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

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.

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 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.

Should I open a Commonwealth locked savings account?

If you have trouble saving money, a Commbank locked savings account could be a potential solution. A locked savings account won’t let you make withdrawals and as such, it can help you grow your savings balance if you keep topping it up. 

The Commonwealth locked savings account advertises high-interest rates and minimal maintenance fees, along with a host of other incentives that will encourage you not to touch the money. 

The account offers a higher interest rate for each month that you make limited or no withdrawals, as well as regular deposits. 

To qualify for a Commonwealth locked savings account with the advertised features, you will need to fulfil specific criteria such as:

  • Depositing a fixed minimum amount into the account every month.
  • Making a fixed number of deposits each month.
  • Making a minimum or no withdrawals each month.
  • Maintaining a minimum account balance.

How can I get a $4000 loan approved?

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:

  • Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
  • Checking your credit history (you can order one free copy of your credit file per year, and make sure that there aren’t any errors that may be bringing down your credit score)
  • Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)

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.

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.

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.

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.

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 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 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
  • Employment details

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.