Tax cuts are coming, and here’s how to reap the biggest rewards

Millions of Australians will get tax cuts from July 1, and a new analysis examines the most lucrative ways to use them.

Workers who chose to invest rather than spend their looming stage three tax cuts can boost their savings by tens of thousands of dollars in just 10 years, a new analysis has found.

Modelling by investment group Colonial First State shows that salary sacrificing $100 a month of the tax cuts into super can deliver more than $17,000 of extra wealth in a decade, while average and higher income earners who inject all their tax cut could grow their wealth by much more.

Despite Labor’s controversial changes to the previously legislated tax cuts, higher income earners remain the biggest winners, with someone earning $150,000 and salary sacrificing their entire $311 monthly tax cut being more than $60,000 better off.

The analysis also examined putting peoples’ tax cut money into extra mortgage repayments, after tax super contributions and non-super investments. In all cases a person receiving the average full-time wage of $98,200 ended up with at least $23,000 more.

Colonial First State head of technical services Craig Day said the cost of living was a worry for many Australians, but those able to invest at least some of their tax cut could reap the rewards in the long term.

“For those on $100,000, $100 is around half of the additional monthly income you get from the tax cuts,” he said.

“While salary sacrificing into your super may give the best outcome over 10 years, the extra contributions will be fully preserved until retirement.”

This might prompt many people to direct tax cuts savings to their mortgage, Mr Day said.

“But for those people within 10 years of retirement that have already paid off their mortgage, directing the extra cash flow coming from the stage three tax cuts towards super would generally give the best outcome,” he said.

“The compounding benefits of investing over the long-term combined with the tax benefits of superannuation mean people can really put their money to work.

“Ultimately, it’s a trade-off. You can spend the extra $100 a month you may get from the tax cut, or you can defer that spending. By deferring and putting it towards your super, you are materially increasing the amount of money you will have in retirement.”

MBA Financial Strategists director Darren James said many clients were not actively making plans for their tax cuts, partially because of the confusion around the recent changes, which broadened the cuts to millions more workers while tightening the savings at the top end.

“I think people will wait until they see it, which is not a bad thing because they are not spending it before they get it,” he said.

The tax cuts would coincide with higher super contribution caps from July 1 – including an extra $2500 annually for tax-deductible concessional contributions – delivering super savers “a double whammy”, Mr James said.

MBA Financial Strategists director Darren James says many people live to their income level.

Many households would receive a triple whammy if home loan interest rates started falling in the new financial year, as widely forecast, he said.

“I think the second half of this year people’s cash flow might start looking better.

“We would hope that people have pulled back and budgeted a little more in this tighter period. Hopefully that sets a good foundation.

“People will always live on their level of income. It’s like dieting – you eat what you want unless your diet restricts you. People got used to living on lower income, so this helps set you up for your future so you are not struggling all the way through.

Originally published as Tax cuts are coming, and here’s how to reap the biggest rewards