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HECS vs Super

Discussion in 'Accounting, Tax & Legal' started by Chris C, 16th Jun, 2009.

  1. Chris C

    Chris C Well-Known Member

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    OK the EOFY is coming up and I have some decisions to make...

    At this stage I'm trying to work out what is better, to either make a contribution to my Super or pay down my HECS (though I'm not entirely sure about the specifics of how HECS works).

    Here are a few of my details. This financial year I think I will have probably grossed around $100,000 in income from my business, thus far I have contributed nothing to my super, and I think I have an outstanding HECS debt of around $12K - $15K (I'm not entirely sure). And I also have $5,000 in savings and another $10,000 in shares (of which have been held less than 12 months on which some have achieved gains and others some losses) and I'd be willing to sell if that'd be advantageous.

    Anyway, so If I contribute money to my super, I'll only be taxed on those earnings at 15% right?

    Also I have read (though do not fully understand) that if I pay down my HECS early then I get a 20% discount. Is that still the case? And if so when do I have to pay it down by? June 30th? Before Graduation (I graduate July 22nd)? Or is it just before I submit my personal tax return for the 2008/09 financial year?

    The impression I'm getting is that I only need to pay it down before I submit my personal tax return and as such would I then be best off putting my into Super, then looking to pay down my HECS in full just before I submit my personal tax return? Given that I get get a tax reduction by contirbuting to Super this year as well as a 20% saving on my outstanding HECs debt next year.

    Are there any other things I should be aware of or thinking about? Or any relevant details that'd help in regards to giving me some suggestions?
     
  2. ashwright

    ashwright Well-Known Member

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    Hi Chris,

    I am pretty sure 'early' is the HECS-HELP cut-off date which is about 4 weeks after the start of semester. Ie you need to pay the HECS-HELP before the semester 'starts'. So since you have already got the debt. It is too late for the 20%.

    If you make a voluntary payment to your HELP debt you get a 10% discount. This is probably what you are talking about. The ATO needs to have this before the 30 June, if you do not want to pay the interest in that year.

    You can think of HELP as a loan which incurs about 4% interest (What ever the CPI (Inflation) is). And you are making capital+interest payments to this loan, which is taken from your paycheck/tax.

    My suggestion is to pay off the debts which have the highest interest rate first. Or invest the money in the highest after-tax rate you can find, if this is higher then the interest rate on the debt.

    See the HELP section for more information:
    Higher education loan schemes essentials
     
  3. jrc77

    jrc77 Well-Known Member

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    Chris,

    This website says that the indexation occurs on the 1st June.

    We were in a similar position with my wifes HECS/HELP debt last year and we decided to pay it off. My reasoning was something along the lines of:

    If we didn't pay it out:

    1. The ATO would take a "forced" payment of 8% of her income when the tax return was submitted (money already paid as part of her PAYG). This payment was going to pay about half her HECS debt.
    2. On the 1st of June it was going to be indexed to inflation.
    3. The remaining debt would be paid from "forced" payments over the next twelve months.

    So effectively would have been paying the debt over a 13 month window.

    Paying it out in full, we:

    1. Saved on the indexation (as we did it before the cutoff period).
    2. Got the 10% bonus for voluntary payments.
    3. Got back the HELP PAYG components in her tax return.

    As we would have effectively paid it over a little more than a year period I was quite happy with a 10+% guaranteed return for one year :)

    I didn't really consider the possibility of putting the extra money into Super (which I suppose would be pretax - making a savings there) as I have an issue with putting extra money into something that we can't touch for 35+ years when we will need that money for buying a family home etc. Also concerned that if I rely on Super the government will change the rules on it detrimentally.

    Regards,

    Jason
     
    Last edited by a moderator: 17th Jun, 2009
  4. Chris C

    Chris C Well-Known Member

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    Firstly I just want to say a BIG thanks. This definitely clarified a few things for me.

    That said one thing I probably didn't explain well was the fact that I haven't paid any HECS repayments this year because I personally don't earn an income per se given I'm self employed. I normally just make a lump sum HECS payment at the end of the year when I do my personal income tax return.

    When my accountant does up my quarterly business BAS statements and I pay the tax for that quarter, that doesn't factor any HECS repayments does it?

    Assuming it doesn't and given that I normally make my HECS repayment as a lump sum when I do my income tax return, does this mean that I have until my income tax return is due (October) before I NEED to make the voluntary payment (assuming I plan to pay the entire amount down) to receive the 10% discount?


    Given that I had to pay like $7,000 of my HECS down last year and will be forced to pay 8% of my income this year (which will be another $7K or $8K) I guess I'm interpreting the 10% saving I could get by paying my HECS down early as "interest" on the debt.

    This is the sort of situation I'm in.

    I have the same issue, thus the reason why I don't put a lot more of my money in Super. Though at the same time I'm aware that when your additional income reaches the 40% tax bracket sacrificing every dollar in the 40% tax bracket saves/makes me 25%.

    So my plan at this stage is something like this, make a payment of somewhere between $5K - $10K into Super before June 30th to get the 25% net saving on tax. Then save up and pay down my outstanding HECS debt by October when my individual tax return is due to get the 10% saving on the voluntary payment.

    Does this sound like the most tax effective way of proceeding?
     
  5. ashwright

    ashwright Well-Known Member

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    You would have to ask your accountant about this.

    I agree with you here, if you have paid of the debt before your tax return goes in. There is not more debt to pay off, hence the ATO has no need to take the compulsory payment.


    Yes, Question would be how long does it take to pay off the debt. If you are looking at 2 years, then you could consider that the 10% bonus as equivalent as about 5%pa. So the total cost of the debt is closer to 9%pa (3.9% CPI+4.88% early payment).


    I also think the legislative risk in super 30-40 years out is quite high. Just look at what they are doing to the pension age. Hence I am not putting any extra money into super.

    I think this sounds reasonable, It is your money. You should be happy where you spend it.

    Ash.
     
  6. Chris C

    Chris C Well-Known Member

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    Yeah it would be around 2 years I'd imagine, maybe less. Either way though, I guess a guaranteed 9% return in the current climate isn't anything to turn ones nose up at.


    I guess it all comes back to risk vs reward. That said I'm definitely not putting all my eggs in the "Super" basket.


    I'm happy just as long as my money is making more of itself...

    :p

    Thanks again.