Maximising Wealth for High-Income Earners
Business owners, ambitious professionals and high-income earners face a unique set of financial challenges and opportunities. While earning a substantial income provides the foundation for wealth creation, it also brings with it the responsibility of managing investments wisely and optimising after-tax outcomes.
This is especially important given that the highest earners shoulder a disproportionate tax burden, with the top marginal tax rate sitting at 47 per cent. Indeed, the top 10 per cent of taxpayers account for more than 50 per cent of the income tax revenue per the Parliamentary Budget Office.
For high-income earners, owning assets personally and having them taxed at marginal tax rates may not be the most efficient method for building wealth. Instead, you should consider alternative vehicles for maximising after-tax income including superannuation and investment bonds.
Tax Efficient Structures – Make Your Income Work Harder
Superannuation is a concessionally taxed structure for ensuring sufficient income in retirement. Concessional (before-tax) contributions including superannuation guarantee and salary sacrifice arrangements are taxed at a flat 15 per cent tax rate. Non-concessional (after-tax) contributions are not taxed upon entry. Investment earnings in the accumulation phase are taxed at 15 per cent, and that’s before accounting for franking and tax offsets.
There are annual limits on how much can be deposited into super, however, high-income earners can capitalise on carry-forward provisions to take advantage of the concessional tax benefits. As your wealth increases, you may be able to expand your investment options and take more control of your superannuation via a WRAP platform or self-managed super fund (SMSF).
Alternative Investment Vehicles: Flexibility Before Retirement
Investment bonds are another alternative. Income is not assessed in your own name and instead paid by the providers at a tax rate of up to 30 per cent. The real tax rate is often much lower once franking and tax offsets are accounted for. Investment bonds also have the added benefit of being accessed before retirement. To gain the full tax benefit, capital in the investment bond should not be withdrawn for ten years.
Strategic Growth and Protection: Align with Your Goals
While in your prime income-producing years, it’s critical to implement an investment strategy that aligns with both your investment horizon and risk profile. Often this will involve sizeable allocations towards growth assets, such as equities, to ensure your capital is growing and not being eroded by inflation. Having a portfolio tailored to your goals and objectives, with transparent assets under management aiming for outperformance, can give you a greater benefit leading into retirement.
Beyond the headline growth of the portfolio, high-income earners also need to consider and protect themselves from adverse events. This includes reserving funds to maintain your lifestyle should asset prices decline, in addition to regularly reviewing income, disability and life insurance. A trusted adviser can also offer alternatives you might not be aware of, such as hedging, to mitigate drawdowns in your portfolio.
Building and protecting wealth when you’re a high-income earner isn’t just about what you make – it’s about how well you structure it, grow it and protect what you keep. With the right advice and a plan tailored to you, you can feel confident your money is working as hard as you do. If you’d like to talk through what’s possible, we’re here to help.