Simple ways to take full advantage of new tax cuts

Everyone earning over $45,000 will be better off from July 1 – but how can you make sure the Stage 3 tax cuts benefit you most?

On 1 July, new personal income tax cuts are kicking in. These cuts will benefit anyone earning more than $45,000, and some taxpayers will be saving up to a whopping $4529 every single year.

Lately, I’ve been getting a lot of questions from people wanting to make sure they take full advantage of the tax cuts. So I wanted to unpack these new tax cuts, what they mean, and how they impact what makes sense to save you tax moving forward.

What’s changing

The current marginal tax rates and income brackets are outlined below:

From 1 July, the tax free threshold is being lifted, tax rates reduced on income earned up to $45,000, and the income threshold for the top marginal tax rate is being lifted. The table below shows what the tax rates will be from 1 July:

The biggest benefits will be received by those earning $190k or more, but every single tax payer will benefit after these changes.

Should you change your tax strategy?

Based on these changes, there are a lot of people wondering whether they should be changing what they’re doing with their tax, whether the tax strategies they’re already using or may be thinking about still make sense. So I wanted to cover off on some of the most common tax strategies and how they’re impacted by these stage three tax cuts.

Maximising your tax deductions

The first strategy is a simple one, which is maximising your tax deductions each year. Whether it’s work related travel, home office expenses, or other tax deductible costs, historically these deductions have helped to cut your tax bill and save tax at EOFY.

Post July 1, if you earn more than $45,000 p.a. your overall tax rate is going to be at least slightly lower than previous years. This means tax deductions remain valuable, although for most people they will save you a tiny bit less tax in future years. If your income is above the $200,000 threshold for the top marginal tax rate, the value of your tax deductions will be unchanged.

This means it still makes a lot of sense to maximise your tax deductions each year. However you should keep in mind that with any tax deductible expense, you only receive back part of the money you spend – the expense still costs you money, so there’s no point spending money if you don’t actually have to.

Superannuation contributions

Making tax deductible contributions to your super fund like salary sacrifice allows you to claim a full tax deduction for the amount you contribute, up to the annual limit of $27,500 each year.

When money is contributed to your super fund in this way, it’s taxed inside your super fund at a rate of 15 per cent as opposed to your marginal tax rate. You can see from the tables above that if your income is above $19,000, you will pay less tax at the super tax rate of 15 per cent compared to your personal tax rates.

This means you save tax and end up better off by contributing money to super. As mentioned above, because tax rates are going to be slightly lower from 1 July, the tax benefit of making super contributions will be very slightly reduced, but this strategy still has the potential to deliver serious tax savings.

The new tax cuts still mean it’s worth making tax deductible contributions to your super.

Calling out that any time you put money into your super fund, it needs to stay there until you reach the age you can access your super – so this is unlikely to be the first strategy you run to when you start investing. But given the tax benefits of making these contributions, along with the fact that tax inside a super fund at 15 per cent (maximum) is much lower than your personal marginal tax rates, the strategy is a compelling one.

Negative gearing

The most common form of negative gearing is when you borrow money (gear) to buy an investment property, and where the cost of your holding that investment property is more than the rental income you receive. In this case, you’re able to claim a tax deduction for the costs of holding the property which in turn ‘softens’ the cost of your investment.

Aussies tend to get a little bit fixated on the tax benefits that come from negative gearing, and these can be helpful – but it’s worth calling out that the biggest benefit you typically receive from negative gearing is driven by the ‘gearing’ itself, i.e. the fact you’re borrowing money to invest.

The biggest benefit of negative gearing is the fact you’re borrowing money to invest. Picture: NCA NewsWire / Max Mason-Hubers

When you borrow to invest, you’re using a small amount of cash savings and combining it with the bank’s money to acquire an investment asset that’s worth a lot more than the money you have in savings alone. This means you have a much bigger asset that’s now working for you to make you money and build your wealth. This is by far the element that will make you the most money when you buy an investment property – and the gearing benefits will be unchanged post the stage three tax cuts.

With any debt strategy, it’s important you’re careful to manage your risk so you should plan smart if you’re going down this path. Further, given overall tax is slightly lower from 1 July, the tax benefits of negative gearing will also be slightly reduced, however this remains a rock solid strategy for building your wealth.

The wrap

Saving tax is one of the only ways you can get ahead with your money without sacrificing anything more today, so it makes sense to understand the rules and use them to your advantage.

In today’s cost of living crisis, these upcoming tax cuts will provide some welcome relief for Aussies that could do with a pressure release. But it’s important you take advantage of these tax cuts and look to find a way to use (at least some of) them to actually get ahead, not just keep up. Tax planning is crucial here – the rules can be a little complicated, but the upside is real so it’s worth taking the time to get right.

Ben Nash is a finance expert commentator, financial adviser and founder of Pivot Wealth. Ben is the creator of the Smart Money Accelerator program that helps people build a second income investing faster.

Ben is also the Author of the brand new book, ‘Replace your salary by Investing’ and the host of the Mo Money podcast and runs regular free online money education events, you can check out all the details and book your place here

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.