Welcome to Finance and Fury

You might have seen the budget that came out last week – in this episode we will be looking at the bringing forward of the tax cut – but also using this as an opportunity and what to do with it

The budget and the tax cuts –

  1. The Government passed its Budget tax cuts last Friday, after bringing forward major cuts slated for July 2022 to July 2020
    1. So this tax cut will be back dated –people will get a refund at tax time or the PAYG will be adjusted for lower taxes for the rest of the FY
    2. Around 11.6 million Australians are set to get some benefit
    3. There are about 12.6m employed people in Australia – so this affect the majority of the working aged population
    4. Obviously if you earn less than the $18,200 threshold – you don’t pay any taxes so when taxes are cut – cause you don’t pay any taxes you don’t get a reduction in what you pay – if you pay nothing then it is hard to reduce this beyond zero

Who will be affected – based around the taxable income thresholds

  1. Earning up to $37k – tax relief of up to $510 – for 2.4m income earners
  2. Earning between $37k and $48,000 – get tax relief between $510 to $2,160 – for 1.8m individuals
  3. Earning between $48k to $90k – get tax relief between $2,160 to $2,295 – for 4.6m
  4. Earning between $90k to $126k – get tax relief between $2,295 to $2,745 – for 1.5m
  5. Earning above $126k – get $2,565 in reduced tax
  6. So with the tax cuts – You will likely have more money due to the tax cuts –

Why the Government has done this –

  1. Treasury estimates that reducing the personal income tax burden on Australians through this measure will boost GDP by around $3.5 billion in 2020–21 and $9 billion in 2021–22 and will create an additional 50,000 jobs by the end of 2021–22 – based around big assumptions
    1. Demand side economics – that people will spend –
    2. two ways to achieve – give people money directly or indirectly allow them to keep more of their money through tax cuts – so tax cuts are in
    3. Hence why they are giving out cash payments to pensioners – got some economists saying that vouchers should be employed instead – spending forced rather than people saving
  2. This tax cut pretty predicably been slammed though – canned a ‘Perverse outcome’ of tax cuts
    1. Analysis by The Australia Institute found that the top 20 per cent of earners will receive more than 40 per cent of the benefit of the tax cuts – reading some of the comments from The Australia Institute senior economist Matt Grudnoff
    2. “It is clear that most of this tax cut will go to those who are far more likely to save it. Saving the tax cut is made worse during an economic crisis,” “People who are worried about losing their job are not keen to spend. Any additional money they get is likely to be used to pay down debt and increase savings in order to create a buffer against the growing uncertainty that they are feeling.”
    3. Grudnoff also noted that a large amount of the tax cut flowing through to low- and middle-income earners is temporary, in the form of the low- and middle-income tax offset. However, the tax cuts for high-income earners are baked in.
    4. “This leads to a situation where low- and middle-income earners will pay more tax next financial year than they pay this year. Effectively they face a tax increase next year when compared to this year.”
      1. Technically not true – the LITO is increasing to $700 from $445
      2. It is the Low and Middle Income Tax offset that is in place for the next 4 financial years –
    5. A duel income household of two individuals earning $60,000 each will benefit by a tax savings of $4,320 annually when compared to the 2018 brackets , while another childless household where one is a low-income earner and the other is unemployed would see a benefit of $500. And a household with no children where both adults are unemployed would see no benefit from those policy measures. 
    6. “Meanwhile, high income households gain the most from tax cuts.” – however – not proportionately –
      1. Someone earning $40,000 p.a. will get a 21.4% reduction in their taxes
      2. Someone earning $80,000 p.a. will get an 11.3% reduction in their taxes
  • At $140k p.a. they will get a reduction of 6.1% in their taxes paid
  1. Someone earning $200k will get a reduction of 3.8% in taxes
  1. The tax cuts cap out – the most someone will save is $2,745 – at earning $120k –
  2. Someone earning $200k will save less – at $2,565 p.a.
  3. But comparing $40k earnings to $200k – tax savings of $1,060 to $2,565 respectively –
    1. So someone earning $200k will get around 2.5x more tax savings than someone earning $40k
    2. But after the tax savings – $40k will pay $4,467 in taxes – or about 11% of their income in tax
  • Someone earning $200k will pay $67,097 in taxes – or 33.5% of their gross income is paid in taxes
  1. The narrative can be spun anyway – Looking at the tax cuts

