The quiet Australian has spoken and this time, Canberra has listened. All three stages of the coalitions tax cuts have been passed by parliament, meaning many Australians will have more in their pocket to spend. That is precisely what the government wants you to do in order to kick start the economy. I suggest that you get money smart and do the exact opposite.
What exactly are the tax cuts and when do they apply?
Stage 1 is retrospective and applies to the last financial year and runs through to 2021/2022 when more changes come into effect. This will see immediate tax relief for low and middle income earners of up to $1,080 or up to $2,160 for some dual income families. The maximum offset of $1,080 will be available to those with taxable incomes between $48,000 and $90,000 with a tapering either side of these brackets. The ATO has reported a significant increase in early tax return lodgements as people are trying to capture this refund as soon as possible.
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Stage 2 will take effect from July 1, 2022 where the government will start changing the tax brackets permanently. The cut off for the 19% bracket will increase from $41,000 to $45,000 and the low income tax offset will increase from $645 to $700. This builds on an increase to the 32.5% bracket from $90,000 to $120,000 which the government had already made into law.
Stage 3 will see a significant change that kicks in from 1 July 2024 affecting around 13.3 million taxpayers who will permanently pay lower taxes. This change is essentially a “flattening” of the tax brackets where 94% of Australians are anticipated to have a marginal tax rate of 30% or less. Those earning between $45,000 and $200,000 will have a top marginal tax rate of 30%.
What are you going to choose to do with your tax saving?
If your first instinct is to go out and indulge (after all, this is money that you wouldn’t otherwise have), just take a moment to stop and think. It is a bit like eating chocolate cake – we all enjoy it at the time but often regret it afterwards. If you want to make a change and feel good about how you manage your money, this is a great opportunity to make a different choice.
Ask yourself if money is causing stress, strain or anxiety in your life? If you answered yes, then you are most certainly not alone. Financial strain is known to be one of the leading causes of relationship breakdowns and health related issues globally. We tend to think of money as being separate and distinct to other aspects of our lives, but it’s not. It is often far more intertwined and connected to our overall well-being than we realise.
So commit to making a good decision and do it for your overall health and well-being.
In terms of what to do, the options are varied. You could pay off credit card debt, use the tax savings to create an emergency buffer or set it aside to pay bills. Others may choose to add it to their mortgage offset, pay it directly off their home loan, make an additional contribution to super or invest it for example.
Determining the best option for you will depend upon your particular circumstances. Here are my top 5 tips to consider:
Start by preparing a budget (please stay with me here). There are a lot of good tools and apps online, I quite like the ASIC Moneysmart Budget calculator because it’s free and easy to use. www.moneysmart.gov.au. You will be able to calculate what you need to live on and how much you can save – don’t forget to include the additional tax savings. It is essential that your budget is realistic, so you will need to stress test it. As we are all creatures of habit, go back over six months of your bank statements and highlight essential and non-essential expenditure and then check what you actually spent versus what your budget it predicting. This will help you to understand where your money is really going. From there you can start to decide where you can re-direct money to help you get control back.
Once you know your capacity to save, you can then make a plan. Don’t forget to monitor your spending against your budget on a regular basis – I suggest monthly. Commit to this for a minimum of three months to establish the habit after which you will find it easier to make it just something that you do.
Now think about your short, medium- and long-term goals. If you are in a relationship it is really important to do this as a couple. Some examples of goals could be paying a lump sum off a credit card debt, car loans, personal loans, building an emergency cash reserve or setting it aside for bills. Medium term goal could be things like saving for a holiday or home renovations. Long term goals may be paying off your residential mortgage before retirement, targeting early retirement, saving for an investment property or building an investment portfolio.
From there – prioritise your goals and decide how much of your savings to allocate to each. Setting up you banking for autopilot can really help with automatic transfers that match your budget and goals. Another tip is to break it down into weekly blocks for day to day living and then set aside money separately for bills and goals.
If you have a credit card debt and find that you are unable to fully pay off your balance before the interest falls due each month or only managing to pay the minimum payment, it is usually a signal that you may be spending more than you earn. In that instance, consider cutting up your card and replace it with a debit card. As a society we have normalised buy now pay later and credit cards which plays havoc with our financial lives. The tax refund will give you a head start to get the debt knocked off even sooner.
Paying extra into your residential mortgage or mortgage offset account is a good option for many as your residential loan is non-deductible. Jump online and use an online calculator to see how much interest you can save, as well as the years you can shave off your home loan. My favourite thing in the world is compound interest – self-confessed money geek. Interestingly, Albert Einstein called compound interest the eighth wonder of the world and I have to agree! Paying extra off your mortgage is compounding in action. Don’t just pay what the bank dictates.
Making an additional contribution to your super can help with boosting your retirement nest egg and has the added bonus that you will be investing in a low tax environment (15% on earnings). Before making a contribution however, do some research and consider getting advice as our super system is really complex! There are specific rules about how much you can contribute, the types of contributions you can make as well as your eligibility to contribute. The ASIC moneysmart website is a great resource to boost your financial literacy in this area. Bear in mind that you cannot access your super until you meet a condition of release which varies from person to person.
You may be eligible for the government co-contribution where you can contribute up to $1,000 to your super (after tax money) and the government will match it with up to a $500 contribution. It is essential that you check your eligibility for the co-contribution first, as there are multiple rules that need to be met in order to qualify….
Most Australians will blow their tax cut or simply have no plan at all. A much smaller number will do the opposite. Which one will you choose to be ?