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Tax cuts – making smart choices

The Federal Government’s tax cuts kicked in during November, with millions of Australians saving up to $47 a week. The cuts are designed to stimulate a struggling economy. But what should you be doing with your extra funds?

tax cuts

The tax cuts are being backdated to July 1, 2020, and under the changes, the top threshold for the 32.5 per cent tax rate will rise to $120,000 from $90,000, giving this group up to $47 a week extra. The top threshold for those on the 19 per cent rate will increase to $45,000 from $37,000. The low and middle-income tax offset of up to $1,080 will be extended for one more year. Receiving this offset is dependent on the size of your taxable income.

So how can you get the most out of your extra money?

Pay down your debts

One of the smartest things you can do is pay off any debts that are attracting a high interest rate, including credit-card debt or personal loans. It’s usually best to prioritise by paying off those debts with the highest rates first. Contributing more to paying these off will reduce your interest bill, potentially saving you thousands over time. Once you’ve paid them off, use the extra money from your tax cuts to build up an emergency fund so you don’t need to reach for your credit card next time you have to fund a major purchase.

Start a savings plan

What you do with any extra money you receive comes down to your personal choices.

However, the latest tax cuts make saving a regular amount easier. Consider making a savings plan by saving 10% of your gross salary. With the latest tax cuts you are unlikely to miss that money when you put it aside for your long-term wealth.

Set up an investment plan

Leaving your money in the bank at the current record low interest rates is unlikely to generate the type of wealth you need for your financial future. You may want to think about setting up a savings program and placing the extra funds from the tax cuts into a managed fund of market-linked investments for a longer investment time frame of, for instance, 10 years or more.

Managed funds typically distribute capital gains on the sale of underlying investments regularly. This can help smooth overall returns and avoid an excessive capital gain in any one particular year. Where assets are held for at least 12 months, you may be eligible for a discount on the capital gain.

Please talk to your financial adviser before setting up an investment fund.

Increase your super contributions

Super is one of the most tax-effective ways to save for your future given that the earnings in the fund are subject to a maximum tax rate of only 15 per cent. But, don’t forget, once you contribute to super, it’s generally not accessible until you retire or meet another condition of release.

The benefits of property ownership

If you don’t yet own any property, given the low interest rates, you may want to consider getting a foot on the property ladder, either by purchasing an investment property or buying your own home. The extra funds from your tax cuts can go towards building a healthy deposit so you need to borrow less.

How you use your extra savings, depends on your circumstances. Instead of spending it all, consider saving or investing it for your future.

If you’d like further advice on your saving options, contact your financial adviser. If you don’t have an adviser, we can put you in touch with one.