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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Learn more about savings accounts

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While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:

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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.

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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.

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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.

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Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

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.

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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. 

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Can you direct deposit to a savings account?

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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:

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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.

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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