Australia’s tax system is set for significant changes with the implementation of Stage 3 tax cuts due to come into effect on 1 July 2024. Summary of the changes:
▪ reduce the 19% tax rate to 16%;
▪ reinstate the 37% tax bracket (which was going to be removed from 1 July), but increase the income band to which this applies from $120,000 to $135,000, and
▪ decrease the threshold above which the 45% tax rate applies, from $200,000 to $190,000.
The following table compares the tax rates for the current financial year with both the original Stage 3 tax cuts, and the new rates which are now law:
Note: Calculations take into account the Low-income tax offset and Medicare Levy.
Source: The Government’s factsheet Tax cuts to help Australians with the cost of living
Top 3 opportunities to make the most the stage 3 tax cuts
- Making the most out of unused concession contribution (CC) caps and the timing of your personal deductible contributions
- Consider the timing of selling assets that attract capital gains tax
- Review the timing of tax-deductible expenses including pre-paid expenses.
Making the most out of unused concessional contribution caps
Carry-forward concessional contributions (CCs) allow you to use unused CC cap amounts going back up to five past financial years. This means that unused caps from FY19 will expire this financial year if they are not utilised. To be eligible, you must have a total super balance (TSB) below $500,000 at 30 June last financial year. With tax cuts set for next year, it may be more valuable for you to reduce your income this year compared to next year.For example, the marginal tax rate for a person with $150,000 of income is currently 39%. Next financial year a person with the same income will have a marginal tax rate of 32%. Reducing your taxable income is more valuable this year compared to next year. One way you may be able to reduce your taxable income is by using carry-forward CCs.
Using myGov to help - You can check your carry forward CCs through your mgGov account. Using the tax portal on myGov and choosing ‘super’ on the top panel will provide details of historical concessional super contributions, as well as cumulative carry-forward amounts. myGov also confirms eligibility based on the TSB as at 30 June of the previous year.
Timing the sale of assets
Are you thinking of selling assets that would create a capital gain? If your marginal tax rate is going to be lower in 2024/25, you may pay less capital gains tax (CGT) by selling after 1 July this year. But before you decide to defer any asset sale, it’s important to consider:
- market risk (the value of the asset could decline and offset or eliminate any tax benefit from selling next financial year), and
- holding costs, which for real property may include rates, insurance and interest payments.
Review the timing of your tax-deductible expenses including pre-paid expenses
Some expenses that you pay, including certain pre-paid expenses, are tax deductible. Pre-paying eligible expenses can be a helpful way to manage your tax. As a result of the change to the tax cuts from 1 July, you could consider whether the benefit of a tax deduction for eligible expenses is more valuable in the current financial year, or from 1 July 2024. This will depend on a couple of factors, including your assessable income, your marginal tax rate and the resulting value of the tax deduction.
Examples of deductible expenses that may be pre-paid include:
- premiums on an income protection policy held outside super
- interest on a fixed rate investment loan
- expenses for a rental property, and
- work related subscriptions.
If you were planning to bring forward payment of eligible expenses (and therefore the associated deduction) to optimise your tax savings, you may need to review this strategy to work out the amount you save as a result of the changes.
Next Steps
To find out more about how a financial adviser can help, speak to us to get you moving in the right direction.
Important information and disclaimer
The information provided in this document is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide.
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