To save or spend a tax cut…

09:40am May 09 2018

The question now is what will some Australians do with the spoils of their tax relief. (Getty)

Who needs a tax cut? “Me”, I hear you cry! Let’s be honest, we all want one.

For those earning less than $125,000, the 2018 federal budget has lived up to the speculation and delivered personal income tax relief, with a maximum tax saving of up to $530 coming in from July 1, 2018 for those earning between $48,000 and $90,000.

Of course, like all changes which require updates to legislation, it may take some time before you will see the benefit come through.

For those earning over this amount, there was some tax relief also provided with the government confirming it would no longer proceed with the 0.5 per cent increase to the Medicare Levy from July 1, 2019, but also the promise of further tax savings in the future via changes to the existing marginal tax rate thresholds. If you’re lucky enough to be on a higher income earning more than $180,000, sorry to say, but there was little “new” tax relief announced, well not until 2024 anyway when the threshold is slated to lift to $200,000.

But the real question for many Australians waking up to headlines of tax cuts is what to do with the saving from the tax relief? And to consider this, you have to put it in perspective. Because the tax relief has been delivered in the form of an increased low income tax offset, rather than changes to marginal tax rates and thresholds, you won’t see any direct benefit come through in your weekly pay packet.  

Instead, this benefit will come home to roost when you lodge your 2018-19 tax return, which may not be until October 2019. So it’s a little while.

There is a positive out of this though.

If your current income covers your expenses, then you have at least found a way to keep track of your finances, and that gives you time to think about what you will do with this potential tax relief.

For some, there may be a specific purpose to which you will use this money. Perhaps a reward for yourself, which could be a worthwhile use?

However, you could also think about banking any of these savings. With bank interest rates historically low, could you put some extra money into your super – which can be a tax-effective saving option -- to help your future retirement needs? It might be a small amount today, but could grow substantially.

The value of $10 per week invested and earning 4 per cent after tax can amount to more than $15,000 over a 20 year period. You could even qualify for some extra benefits, such as a government co-contribution or other tax offsets by doing so.

One thing to keep in mind – Australia, like many developed countries, has an ageing population, and over the next 30-50 years, the number of working (tax-paying) Australians as a ratio to those in retirement will dramatically decrease.

This means there is likely, on a comparative basis, to be reduced funding available for future governments to support those in retirement, so every little bit you can do to help yourself will pay off in the long run.

For more on how the Federal Budget may impact you and your finances, visit bt.com.au/budget.

The views expressed in this article are those of the author and do not necessarily reflect those of the Westpac Group.