Federal Budget 2020: Making sense of the government’s tax revisions, offsets and cuts

Federal Budget 2020: Making sense of the government’s tax revisions, offsets and cuts

Two big rule changes will see millions of Australians save $12.5 billion in taxes within the next year, under federal budget announcements designed to get people spending and the country out of a recession.

The savings are being passed on even though the budget will blow out the deficit as measures are introduced to lower unemployment and help people fare the financial difficulties brought by COVID-19.

“More than 11 million taxpayers will get a tax cut backdated to 1 July this year,” Treasurer Josh Frydenberg said.

“Australians will have more of their own money to spend on what matters to them, generating billions of dollars of economic activity.”

Millions can earn more and pay less tax

The federal government has fast tracked tax cuts for some low and middle income earners.

“More than 7 million individuals are expected to receive tax relief of $2,000 or more for the 2020-21 income year compared with 2017-18 tax settings,” Mr Frydenberg said.

“Australians will have more of their own money to spend on what matters to them, generating billions of dollars of economic activity and creating 50,000 new jobs.”

Stage two tax cuts work by including more people in lower tax brackets, effectively charging them less tax.

People earning from $37,001 to $45,000 will be charged tax at 19 per cent -- about 13.5 per cent less than their previous bracket. 

While those earning from $90,001 to $120,000 will be charged tax at 32.5 per cent -- about 4.5 per cent less.

Treasury estimates the drop in personal income tax will boost the gross domestic product by around $3.5 billion in the 2021 financial year. By the 2022 financial year, they estimate it will add $9 billion and 50,000 jobs.

Tax breaks are likely to be back paid

The changes to the tax brackets could take effect as soon as this month -- about a third of the way into the financial year -- and so the federal government will be offsetting the tax people have already paid with refunds in each pay packet. 

Effectively, a year’s worth of tax cuts will be condensed into approximately eight months.

For instance, a person earning $80,000 won’t just receive an extra $20 a week, but rather they’ll get $31 a week as the government catches up on payments.

The following financial year, the tax breaks would revert back to $20 a week. 

NAB economists, describing the budget as “one of the most stimulatory budgets we have ever seen”, said backdating tax cuts would help offset tapering government stimulus payments.

“A key decision has been to backdate the phase 2 tax cuts (worth $17.8 billion over four years),” they said.

“The backdating of phase 2 cuts is important as it helps fill the gap to consumers incomes from the reduction of JobKeeper and JobSeeker payments.”

Spend, spend spend

A tax offset was meant to be scrapped when the government introduced the second stage of its tax plan, but as JobSeeker and JobKeeper payments begin to taper, and Australians continue to feel the economic fallout from COVID-19, a decision has been made to renew an offset for another year.

The low and middle income tax offset (LMITO) is intended to put extra money into people’s wallets. How much they receive depends on their income.

The most a single person can get back is $1080, while dual income couples can receive $2160.

When the savings of the LMITO are combined with stage two tax changes, a person who earns $60,000 -- or $80,000, for that matter -- can potentially save about $2160 in taxes, compared to what they would’ve paid in the financial year ending in 2018.

People earning $120,000 gain the largest combined tax break, a saving of $2745.

Tax breaks were among a raft of initiatives introduced in this year’s federal budget. Other changes were made to superannuation, the first home loan deposit scheme and much more.

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Do I have to claim interest on my savings account?

When you lodge your income tax returns, you must include in the documentation all your sources of income, including bank interest. Your bank will report any interest you earn on the funds in your savings account to the Australian Tax Office (ATO). When the ATO then compares this information with your tax returns,  you also need to have mentioned the interest earned. If there is any discrepancy, you’ll receive a letter from the ATO. 

Avoid this situation by ensuring you receive your bank statement with interest noted. Then declare the interest in your tax returns and pay the tax that’s applicable based on the income tax rate.

You only need to claim your share of the interest earned for joint accounts. If you manage an account for your child and receive or spend money via this account, you will also need to report any interest earned from said account.

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
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How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.