Welcome to our May newsletter, and while the weather is cooling the economic and political landscape is heating up. All eyes are on interest rates as the federal election campaign shifts into top gear ahead of the May 21 polling day.
The economic event that overshadowed all others in April was the release of the March quarter Consumer Price Index (CPI), which showed inflation up 2.1% in the quarter and 5.1% on an annual basis. This was the biggest lift in prices since 2001 and well above the Reserve Bank’s target of 2-3%. The biggest increases were for fuel, housing construction, and food as the war in Ukraine pushes up global oil prices and the cost of transporting food and other goods. Most economists now agree that the Reserve will lift official interest rates on Tuesday from their current historic low of 0.1%. The question now is by how much. Any rate rise will be passed through to variable mortgage rates, putting more pressure on household budgets during an election campaign where cost of living is a major theme.
On a positive note, unemployment fell below 4% in March, its lowest since 1974 as the economy continues to recover from COVID-related disruptions. As a result, businesses are more confident, with the NAB business confidence index lifting to a five-month high of 15.8 points in March, well above its long-term average of 5.4 points. Consumers are less confident, with the Westpac-Melbourne Institute consumer sentiment rating down 0.9% in April to a 19-month low of 95.8 points.
The Aussie dollar fell from US75c to around US71c over the month, adding to cost pressures on imported goods. Oil prices eased slightly, with Brent crude down 6% in April but up 48% on the year.
Salary sacrifice to cut tax and boost your super
This time of year, people’s thoughts start turning to their tax return, but it can also be a good time to set things up so you don’t pay more tax than required next financial year.
Simply talking to your employer about setting up an arrangement to “sacrifice” some of your pre-tax salary could potentially lower your tax bill – and boost your retirement nest-egg.
Reducing your tax bill
A salary sacrifice arrangement simply involves coming to an agreement with your employer to pay for everyday items or services you would normally pay for out of your after-tax salary directly from your before-tax salary. This might include things like childcare, health insurance or super. The benefit is that this reduces the level of income the ATO uses to calculate your tax bill.
If you set up a salary sacrifice arrangement with your employer, it’s important to understand that while your taxable income is lower, the benefits are still listed on your annual payment summary. For some people, this reduces the tax offsets, child support payments or other government benefits they receive, limiting the value of salary sacrifice.
Salary sacrificing options
The items or services you can pay for using salary sacrifice depends on your employer.
Some employers let their employees salary sacrifice for expenses such as cars, health insurance, school fees and home phones. Others are not prepared to do this, as they may end up paying Fringe Benefits Tax (FBT) on the benefits you receive.
Employers are usually more willing to allow you to package FBT-exempt work-related items such as portable electronic devices, computer software, protective clothing or tools of trade, as these generally don’t result in FBT bills.
Boost your super account
One of the most popular forms of salary sacrifice is redirecting some of your pre-tax salary into your super fund. Most companies are willing to provide this option as it not only helps you build retirement savings, but it can also earn them a tax deduction.
When you salary sacrifice into your super, your contributions are taxed at 15 per cent when your super fund receives the money. For most people this is a lower tax rate than if they received the money as normal income.
A further bonus with salary sacrificing into super is you only pay 15 per cent on any investment earnings you receive inside super, instead of your marginal tax rate for investments held outside super.
Find out what’s on offer
If you’re interested in a salary sacrifice arrangement, it’s a good idea to discuss the subject with your employer or HR team to find out the company’s policy.
It’s also a good idea to talk to us, as the value of these arrangements needs to be weighed up carefully against your reduced take-home pay and the potential loss of government benefits.
These arrangements should be put in writing before you earn the income you are sacrificing, so you need to talk to your employer prior to the start of the new financial year if your salary will change from 1 July.
Tips for employers
Allowing your employees to salary sacrifice can help them reduce their tax bill and it boosts engagement with your business. Another overlooked benefit is if your employee salary sacrifices into their super, you can claim a tax deduction for their contributions, as they are considered employer contributions.
