Tax cuts are the golden ticket at Federal Budget time. The Government loves to give them and taxpayers love to get them. But tax is rarely simple.

As part of the Government’s three-phase tax plan, we were promised a second phase of tax cuts from July 2021. But these changes are being made ahead of schedule – they’ve been announced in this year’s Budget and will be backdated to July 2020. Which means you may be noticing a difference to your pay packet already.

What could this mean for me and my super?

The reduced tax is being rolled out now, with businesses having until 16 November 2020 to implement the changes into their payroll. The changes will apply to all payments made from 13 October 2020 and will be reflected in your regular pay cycle. But you might have to wait a little bit longer for the benefit of the tax cuts backdated to July 2020 – the ‘pay back’ of cuts from the months already passed will come as a windfall in your 2020/21 tax returns.

While phase 1 gave the greatest tax cuts to low-income earners, the current Phase 2 tax cuts focus on middle-income earners. Phase 3 is expected to include tax cuts for high income earners.

Here’s an example of the tax savings for different before-tax incomes, based on their change from the last tax year (2019/20):

Source: Budget 2020 Income Tax Calculator, ABC News, 7 Oct.

Also in the 2020 Budget, the Low to Middle Income Tax Offset (LMITO) has been increased from $455 to $700 and extended for another year. So if you’re eligible, you’ll also receive the LMITO in this financial year’s tax return.

And specifically related to super, the next step of the Government’s tax plan comes into effect in July 2021, meaning your super guarantee (SG) contributions will rise to 10% from 9.5%.

Wondering whether to boost the economy or your super?

Because this is a stimulus Budget, the Government’s intention is that we spend the extra money to get the COVID-19 affected economy moving again.

But the uncertain economic environment means while some people may choose to use it for things they feel they’ve needed for a long time, others may want to save the extra money in their tax return for a rainy day.

Mercer’s Technical Advice Specialist Anthony Williams says it’s important to think about what you do with your tax return windfall so it can support you best.

He says that many people will be in great need of the money, but if you can afford to put a little extra into your super for the long term, it may strengthen your retirement options. This may be especially true for people who took advantage of the recent COVID-19 super early access provision to take money out of their super. This could be a good opportunity for these people to rebuild their balance after a difficult financial period.

When to make a contribution: before tax or after tax?

A change in the tax thresholds can have an impact on the right time to make a contribution. – before or after tax. Says Anthony:

“Whenever the Government changes the rates of tax, we need to take a step back and ask whether extra contributions to super are worthwhile at my tax rate and if so, which type of contribution works best for my situation.”

The super contributions taken out of your before-tax pay are taxed at 15% when they go into your account. For most people this is a lower rate than their marginal tax rate. On the other hand, if you earn below $45,000 or above $180,000, it may be worth looking at after-tax spouse contributions, which could provide a greater tax benefit than pre-tax contributions.

If you’re eligible for tax cuts, what will you do with the extra money?