Budget night, the night that most financial professionals look forward to and tell their kids they cannot be interrupted whilst watching. Interested in which announcements media were right about, and which announcements the Government decided not to leak so that they had some surprises to announce.
There are always good and bad things in the budget for everyone. It is a tough job to try to please all the people affected by the decisions made, and it is just never going to happen.
The part that I detest the most about budget night is the inevitable media commentary focusing on who has missed out, and the “tough” questions the journalists ask that are sometimes inane or irrelevant, but the journalist persists in asking so that they look like they are being smart and trying to get a “win”.
One of the most frustrating aspects that is raised very frequently is how tax cuts will favour the wealthy. “Those on higher incomes will benefit the most from tax cuts”.
Well, guess what? It is hard for people who pay little or no tax to actually save tax.
There you go. I said it. I absolutely agree that those on higher incomes will benefit the most from tax cuts. It is the truth. I am not going to try to deny it. I bend to the reporters’ will and clearly clever commentary – that the wealthy and those on higher incomes will benefit the most from this strategy.
But is that really such a bad thing? The Pandemic has meant a lot more people are on lower incomes right now, and taxpayers are really, really valuable to the economy. Of course those who are doing it tough need support and assistance at this time, and the deficit is showing the stimulus and support being provided is significant.
But this time, there is some luck involved in who has kept jobs and who hasn’t. I mean who would have thought hospitality and travel would be dead industries in 2020? This situation is not a case of people who should have known their occupation was on its way out. The people in trouble are not selling fax machines or operating video hiring stores, they are just unlucky.
But conversely, those who have kept their jobs are lucky, but are not all feeling that way. There are plenty of people who are doing it tough every day working in the pandemic in changed and difficult circumstances who have not had any government benefit and have still had to get up every morning and go to work. They are listening with some jealousy to the popular commentary that people are baking, doing jigsaw puzzles, renovating and are bored. These people would love some time off, and the safety of staying home even on a lower income. They know they are lucky, but it is still hard.
So don’t they deserve some benefit from the budget too? I think they do. They are the lucky ones, but they shouldn’t have to do all the heavy lifting for everyone with no financial breaks.
So let’s look at this closer. If your taxable income is $100,000 pa you will benefit by $1,530 pa from the tax cut in the 2021 financial year. If your taxable income is $50,000 you will benefit by $1,080 pa. But if your taxable income is $30,000 you will only save $255 pa*. That seems unfair, right? The person with the least income is not much better off. Doesn’t that favour the wealthy?
Well, sure. But consider this. The first person pays $24,497 pa in tax and medicare levy, person 2 pays $7,797 and person 3 pays $2,242**
So the savings are actually 6.25% of tax for the highest, 13.85% for the middle, and 11.37% for the lowest level in savings. So if you look at it this way, the highest income earner in this example on $100,000 pa is actually getting less than half the tax saving than the person on $50,000 pa.
People who have lost their jobs or hours and are on Jobkeeper at $600 pw, or on Newstart at $815.70 pfn (single, no children) from September 2020 are paying little tax (depending on their personal situation) so it is much harder for them to save tax.
It is really important that you don’t lose perspective and fall for the media hype and headline hysteria during these times. The most important thing for you is to focus on what you can do with your situation to make the most of it. The Government is doing a pretty good job with their economic strategies. It’s not perfect and never will be, but they have stepped up and recognised how dire this situation is and acted accordingly.
Everyone needs to live within their means, get help when they need it either personally or financially and do the best they can. Focus on what you can control, and make sure that you are doing what you can to maximise any opportunities that may arise.
These are tough times, but telling those still working that they are being favoured by tax cuts is not going to help anyone. We need them to feel valued, so that they keep going and help pay taxes for those who can’t right now.
The future is going to be different. Hopefully better but definitely different. Just do your best.
Adv. Dip FS (FP)
Insider Out – Understand and Trust your Advice
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*Source ABC calculator online – savings are in comparison to tax paid in 2020 financial year and include income tax, low-income tax offset, and low-and-middle-income tax offset.
** Source moneysmart income tax calculator for 2020 financial year.