To do this, you need to ensure you create an ‘effective’ salary sacrifice arrangement meeting the ATO’s guidelines. Otherwise the benefits your employee receives are considered part of their taxable income.
Effective arrangements require a clear agreement stating the terms and conditions and they must be documented in writing to avoid any uncertainty or future disputes.
Sacrifice arrangements can only apply to wage and salary payments for work yet to be performed, not past earnings. Salary and wages, leave entitlements, bonuses or commissions accrued prior to the arrangement cannot be used.
A simple way to avoid problems is to document your employees’ salary sacrifice arrangements before the start of a new financial year – or whenever there is a change to their salary – so it covers future earnings.
You need to keep detailed records of these arrangements for five years and list all sacrifice amounts on the employee’s annual payment summary.
If you would like help working out if a salary sacrifice arrangement makes sense for you, call our office today.
Tax offset v tax deduction: What’s the difference?
This year’s Federal Budget was full of talk about one-off support for households in the form of tax offsets, but most people are a bit hazy on the difference between a tax offset and a tax deduction.
Both can help reduce the amount of tax you pay each year, but a tax offset generally results in a bigger dollar tax saving than a tax deduction of the same amount. The key difference is the point at which they are applied to your income when calculating the final amount of tax payable.
What is a tax deduction?
A tax deduction is one of the first things applied to your income when calculating your tax bill. It reduces your taxable income and hence the amount of tax you pay, potentially moving you into a lower tax bracket. Deductions are intended to ensure you only pay tax on income exceeding the costs associated with earning that income.
For a small business, deductions ensure it doesn’t pay tax if its running costs exceed its revenue. Common deductions include operating expenses such as stationery, and capital expenses such as equipment.
There are also temporary deductions, such as the additional 20 per cent deduction for costs related to digital adoption (like portable payment services and cyber security) and employee training expenditure announced in the 2022 Federal Budget.
Employees can claim deductions in a similar way. Personal deductions include work-related expenses like the cost of a computer if you have a home office, or supplies purchased for classroom use by a teacher. Other deductions include the cost of managing your tax affairs, donations and income protection insurance.
Offsets are similar but different
Tax offsets on the other hand, are deducted at the end of the calculation process and directly reduce the tax you pay.
Offsets are used by the government to encourage specific outcomes, such as uptake of health insurance through the Private Health Offset, or adding money to your spouse’s super through a contribution offset. They are also used to provide tax relief or financial support to certain groups in the community.
Calculating tax using offsets and deductions
The easiest way to understand the difference between an offset and a deduction is to walk through an example.
In the table below, we have two taxpayers. One person has an income of $30,000 a year paying tax of 19c on every dollar above the tax-free threshold of $18,200. This results in tax of $2,242 before any deductions or offsets. The other earns $130,000 a year, paying the top marginal tax rate of 37c in every dollar above $120,000, resulting in tax of $33,167.
As you can see in the table below, the impact of a $1,000 tax deduction provides a bigger tax saving of $370 for the higher income earner, compared with $190 for the lower income earner.
However, not only does a $1,000 tax offset provide both taxpayers with a bigger tax saving of $1,000 each, but it’s worth relatively more to the lower income earner at 3.3 per cent of $30,000 compared with less than one per cent of $130,000.
Impact of a $1,000 tax deduction and tax offset on tax owed
|$1,000 tax deduction
|$1,000 tax offset
Source (with updated figures for 2021-22 financial year): ANU Tax and Transfer Policy Institute Tax Fact #6
How tax offsets affect the tax you pay
Unlike tax deductions, the ATO automatically applies most offsets to your tax payable when you lodge your tax return.
In general, tax offsets can reduce your tax payable to zero, but they can’t be used to generate a tax refund if you don’t pay tax. If your taxable income is $18,200 or less, an offset won’t reduce the tax you pay as your tax payable is already zero. If you have paid any tax on this amount, you receive the tax back as a refund, but no offset is applied.
