Tax cut

What Should You Do With Your Tax Cut?

One of the key pillars of this year’s federal budget was the future and backdated tax cuts.  The “stage two” tax cuts originally set down for the 2022-23 year have been brought forward and backdated to July 2020.

The measures are expected to see lower and middle-income earners receive tax relief of up to $2745 for singles, and up to $5490 for dual-income families – compared to 2017/18.  The new tax scales have been released by the ATO now so all employees should be seeing an increase in their take-home pay.  You will get the kicker for the backdated portion when you lodge your 2021 tax returns.

The government wants us to spend these tax cuts to drive economic activity.  This argument that increased consumer spending will stimulate the economy is debatable as all spending isn’t equal.  Spending money on electronics made in China doesn’t benefit our economy as much as eating out at local restaurants.

On top of this Covid-19 has changed the rules of the game.  We have seen a fall in private consumption and people are still anxious about outbreaks and shutdowns.  In this environment, people will be more likely to save, not spend.

Here are my thoughts on what you should do with your tax cut.

Pay off your debt

If you’ve got debt, pay it off.  We have very high household debt-to-income ratios in Australia.  Each person will have different priorities at times like these, but if financial security is at the front of your mind then you should be reducing non-discretionary spending and non-deductible debt.

Paying off high interest finance like credit cards and car loans as quickly as you can is about the most effective investment you can make.

Invest

If you don’t have non-deductible debt, then think about your goals and look to invest the tax cuts.  Think about your goals and choose investments that are appropriate for the length of time to invest.

Younger people are particularly well served by investing early and often with compound interest on your side.

Now might be the time to sit down with a financial planner to start mapping out the years ahead.  We work with a few planners in this space so let us know if you’d like some contact details.

Don’t spend it before you get it

Don’t second guess how much your tax refund is going to be and don’t spend it before you’ve got it.  A lot gets taken into account in calculating the tax at year end and you might get caught out.

Also, avoid the Buy Now Pay Later offers such as AfterPay.  These lenders are essentially unregulated and borrowers are getting caught out.  The ASIC report this week about the schemes highlights that as many as 20% of borrowers are getting into trouble with these credit products.  Past financial results have shown that the lenders make between 10% & 20% of their income from late fees. So beware, don’t overcommit and don’t spend more than you earn.

 

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Taxation of Coronavirus Payments In Your Tax Return

Over the past 9 months, there have been numerous Covid-19 government support payments for business and individuals. A question we are often asked is how these are treated for tax purposes.

JobKeeper payments

JobKeeper payments received by individuals are considered taxable income. Your employer will report them to the ATO along with the tax they withheld. These payments will be part of your Payment Summary which will be available through MyGov.  They may appear separately or as part of your salary and wage income. If you are a sole trader you declare the JobKeeper payments as income.

Businesses that received JobKeeper payments to help make up for a fall in turnover, will need to disclose these payments as part of the assessable income of the business for the financial year.  It will be offset by the JobKeeper payments made to staff.

JobSeeker payments and the $550 Coronavirus supplement

Your JobSeeker payment and the $550 Coronavirus supplement are both taxable income and are included in your tax return. The ATO should automatically populate this information for you under the ‘government payments and allowances’ section in your tax return. 

The $750 Economic Support Payment

This payment was made to Australians on lower incomes who were receiving some kind of assistance from Centrelink.  It is exempt from tax and does not count as income. 

Business Cash Flow Boost payments

The federal government cash flow boosts were delivered as credits in the activity statement system to small and medium businesses who employed staff.  They are tax-free payments. You do not need to report or include them in your tax return.

State Government Grants

A government payment to assist a business to continue operating is included in assessable income. This will include assistance provided as a one-off lump sum or a series of payments.  These include:

  • Queensland COVID-19 adaption grant
  • New South Wales Government Small Business COVID-19 Support Grant
  • South Australian Government $10,000 Emergency Cash Grants for Small Businesses
  • South Australian Government Job Accelerator Grant Scheme
  • Victorian Government Business Support Fund
  • Payments under the Northern Territory Government Small Business Survival Fund
  • Northern Territory Government Business Improvement Grant
  • Western Australian Government Small Business grant scheme

Electricity rebates

Some states and territories are offering households and some businesses automatic electricity rebates. These rebates are not included in assessable income. For a business, the rebate will reduce the deduction the business can claim for electricity.

Early release of superannuation

If you accessed part of your super under the COVID-19 early release of super payment, you won’t be required to pay any tax on the payment so you don’t need to disclose it in your tax return.

Still have questions? Feel free to reach out to the team at Activ8 Accountants & Advisors who will be happy to talk further.