Yahoo Finance Easy way to turn stage 3 tax cuts into $10,000: 'Set and forget'
One in 10 Aussies are planning to invest their tax cuts, with new research revealing just how much you can make.
Aussies will be getting an increase to their pay packets when the stage 3 tax cuts come into effect today. The average Aussie will pocket an extra $36 a week or $1,888 a year, but there’s a way to make your savings even bigger.
The stage 3 tax cuts will change Australia’s tax brackets and reduce the amount of tax people pay on their income. That means you’ll get to take home more of your pay each week, fortnight or month.
Most Aussies say they are planning to save their tax cut or use the extra cash to offset higher costs. For those who are in a position to invest that cash, Sharesies country manager Brendan Doggett told Yahoo Finance you could turn your tax cut into more than $10,000.
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What are the stage 3 tax cuts?
Firstly, let’s quickly recap on what the stage 3 tax cuts actually are.
Today’s changes are going to:
Cut the 19 per cent tax rate to 16 per cent for incomes between $18,200 and $45,000
Cut the 32.5 per cent tax rate to 30 per cent for incomes between $45,000 and $135,000
Retain the 37 per cent tax rate but increase the threshold from $120,000 to $135,000
Retain the 45 per cent tax rate but increase the threshold from $180,000 to $190,000
You don’t have to do anything to get the tax cut. Employers will automatically adjust the amount of tax they take out of your pay.
You can see how much you’ll save with the reworked cuts here.
How can I maximise my tax cut?
Research from NAB found 12 per cent of Aussies are planning on investing their tax cut, which could be one way to maximise the cash. So just how much can you make?
Someone with a $90,000 annual salary will get $160 back per month under the tax cuts.
If they were to invest that $160 amount every month, Sharesies calculated that they could have $6,046 in three years’ time thanks to compound interest, which is an extra $286. In five years, that could grow to a healthy $11,396, an extra $1,796.
That's based on the average ASX 200 rate of return being 3.3 per cent over three years and 6.8 per cent over five years.
Doggett said many people thought you needed thousands of dollars in the bank to make a decent return but this wasn’t the case, with smaller amounts like your tax cut able to make a difference. That catch, of course, is it'll take time.
“It’s actually more about playing the long game - investing what you can afford and consistently to grow your wealth over time,” Doggett told Yahoo Finance.
“This regular approach to investment is what we call dollar-cost averaging, where you invest the same amount in a particular stock, regardless of the share price.
“This ‘set and forget’ mindset helps turn investing into a habit, and is a game-changer in keeping the momentum needed to watch your money grow.”
What else could I do with my tax cut?
With the cost of living putting pressure on many household budgets, it’s no surprise that a third of Aussies are planning to save the extra money from their tax cut. This was the most common thing NAB found Aussies were going to do.
Some banks are currently offering high interest savings account with rates as high as 5.5 per cent (but there are some conditions attached).
Other Aussies are planning to spend their tax cut on offsetting the higher cost of living, (29 per cent), followed by paying down debt (22 per cent), which could be something like a home loan or credit card. Just 8 per cent say they’ll splurge on non-essentials.
Compare the Market calculated that someone with a $700,000 home loan is now having to find an extra $18,000 a year since the Reserve Bank of Australia (RBA) started hiking rates in May 2022.
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