The Government has made a big deal about the tax cuts that came into effect on 1 July 2024. From the way they were reacting, you would think that the Government front bench is full of geniuses with an IQ higher than infinity. There are many undeserved high 5s.
Which is strange.
That is because they had nothing to do with it. They changed things around a bit, but the idea was not theirs. In fact, when the previous federal Government mooted the tax cuts, this Government were against it.
Well, that is how politics work. And that is why you and I don’t get politics. The lack of ethics and morality makes our stomach churn.
But honestly, I couldn’t give two hoots who came up with the idea. All I know is that tax cuts are good for my pocket lining because I have more in my pocket to do something.
And usually, after the budget day, you get me telling you not to get too excited because the $5 a week, better off you are, is going to be spent on a coffee, so you will not notice a damn thing.
But this time round, I am still determining.
The average taxpayer will get about $40 a week extra. A higher-rate taxpayer will get about $90 a week extra, and unless you are a coffee junkie, you are unlikely to spend it all on a latte with an extra shot.
When investing, I always say a little can make a big difference. I will say the same thing about your mortgage.
This year could be a good one for you. That is because there is a double whammy of tax cuts and an extra 0.5% contribution to your super fund. But additional income means nothing. It’s what you do with it that will count.
Firstly, a little reminder.
The stage 3 tax cuts benefit most, but middle-income earners in the 32.5% and 37% tax brackets will find they are merged into a single 30% bracket. And that is good news.
This means that if you earn between $45,001 and $120,000, you’ll pay a lower tax rate, which means more dollars in your pocket.
If you happen to be at the highest tax rate, the threshold is also being raised, meaning those earning above $200,000 will also see some tax relief.
The average Australian taxpayer earning approximately $90,000 annually will receive an extra $161 per month, while someone earning $190,000 will receive $377 extra per month. That is a lot of money when it comes to tax cuts.
The table below shows how much money you will return from tax cuts.
Source: Treasury.gov.au
Okay, it will not transform your life instantly, but it has the potential to make life easier over time.
Confused? I know what you are thinking. How can I get more now? That will not make a difference now, but it will as the years go by. It all sounds very magical. Is there some Harry Potter witchcraft in action?
No. This is pure mathematics and economics. While that $161 a month might not seem like much, it may work wonders when applied consistently to your mortgage.
This is because:
• it slowly chips away at the principal balance
• and because you owe less, you pay less interest.
And paying less to your bank means more income and wealth.
Okay, I know what you are thinking. Is it going to make that much of a difference?
The amount you save will depend on your income, but over the years, you will notice.
So, if you want the magic or witchcraft to work, here is what you need to consider but, more importantly, do.
1. When someone tells you that you will have more money in your pocket, the obvious thing to do is smile and jump online to buy things. It may be clothes, a handbag, shoes, a holiday or if you are a man, a trip to Bunnings or buying a few gadgets.
You can do that, but it will not affect your financial future.
2. You can put the entire amount into your mortgage. If you don’t want to do that, consider a small increase in your regular repayments.
But don’t believe me – let’s look at some examples.
Example 1
Tom Cruise is an actor, is single and owns a home in north Queensland. He earns $80,000 a year and has a loan with ANZ for $400,000 over 25 years. He is paying interest at 6.5%.
His tax cut is $140 per month, which will be used totally against his loan every month for the next 25 years.
ChatGPT states this will allow him to pay off his loan in about 22 years rather than 25 years. In addition, he will save about $53,900 in interest charges.
Example 2
Michael Douglas and Catherine Jones each earn $90,000. They own a home in the Brisbane suburbs and a mortgage of $900,000, paying interest at 7% with 25 years left on the loan.
As a couple, they will receive a combined tax cut of $232 a month. They will put this amount against their loan.
The loan will be paid off in 22 and a half years with interest savings of approximately $104,771.
Example 3
Victoria Becks is a singer, and her husband, David Becks, is an athlete. They earn $190,000 each and have a 25-year $2m loan with ANZ at 6% interest. Their combined tax savings are $754 per month, and they allocate it all to their loan.
The loan will be paid off in 22 with interest savings of approximately $253,000.
As I said, small investments make a massive difference.
3. Consider making lump sum payments
As it is tax time, an influx of individual tax returns will be completed in the hope of receiving refunds—many of my clients like to use their refunds for small luxuries such as holidays or other perks.
And that is a nice thing to do.
But if your tax refund is substantial this year, consider making a lump sum payment toward your mortgage. This could reduce your loan term by years and save you considerable interest.
Most advisors will tell you to take out investment-only loans as this allows you to borrow more and maybe ‘’claim a tax deduction.‘’ They may also tell you to pay off your home loan before you consider paying off other loans, such as investment loans, and that does make sense from a tax perspective.
But when it comes to generating wealth, your goal should be to pay off all loans prior to retirement, and that means paying off your home debt.
But my job is to ensure you create maximum wealth and financial freedom. But at the same time, I will tell you this.
Life experiences will always trump money, wealth and financial freedom. Never forget that.
So, if you were to blow your tax cut on a holiday to Bali, airfare so you can meet your family, or even a deposit on a new car, you wouldn’t hear me complaining. That is because these things can bring a smile to your face and memories you will cherish. Paying off more against your home loan this month won’t do the same.
Just know that doing so may mean you will have less wealth, and it may take longer to reach financial freedom. And if you are happy with that, you should not feel guilty about enjoying your life.
Paying less on loans is step 5 of our 9 steps to working less, earning more, and becoming wealthy. If you would like to know more, contact Hitesh at hitesh@medisuccess.com.au or call 07 3161 9548.
