What to do with that extra cash - save, salary sacrifice or invest? Michelle Innis canvases the options.
Tax cuts are generally regarded as a boon, but the Government's decision to reduce the top two tax thresholds in last week's Budget won't deliver big benefits to high-income earners.
"What we have is a marginal change to the tax rates," says Centrestone Wealth Management's CEO, Robert Keavney. "It is nothing so significant that it would materially shift the principles of our investment advice.
"Some people will pay a little less tax, but it won't mean they should review whether they are investing in the stockmarket, fixed interest or property."
Australian workers pay no tax on the first $6000 they earn. Between $6001 and $21,600, tax is paid at 17 per cent a year; from $21,601 to $52,000, the tax rate is 30 per cent a year; between $52,001 and $62,500, the rate applied is 42 per cent. Anything over $62,501 attracts tax at 47 per cent - the top marginal rate. (The Medicare levy of 1.5 per cent is applied on top.)
But new thresholds will be phased in for the top two tax thresholds. From July 1, taxpayers can earn up to $70,000 before the 47 per cent tax threshold is reached. This will rise to $80,000 from July 2005.
The threshold for tax applied at 42 per cent a year will rise to $58,001 from July 1 this year, and $63,001 from July 2005.
"Someone earning about $58,000 a year is going to save about $720 a year in tax," says Count Financial's technical services analyst, Dean Borner.
"The average saving is only about $42 a week [from next financial year]." It might not be enough to make you change your investment strategy, but Borner says it could provide the impetus for an investment review.
AMP's technical services manager, John Ciacciarelli, concurs that anyone earning $80,000 to $100,000 a year is going to
save about $42 a week when the full tax cuts are implemented.
"Maybe it is time to review where you are going," he says. "Have a look at your overall strategy. The Government is saying baby boomers need to save more and the tax savings could be added to an existing savings program or gearing strategy."
Ciacciarelli adds that gearing could produce better returns than tax-advantaged super, although the investment risk is
much higher.
"If you're getting the tax cut, don't be tempted to spend it," he adds. "Add it to an existing investment plan."
But Jenny Brookhouse, the national technical manager at RetireInvest, disagrees. She says if you want to spend the extra $42 a week, go right ahead. "If that money is going to be spent on lifestyle, make it a conscious decision and part of a budget - don't just fritter it away," she says.
She adds that if you want to make the tax savings work harder for you, make extra mortgage repayments or add the money to a savings plan or salary sacrifice into super before the cash lands in your bank account.
"If it is allocated before it gets to your bank account, then you won't be tempted to fritter it away," she says.
CPA Australia's manager of financial planning, Christopher Benson, says if you are in the top tax bracket and will also benefit from the reduction in the super surcharge, consider salary sacrifice into super when the surcharge is at 7.5 per cent. The surcharge is 14.5 per cent, but will fall to 7.5 per cent in 2006-07 (see page 6).
Benson adds that the tax cut won't cover increased payments on the average mortgage if the Reserve Bank raises official interest rates in the near term. "That puts it into context," he says.
"But people who are responsible with their money save first and spend the rest," he says. "If you get the tax cut, make extra repayments on your mortgage or add it to super."
Extra cash goes to the mortgage
Darlene White and her husband Paul Crisp will benefit from the Government's decision to lower the 47 per cent tax threshold.
But White, 34, with two children under five, says the small amount of extra cash that will come their way will be used to help pay off their mortgage, rather than invest to produce any extra income.
"What comes into our hip pockets from the changes announced in the budget is minimal," White says. "We have a home equity loan, so we will try and make sure that the extra money from the tax cuts stays in the mortgage each month.
"Everything gets sucked up into our mortgage," she adds. "And we know that if rates rise, the extra money won't cover increased interest payments on our loan."
White works part-time for fund manager IOOF and Crisp works full-time in the telecommunications industry. They have super but White says it will be five years before they begin allocating extra funds to their retirement savings account.
"Our mortgage is more important at this stage," she says. "After that, the worry is child-care places."
