How to have your lamington and eat it too

The big question now is - are you going to eat your lamington or squirrel it away?
The big question now is - are you going to eat your lamington or squirrel it away?

Lamingtons are our topic today - but I'm not talking about the ones covered in coconut. I mean the latest round of tax cuts which, because they are addressed to low and middle income earners, have been dubbed "lamingtons" in the financial world.

You have to admit the tax cuts are pretty sweet, and they are part of what is probably the biggest stimulus package since the Rudd government announced stimulus packages in 2008 and 2009. A centrepiece of the Rudd packages was the $950 cash bonus that was sent to all taxpayers earning less than $80,000 a year.

The big difference between those packages and what the Morrison government has introduced is that the current tax cuts are not one-off payments. They are part of a major reform of the tax system, of which the centrepiece is a 30 per cent flat tax rate for people earning between $45,000 and $200,000. This will be introduced in the 2024-25 income year.

It's a welcome initiative, given the world is moving to lower personal tax rates, coupled with higher consumption taxes. Of course, whether future governments will have the nerve to increase the GST and abolish all exemptions is another matter.

Just keep in mind that a tax offset is not a cash refund like excess franking credits. Tax offsets can only be used to pay tax and cannot be carried forward to future years. The refund cheque you receive is only a refund of tax you had paid that has now been covered by the offset. If your tax liability is too small to use up all the offset, you do not get the cash instead.

The new tax offsets do depend on your taxable income, and the good news for those in a position to manipulate their taxable income, is that this is real taxable income and not Adjusted Taxable Income (ATI). ATI is a nasty little beast that is used when calculating a whole range of things such as family tax benefits, child support, and the contributions tax a high income earner would pay on their concessional contributions.

ATI adds back to your taxable income, reportable employer superannuation contributions, deductible personal superannuation contributions, net financial investment loss, and net rental property loss. It's a very different animal to taxable income.

People with a taxable income that exceeds $48,000, but not more than $90,000, will be eligible for the maximum low and middle income offset of $1080. If income is between $90,000 and $126,000, the offset will reduce by 3 per cent for each excess dollar.

But there are strategies you can use to work with the new rules. For example, if your taxable income was going to be $100,000 a year and you and your employer's concessional superannuation contributions have not yet exceeded $15,000, then instead of losing $300 in the rebate, you could make a deductible personal contribution to super, bringing your taxable income down to $90,000 and qualifying for the full rebate. This will also save you $2,400 in tax by moving that $10,000 into the 15 per cent superannuation contributions tax, instead of your marginal rate of 39 per cent including Medicare Levy

But the big question now is - are you going to eat your lamington or squirrel it away? The government is keen for you to spend it to boost the economy, and I'm sure 90 per cent of people will do that.

But I'm a cautious soul. It is a windfall, and in principle, windfalls should be saved not spent. I suggest you use it to reduce your home loan, attack personal debts, or start a savings plan. Even $1000 added to your existing investments could add $5000 in 20 years. It would be a shame to waste it.

  • Noel Whittaker is an Australian expert on personal finance and the author of Making Money Made Simple. Send your money questions to noel@noelwhittaker.com.au.