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Tax rebates and your mortgage

29 June 2018

What do the end of financial year (EOFY), Federal Budgets and your mortgage have in common? Not a lot at first glance, but this year’s budget, Ruby notes, could have some very positive effects on, for example, your mortgage.

To understand what tax you will pay this year and (in light of the Federal Budget handed down in May), what tax breaks you can expect to see over the next few years (if that budget passes) and what that means to you, it is important to understand the difference between ‘marginal tax rates’ and ‘the rate of tax paid’.

Your marginal tax rate is the highest rate of tax you pay on your income. The rate of tax paid is different for each of the brackets into which your income falls (see table below for what you pay now. This does not include the two percent Medicare levy). For personal income, Australia currently has five tax brackets.

Taxable income

Tax on this income

0 – $18,200

Nil

$18,201 – $37,000

19c for each $1 over $18,200

$37,001 – $87,000

$3,572 plus 32.5c for each $1 over $37,000

$87,001 – $180,000

$19,822 plus 37c for each $1 over $87,000

$180,001 and over

$54,232 plus 45c for each $1 over $180,000

The 2018 Federal Government Budget’s proposed tax changes will - over time - reduce the brackets from five to four. Across the seven years it will take to introduce the changes, and assuming the 2018 budget is passed and enacted, the plan is to remove the 37c tax bracket. From July 2024, if you earn between $41,000 and $200,000 you will pay 32.5c on every dollar over $41k and before $200k.

There have been a number of assessments of the benefits for various tax payers over the life of the tax changes proposed by the Federal Government, for example, the ABC analysis of the bracket changes and who benefits gives a clear indication of winners and losers. Putting those issues aside, we thought it would be interesting to assess the impact of a rebate on your mortgage.

For example, for an income earner in the $37k to $125k brackets, it has been calculated you will receive a rebate amounting to about $10 a week – that’s about three cups of coffee if you’re lucky. If you ditch the coffees and put that rebate into your mortgage, however, you’ll experience substantial benefit. (You could substitute Super or savings account for mortgage giving you yet another slant on what your rebate might mean to you in the long run.)

Back to our example: $10 more a week on, for example, a $350,000 home loan, which you’re paying off with monthly repayments, over a 25 year period, on the average 4.35% interest rate, would see you pay the loan off 11 months ahead of schedule and save you $9915.

Imagine the impact for a working couple who put their tax refunds toward their mortgage.

The views expressed are those of the author and do not necessarily reflect those of the Westpac Group. This article is general commentary and it is not intended as financial advice and should not be relied upon as such.

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