First announced in 2018 — and given a major facelift by the Albanese Government — the stage 3 tax cuts have finally come into effect. Coming at a time when many Australians are still struggling with the rising costs of living, the cuts will see taxpayers get between $350 and $4,500 back in their pocket this year.1
Depending on how large a cut you receive, you might decide to spend the money, either on essentials or other items. But it might be worth considering a few alternatives. For example, younger Australians might be able to make their money go further by topping up their super, whereas others might feel that their debt obligations are more pressing.
Below, we explore some of the benefits associated with these and other options.
Put the money in a high interest savings account
It’s no secret that the Reserve Bank’s ratcheting up of interest rates is intended to discourage people from spending. It does this partly by increasing how much household income is required to service debt, but also by making saving more appealing. With rates on savings accounts having risen from their early pandemic lows, you might consider finding a high interest savings account to deposit your tax cut.
Of course, the prospect of more attractive returns isn’t the only reason to save. Contractionary monetary policy tends to put the country on shaky economic footing (as RBA Governor Michelle Bullock’s talk of walking a “narrow path” serves to remind us), and many people are concerned about job loss or reductions in income. Putting the extra money directly in your savings can serve as a useful buffer if you find yourself out of work or facing some surprise expense.
Top up your super
If you want to think more long-term and are happy to lock the money away, you might consider topping up your super. One of the main benefits worth highlighting here is the preferential tax treatment super receives. Assuming your contribution is treated as coming from your pre-tax income — meaning you can claim it as a deduction on your tax return — it will generally be taxed at 15% instead of your marginal tax rate, which is typically much higher. Any investment earnings within the fund will also be taxed at 15%.
For this lower tax rate to apply to your personal contributions, you’ll need to submit a Notice of Intent form to your super fund at the earliest of the following: before you complete your next tax return, before 30 June of the following financial year, or before you move money out of the super fund.
Just keep in mind that any contributions which you claim a tax deduction for will count towards your concessional contributions cap, which is currently set to $30,000. What’s more, the money you contribute won’t be accessible until you meet a condition of release (such as reaching age 60 and retiring). So before you make any decisions, think carefully about any other financial obligations you might have and whether you’d rather have the money on hand.
Pay down your home loan
If you’re one of the many borrowers who has been struggling to adjust to the higher interest rate environment, directing any extra money you have towards your mortgage might help ease some of that stress, while also saving you interest over the long run. And the good news is that money saved doesn’t attract any tax, unlike earnings from investments or savings accounts.
If your loan comes with an offset account, you might choose to deposit the money there instead of making extra repayments on your mortgage. The two options are functionally similar — in that both lower the balance on which your lender charges interest — but with an offset account, you’ll be able to access that money whenever you wish.
Pay down other debt
Even if you don’t have a mortgage, there might be other debts you can chip away at. Your credit card debt, for example, might not seem urgent but it has the potential to snowball over time depending on how high the interest rate is. Easing your debt burden now might help to free up money in the future to spend in other ways. Just be mindful that not all loans allow free extra repayments, and some go so far as to apply an early repayment fee if you manage to pay down your loan ahead of schedule.
In the end, what you decide to do with your tax cut will depend on your personal circumstances and goals. If you’re unsure how to make the most of your tax cut, consider speaking to a qualified financial adviser.