Also, most tax offsets don’t reduce the Medicare Levy and Medicare Levy Surcharge (if any) you are required to pay.
The amount of tax offset you receive also depends on the particular offset and your taxable income. For example, with the Low and Middle Income Tax Offset (LMITO) for 2021-22, if your taxable income is $37,0000 or less, you will receive a $675 offset on your tax payable when you lodge your tax return. If your income is $48,001 to $90,000, however, the offset is worth $1,500.
Avoiding emotional bias in financial decision making
Our emotions colour every aspect of our lives including our financial lives. Recognising how emotions can influence your financial decision making puts your rational side back in the driver’s seat and can help you to achieve positive outcomes in business and your personal finances.
So where do our feelings about our finances come from? We are the products of our upbringing, learning from and either emulating or rejecting our parents’ attitudes to money – but we are also products of our environment. Money equates success in our society and your financial position strongly influences how people treat you, as well as how you perceive yourself, so it’s no wonder that financial matters tend to stir up strong emotions.
While we experience plenty of powerful positive emotions around money – think about how exuberant you feel when you receive an unexpected windfall or win a lucrative contract – it’s the negative emotions we feel about financial matters that really have the potential to impact our decision making.
Let’s look at the most prevalent and powerful feelings associated with money and how to ensure that they don’t adversely impact your financial position.
Fight the fear
One of the most common negative emotions around money is fear. While it’s prudent to be conscious of risk in your approach to financial matters, fear can take the form of avoidance and cause you to miss opportunities. The most successful businesspeople and investors know how to take calculated risks and as we know, risk and reward tend to go hand in hand. The key is to be mindful of your fears but not let them unduly influence your decision making.
The flip side of fear is hope and that’s a powerful motivator that can be channelled into building a successful business or saving for retirement.
Greed is not always good
Greed is another common emotion that can sabotage prudent financial planning. Greed fuels get-rich-quick thinking, making you vulnerable to those that exploit the unwary. Greed can also make it harder to maintain a disciplined, long-term investment plan and makes you prone to risk taking or knee-jerk reactions when the market is volatile.
Greed is not always bad either. It can drive you to chase ambitious goals, but the trick is in knowing when you’ve got enough or reached that goal. Greed makes us raise those goal posts. That’s where having defined plans and measurable benchmarks comes in.
Guilty as charged
Even more dangerous than fear and greed is guilt. While fear and greed are largely fuelled by external factors like the performance of the stock market or your SMSF or super fund, guilt is your internal conscience speaking to you and it can be insidious. People feel financial guilt about nearly everything. Spending too much… or too little, not earning enough or saving enough, or even having more than others – if it has a dollar value, we feel guilty about it. Feeling guilty can be a key factor holding you back from achieving (and enjoying!) business or personal success.
The best way to combat money guilt is to know your triggers, foster a good understanding of where you stand financially and ensure that your fiscal management reflects your values.
It’s hard not to compare your financial situation with others. There is an innate tendency to maintain a ‘keeping up with the Joneses’ kind of awareness of the holidays your friends are having or the cars they are buying.
In business you must keep a regular eye on your competitors. It can be disheartening to see that someone is doing much better than you. However, there is always going to be someone more successful. By all means aspire to more, but it’s important not to let envy drive your decisions.
Emotions aren’t intrinsically bad; it’s how we channel and manage them that either has a positive or negative affect on our finances. Developing an awareness of what emotions drive you and what holds you back will help you achieve your version of a prosperous and successful life.
This Newsletter provides general information only. The content does not take into account your personal objectives, financial situation or needs. You should consider taking financial advice tailored to your personal circumstances. We have representatives that are authorised to provide personal financial advice. Please see our website www.evogroup.net.au or call 02 9098 5055 for more information on our available services.