The proposed changes to the Stage 3 tax cuts package have been in the news all week, with Labor's proposal to amend the legislated tax cuts yet to pass Parliament. A major issue with the Labor proposals is that the top tax rate of 47 per cent, including Medicare levy, will cut in at $190,000 a year, a tiny increase to the $180,000 cutoff point, which has been unchanged for 15 years. A tax system that forces high-income earners to give the government almost 50 per cent of what they earn does not encourage productivity, but it does encourage strategies to reduce tax.
My website people have been hard at work and you can now go to noelwhittaker.com.au/compare where there are three calculators for you to play with. The first is the existing tax scales, the second is the legislated tax scales, and the third is Labor's proposed tax scales.
For example, if you earn between $45,000 and $120,000 a year now you are paying 32.5 per cent tax on every dollar earned in excess of $45,000. If you earn between $120,000 and $180,000 you are paying 37 per cent on all earnings over $120,000. The rate of tax you pay in your final tax bracket is called your marginal rate, because this is the rate of tax you pay on every extra dollar earned. When you add in the 2 per cent Medicare levy, it's also the real worth of a tax deduction.
The legislated tax cuts applied the 30 per cent marginal rate from $45,000 up to $200,000, and abolished the 37 per cent rate entirely. Under the Labor proposal, the 30 per cent bracket goes from $45,000 to $135,000 a year; and the 37 per cent marginal rate remains for taxable incomes between $135,000 and $190,000 a year.
The bottom line is that, after June 30, a tax deduction will be worth less to you, and income will be worth more because there'll be less tax on it. The big item that springs to mind is tax deductions for borrowing. If you earn $130,000 a year and get $10,000 of deductions because of negative gearing the government contributes $3700 of the loss, because that is your marginal tax rate. The same deduction after June 30 will be worth only $3000.
You will save yourself some money if you do everything you can to maximise your tax deductions in the current year. That could be carrying out tax-deductible repairs, or even prepaying 12 months' interest. If you have money earning interest it may be sensible to put the money on term deposit with all interest payable after June 30. This will move the income to a lower tax bracket.
The other big-ticket item is capital gains tax (CGT), because for most people CGT is charged at their marginal rate.
Case study: Jack and Jill, who are retired and earn $15,000 a year between them, sell an asset that triggers a $400,000 capital gain. After discount, the taxable gain will be $200,000, which will be apportioned $100,000 to each person's income. Assuming that Labor's proposed changes get up, if they sign the sales contract before June 30, their total tax will be $27,842 each, but if they delay signing until 1 July, the total tax would be $25,288 each. It's a tax saving of just over $5000 for waiting to sign a contract.
An issue for investors and people in business is that once taxable income exceeds $135,000 the marginal rate becomes 39 per cent, including the Medicare levy, and at $190,000 a year it becomes 47 per cent, including Medicare levy. We can expect more interest in insurance bonds and personal company structures, which both have a 30 per cent flat rate with no Medicare levy. Tax-deductible superannuation contributions are another tax-effective strategy, but the downside is that your money is inaccessible until you reach 60. As ever, get good advice: it is priceless.
My husband is turning 64 next month and I am 60. Both of us are retired and have $750,000 and $650,000 in our pension income accounts respectively - we still owe $230,000 on our mortgage with a rate of 7 per cent. We wonder if my husband can withdraw $230,000 from his super to pay out our mortgage and avoid mortgage stress. The earning on our super accounts have been only 1.5 per cent year to date so far.
As you have both reached the age of 60 and retired you can withdraw money from your superannuation tax-free whenever you wish. And I agree that it makes sense to withdraw money from super and pay out your mortgage. That would give you an effective rate of 7% which is far better than what your super fund has been doing. I do think you need to take advice about whether you are in the right superannuation fund. The average return in a balanced superannuation fund in pension mode has been 5 per cent for the last year and 7.2 per cent to 5 years. The more conservative capital stable accounts returns have done 3.4 per cent and 3.9 per cent respectively. It's important to get yourself into a better performing fund.
After a binding agreement is signed off by the family court and both parties end up with separate homes, all assets being split, is there any impact or qualifying periods or other rules preventing one of the partners who is over 67 from immediately claiming the pension?
There are no waiting periods for the age pension. The partner who is over 67 is good to claim immediately.
I am allowed to take out some money from my accumulation phase super fund as I'm over 65 but I'm afraid that once I do that my husband may lose a lot of his pension as Centrelink may now count all of my money not just what I took out. I want to contribute to our living expenses as my husband has been paying it all and his super fund is now well below $50,000 and probably won't last more than two more years.
Money in superannuation is not counted until the member reaches pensionable age unless you start an account-based pension from your fund. It would seem that this has not happened. You are free to take a lump-sum when needed and such withdrawals should not affect his age pension. The money he has in superannuation will be assessed now by Centrelink because he must be of pensionable age to be getting the age pension - but given the small balance it may be better off to withdraw the whole sum now. It will make no difference to your husband's age pension.
My son is studying full time at uni while living at home and paying no board. He has $16,000 HECS debt and $6000 in an account that earns basically no interest. He works full time over the summer and winter uni breaks and saves. My hubby and I encourage him to pay off his HECS debt as much as he can before he starts saving for a home deposit, particularly given the recent 7.1 per cent HECS indexation rate. A similar indexation rate could be applied next year too. His older sisters, who both have home mortgages and HECS debt, argue that my son should ignore his HECS debt and save for a home deposit, as he needs to enter the housing market as soon as possible as house prices will only rise and there is no repayment deadline for the HECS debt. My son has one more year to complete his uni degree and he can expect to earn $70,000pa, so will earn enough income to have to make HECS repayments.
This is becoming a very common question, and there is no simple answer. But given the latest inflation numbers of around 4 per cent, one may reasonably expect the HECS interest rate to drop to 4 per cent. Your son is certainly on the right track to becoming a good money manager and I think for the moment he is best to focus on building up his savings. Thankfully, it's a small debt, and can be paid off quickly from his earnings once he starts work.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: email@example.com
- This advice is general in nature and readers should seek their own professional advice before making any financial decisions.