What to do with this new money? – many options – you could spend it – that is the hope of economists – But there are other options – doing what Mr Grundoff doesn’t want you to do – that is use it to build additional equity through paying down debt – or investing – technically both forms of savings

  1. Paying off additional Debt – priority would be in the form of interest rates and deductibility
    1. At this stage – Interest rates are low – but additional debts can be repaid
    2. Opportunity to pay off debt at accelerated rates –
    3. If you are in a household that will get a combined $4,600 p.a. of surplus income due to the tax cuts – this could be placed into debt repayment
    4. Personal debt versus mortgage debt –
      1. Personal loans or car loans – if they have higher interest rates – may be better –
      2. Mortgage – rates are likely to be low for a while – but could be used to make repayments
        1. Interest rates of 2.99% – $500k mortgage – making an additional $380 p.m.
        2. Saves around $63,120 in interest – loan would be paid off 6 years sooner
        3. Saves 24.5% of the total interest that would be charged and knocks off 20% of the live of the loan
  • Mortgage rates – longer term – if rates go back up – say to 5% – this becomes much better
    1. With a mortgage of $500k – making the additional repayments of $380 p.m. would save $127k and knock off 7 years of the loan
    2. Would work out to be about 27% of the interest charged saved
  1. Making additional Investments – opportunity to build wealth
    1. Even investment apps – micro transactions –
    2. But if you can put away $380 p.m. at the household level – into an investment that allows diversification and has low transaction costs – can really build additional wealth – examples earning 8% p.a.
      1. 10 years – or 120 months making an investment of $380 p.m. – Value of just under $70k in invested assets
      2. 20 years – or 240 months making an investment of $380 p.m. – Value of just under $224k in invested assets
  • 30 years – or 360 months making an investment of $380 p.m. – Value of $566k in invested assets
  1. Some of these funds have been contributed by the investment – but the growth comes into it the longer it is invested and the longer the compounding can occur –
    1. 10 years – Value of just under $70k in invested assets – but $24k of this is growth – with $45,600 being invested from the tax savings
    2. 20 years – Value of just under $224k in invested assets – but $132,500 of this is growth – with $91,200 being invested from the tax savings
  • 30 years – Value of $566k in invested assets – but $430k of this is growth – with $136,800 being invested from the tax savings
  1. Another bonus – unlike debt – which saves cashflow long term through paying it back – investments can build additional passive incomes – assuming a yield of 4.5%
    1. 10 years – Value of just under $70k in invested assets can generate an additional $3,128 p.a. in income
    2. 20 years – Value of just under $224k in invested assets can generate an additional $10,072 p.a. in income
  • 30 years – Value of $566k in invested assets can generate an additional $25,485 p.a. in income
  1. Superannuation – salary sacrifice contributions – another option – but with the lowering of tax – gives a leeway to contribute more into superannuation
    1. This can further reduce tax – If you are getting an income of $60k p.a. – you will receive a reduction in tax by $2,160 p.a. – you can gross this up to contribute more based around your marginal tax rate of 34.5% (including the Medicare levy)
    2. This works out to be about $3,298 p.a. pre-tax income – so this can be contributed to super and save a further $1,138 in tax –
    3. A net amount of $2,803 p.a. would go into superannuation after the 15% tax is deducted – about $495 of tax p.a. – over the years, if you contribute this into superannuation you can get additional wealth than what investing personally may get you
      1. Get additional funds into superannuation due to being able to gross this up –
      2. Have a lower ongoing tax rate for any investments
    4. Strategy outcome over time –
      1. 20 years – $137,600 in super – passive income of $6,192 in retirement p.a.
      2. 30 years – $348k in super – passive income of $15,668 in retirement p.a.
    5. Might not do this if you need access to the money

 

These tax cuts are likely to be putting more money into your pocket every single pay cycle – so it is an opportunity to use it to create further financial independence

Use this to help build additional wealth or pay off debts – you can spend it if you want – but this could be an additional opportunity

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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