contribution.
Michelle uses the remaining $1,000 to contribute to her ESP account – an after-tax contribution.
Michelle is entitled to a Government co-contribution of $1,500 for the $1,000 after-tax contribution.

Example 1

Imagine if David and Michelle applied this same strategy over the next 25 years until retirement.

They would have $160,000 more in Michelle’s ESP account had they not applied the same contribution strategy!

* Including the 1.5 per cent Medicare levy. Tax rate and threshold based on 2007/2008 marginal tax rates. David’s marginal tax rate: 41.5 per cent; Michelle’s marginal tax rate: 16.5 per cent including Medicare levy.

Assumptions
David’s entire bonus of $5,000 is contributed each year until retirement age 65. Moderate investment portfolio for super and non-super money. Return for super investment 8.0 per cent p.a. after fees and taxes and return for non-super investment 8.5 per cent p.a. after fees, tax is paid by the investor rather than in the fund. Inflation rate 3.0 per cent p.a. and salary growth rate 4.0 per cent p.a. No administration fees are assumed. Contributions tax 15 per cent p.a. Franked income in the moderate portfolio: 23.8 per cent. Income return: 3per cent and capital gain return: 5.5 per cent Non-super investment pays a distribution at the end of the year based on 3 per cent income return, taxed at the investor’s marginal tax rate and net amount re-invested at year end. At age 65, the non-super investment is redeemed and CGT is paid using the 50 per cent rule. No lump sum tax paid at age 65. Super contributions or non-super investments are made at the end of each year and are not indexed. These calculations comprise additional contributions and do not take into account the Superannuation Guarantee. Maximum co-contribution rate of $1.50 per $1.00 paid at the end of the year. Spouse rebate is 18 per cent of spouse contribution up to $540. Investment performance can go up and down over time and the assumptions used may vary. Results rounded to nearest $1,000.