‘Don’t waste it’: Smart ways to spend your income tax cut

Financial adviser Glen Hare of Fox & Hare says the only strategies that can deliver guaranteed (or close to) returns are those involving tax or debt.

For young people, a tax cut may be a good time to think about salary sacrificing and taking advantage of the First Home Super Saver Scheme, Hare says.

“If you salary sacrifice a portion of your income into superannuation, you’ll get a guaranteed return. If you’re on a marginal tax rate where you’re paying 30 per cent, if you salary sacrifice a portion of your income into your superannuation, you’re going to save 15 per cent,” Hare says. Of course, that money will be locked away until retirement.

Salary sacrificing into super may be an especially good idea for pre-retirees, says financial adviser Benjamin Brett, from Bounce Financial.

“The concessional contribution cap for contributing to superannuation is increasing to $30,000 from the current $27,500 in the 2024-25 tax year, allowing people to contribute more each year and receive a further tax deduction.”

Similarly, plugging those weekly savings into either your mortgage or your offset account can reap a fairly guaranteed return, Hare says.

“If you’ve got a mortgage of 6 per cent, and you put that extra money into your offset, you’re saving 6 per cent on interest, and that’s a guaranteed return,” Hare says.

Brett agrees, and says this is one way to deliver significant benefits over the long run.

“For a lot of families, their biggest cost is a rising mortgage repayment. In an environment where debt is no longer cheap, directing some of this money towards extra repayments onto the home loan or to other debt could have an outsized effect on their finances over the long term.”

Consider your credit cards, says Hare. “If you’ve got a credit card bill, and you’re paying 20 per cent interest, that’s a guaranteed return.”

The same goes for personal loans.

“Making additional payments on debt is a guaranteed return. You know exactly what that rate of interest is that you’re paying.”

Scott Montefiore, director of wealth services at William Buck, says people with no mortgage but a HECS debt could also use the tax savings to reduce or pay off their student loan.

“One consideration is to pay off your anticipated tax saving from the stage three cuts to prepay your HECS debt before May 31, 2025, as indexation is applied on June 1 of that year,” he says. Paying this early would mean that the indexation for the amount you prepay would not be applied,” Montefiore says.

Putting the extra cash into a high-interest savings account or an ETF may make you money, at around 5 per cent for a high-interest account or between 6 per cent and 10 per cent for an ETF. But Hare says to be careful of letting psychology rather than logic dictate your decisions.

“People want to be able to see that money sitting in their bank account, versus paying down that debt. But from a financial perspective, it makes absolutely no sense to get 5 per cent when you can save 20 per cent.”

Start an investment portfolio

If you don’t have any debt, investing the savings is another option.

“If somebody is already regularly investing, then this money can be used to increase the amount they’re putting into those investments,” says Hare.

“But if they’re not, this is a really good way to start that. Regularly investing $20 or $30 a week in a diversified ETF is a good way to start.”

If you’re only investing the difference between your pre-tax cut and post-tax cut pay, it’s important to look for low-fee investment options, says Hare.

That is, if you’ve only got an extra $30, you don’t want to be paying $10 in brokerage.

“A number of the ETF providers have started their own personal investor platforms that don’t come with transaction fees, so that’s one way to remove the barrier for those investing nominal amounts,” says Hare.

Don’t be afraid to have a fun plan

Edwards adds that if you’ve been struggling to make ends meet, or you’ve given up things like the gym or Netflix subscriptions, there’s nothing wrong with using the money to uplift your lifestyle.

Just be intentional about it. “It’s about asking yourself, ‘Which of the things that I’ve cut back on that are going to add the most value to my life, if I were to add them back in?’” she says.

On the other hand, you may want to take a longer-term view. That is, if over the year you know you’ll have an extra $1000, why not bank it for a future holiday?

“These things can be very easily absorbed into a couple of extra coffees or some thoughtless additions to the grocery trolley,” Edwards says. “Really, the best thing we can be doing is making sure that it isn’t just absorbed into the pressures of life.”