The 2020-21 Federal Budget announcement unleashed a raft of measures aimed to get people into jobs, create new jobs, invest in sectors that we need for the future, and reductions to income tax rates to help households by putting more money in their pockets to ease pressures or for consumption spending back in the economy. But don’t leave me, I promise this isn’t going to be boring economic waffle. This tax saving is what I’m going to talk to you about in this blog, but most importantly how you can unleash it to benefit yourself longer term if you’re so inclined!
Now the tax saving will obviously depend on what you earn, so I’m going to base it on a household where we have a couple and each is earning around $125,000 before tax. The reason I’m picking on these earners is because they are going to see some decent tax savings, around $2,600 each, or $5,200 for the household!! What a great “pay rise”. So immediately the brain starts to assess the hundreds of frivolous spending options that this could cater to, like a week long down south getaway, an extra $100 a week to spend on clothing and shoes, a new sofa or fancy french door fridge, a bedroom makeover, and the list goes on. Now these are not my specific ideals in case you’re wondering. I’m immediately in financial planner mode – think saving, investing, accelerated debt reduction or additional superannuation contributions for long term retirement saving (for more tax savings!).
But hey, if you take a small part of that to spend or increase your standard of living (not that our $250K household should need to) then there should still be plenty to allow for financial strategies.
Savings
Savings once upon a time would generate a return, called interest, for placing your money with a bank or authorised deposit-taking institution if you prefer to call them that. These days with the Reserve Bank cash rate at a meagre 0.25%, you can kiss your interest goodbye as money in the bank is really just about safety as opposed to generating much in the way of interest. You’re likely to earn less than 1% on most reward saver accounts. But don’t complain to your elders because they will tell you about the late 80’s when interest rates were 18% and all they had back then was debt. Now that they’re retired they are getting nothing. It’s all true, but I digress.
Do you want to put your extra pay into a savings account for a rainy day? You may want to, but earnings on that aren’t going to be your driving reason. Alternatively if you have a home loan with an offset account, they can be a fantastic place to park cash because you will save interest on the home loan which is probably in the 2-3% range, plus you don’t have to pay tax on that.
Key point here is to automate a transfer so you don’t have to think about it and you don’t have chance to spend the extra earnings first.
Debt Reduction
Credit cards, car loans, personal loans, interest free store cards, home loans (hopefully no afterpay!)…. have you got a list of debts that could use some extra money going towards them? Debts can stop us from living the life we want as well as create an enormous amount of financial pressure, so they certainly should be considered when you find yourself with extra money in your pocket. In my financial advice business, we like to domino debts, starting from the highest interest rate first. Or if you have a small liability that could be knocked over in a few months (a quick win) you could start with that one first. If there are too many debts and the order of priority is confusing you, seek personal financial advice.
The good thing about paying off one debt at a time is that you can see clear progress, and once one is paid off, redirecting that repayment to the next debt will see things improve exponentially. Then say after me… though shall not accrue more debt on said credit card now that it’s been paid off. Though shall continue reducing overall debt and not use that extra cash flow to fund additional debt (unless it’s a good one for investments and you’re in a strong position to begin with).
Speaking of debt – I once came across a guy who borrowed $20,000 on a credit card at 25% p.a. interest (the higher cash withdrawal interest rate) to invest in the share market. I’m pretty sure that was just before the Global Financial Crisis too. Shares are not a quick-win and this is never a good idea. He was in an extremely poor overall financial position already. He subsequently declared bankruptcy as there was no other way out of his financial mess.
Investment
Having studied economics and having an early passion for the world of investment, this is one of my favourite topics. It’s never too early to start investing, in fact, the earlier the better due to the power of time. But you have to be in a sound financial position to even think about investing – ie. having money in the bank for emergencies, having debts well controlled, because money you put into investments is intended to be left there for a long period of time to do it’s work.
The investment universe is broad, including things such as direct shares, exchange traded funds, managed funds, investment bonds, precious metals, mortgage backed credit funds, listed and unlisted property trusts, direct assets (for the record I don’t consider cryptocurrency an investment). Obviously this tax saving isn’t likely to buy you a direct investment property so I won’t touch on that. But many of the others listed are available for you to start small and grow your investment portfolio over time. You should do a bit of research of your own but if in doubt, always seek professional advice to help determine your investment strategy. Some investments are easier for one-off lump sums, and others are handy for regular investment savings plans. I can’t really say too much here without crossing a line but do explore your options carefully.
Superannuation Contributions
Superannuation can be added to on an ad hoc basis, usually for non-concessional contributions however these can also potentially be claimed as a tax deduction. There is a process to follow if you do wish to claim a lump sum super contribution.
Alternatively you can contribute regularly to superannuation, and this can be done through payroll in the form of salary sacrifice (most employers allow this). Salary sacrifice superannuation contributions are taken from your gross (pre-tax) earnings, then they are sent off to your superannuation fund where they are taxed at the superannuation tax rate of 15%. The benefit of this is if your personal marginal tax rate is higher than 15%, and in our case this couple are on the 39% tax rate, so they could save 24% tax in every dollar that they salary sacrifice into superannuation. So tax savings and more money for retirement are some of the advantages of this strategy. The downside is that superannuation is preserved, so depending on your age, you may not be able to access your superannuation for quite a while, usually 60 years of age and once you’ve met a condition of release such as retirement.
Those earning $125,000 could potentially salary sacrifice $4,000 per year pre-tax to utilise all of their new tax saving. Be careful though – there is a cap of $25,000 on concessional contributions which includes what your employer is paying in SGC. If in doubt, seek personal financial advice.
So what are you going to do…?
Ok so that’s a wrap up – and you may like one or several of the ideas that I’ve just given you. I hope that helps you see that there are many powerful uses for a tax saving, and it can be a great starting point to improving your long term financial position. Grab out a note pad, start jotting down some priorities, some issues you might be facing, and some goals, and then think about how you can best apply this extra cash flow to work towards fixing those problems or realising those goals. You could be amazed at the path it can take you on if you put those plans into action.
Shonel x
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Unless specifically indicated, the information contained in this blog is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek personal advice from a financial adviser.
Shonel Vuletich is an authorised representative of Synchron, AFS Licence No. 243313.
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