3 ways to make the most of the stage 3 tax cuts

The stage 3 tax cuts have generated more than their fair share of headlines this year. They have now passed the Senate and are set to kick in from 1 July. The good news is they will put a little more money into the pockets of many Aussies. 

The challenge will be to make the most of these tax cuts, rather than having the extra money eaten away by the day-to-day costs of living. We explore three strategies that you may consider using to capture the benefits of the tax cuts – adding the extra money to your mortgage, investing it in growth assets or topping up your super. 

We have crunched the numbers for all three strategies based on three levels of income – $70,000, $100,000 and $130,000 – based on a 10-year period. Our hypothetical examples assume the extra money is used for that entire time.  

It’s worth noting this isn’t about ‘racing’ the different options in the hope of finding a ‘winning’ strategy but simply about highlighting the potential impact the different strategies can have on your hip pocket.   

Some people will be at a stage in life where paying off the mortgage will be the best choice, for others investing regularly in growth assets will be a better option and, for others, making extra superannuation contributions will be the way to go. Ideally, this will get you thinking about putting a plan in place to make the most of the extra money. 

The impact of the tax cuts 

Let’s start by looking at how much money you may have to play with based on the different income levels we are looking at. As you can see from the table below, we are not talking about huge sums of money –  the savings work out to be roughly $27, $42 and $65 each week. The money could easily be lost amongst the costs of day-to-day living which is why it’s so important to have a plan to be deliberate about using the extra money. 

Strategy 1: Add the extra money to your home loan 

As personal finance strategies go, making extra mortgage repayments is very much in the ‘oldy but a goody’ basket. This strategy means you’re effectively ‘earning’ the rate you’re paying on your home loan, tax-free and risk-free. At the moment this is around 6.5%. 

The downside of the strategy is that the ‘earning rate’ of extra mortgage repayments is likely to be a little less than rate earned from growth investments, and it doesn’t offer the tax benefits of superannuation contributions. 

By putting the extra money into your home loan, you will reduce the balance of the loan quicker, meaning less interest on every future repayment. For our example, we have focused on the additional reduction on your mortgage, over what it would normally have been in 10 years’ time. The lower mortgage in 10 years' time also means interest rate savings into the future.

If you are earning $70,000 per year and put your $1,429 annual tax break towards your mortgage, after 10 years you will have reduced your mortgage balance by an extra $20,040 – regardless of your starting balance. Similarly, the tax cuts for a person earning $100,000 will equate to an extra $30,649 paid off their mortgage over 10 years and for the person on $130,000, an extra $47,490. 

While these amounts might not be considered life changing sums of money, capturing additional weekly income of $27 (for someone on $70,000) and, over a decade, turning it into a benefit of just over $20,000, is not insignificant. 

The potential benefit of adding the extra money to your home loan 

Assumes interest rate of 6.5%p.a. 

Strategy 2: Use the money to build a growth portfolio  

The second strategy to consider is using the extra money from the tax cuts to invest regularly in growth assets, for example a diversified portfolio of shares. 

Over the past 20 years (to the end of January 2024), Australian investors have seen an average return of 8.8% a year for investing in Australian shares, and 8.3% a year for investing in global shares. For this strategy we will use a figure of 8% a year to allow for some tax having to be paid. 

Because the return from investing in growth assets is a little higher than the return (i.e., the interest saving) from making extra mortgage repayments, the ending balances are also a little higher after the 10 years.   

For example, as you can see from the table below, the person earning $70,000 per year ends up with a portfolio of $21,771. This is about $1,700 more than the extra mortgage repayment strategy. For the person on $130,000, investing the tax cuts over the next 10 years sees them finish with a portfolio valued at a little more than $51,500.  

The potential benefit of using the extra money to build a growth portfolio 

Assumes earnings of 8%p.a. after tax 

Strategy 3: Use the extra money to top up your super 

The third option to consider is using the money from the tax cuts to make additional superannuation contributions. This strategy has two benefits over using the extra money to build a growth portfolio – there is a tax saving in contributing money to superannuation and investments earnings are likely to be slightly higher in the low-tax superannuation environment.  

An important trade-off to remember, though, is that you probably won’t be able to access the money in your super until you’re at least 60. 

For our hypothetical examples, we have assumed that you make pre-tax contributions to your super. This will mean you end up with more money going into superannuation than the previous two strategies. For example, someone on $70,000 will effectively be able to add $1,579 each year into their super compared with $1,429 for the other two strategies. 

Over 10 years the superannuation strategy adds up to $24,800 in super for someone on $70,000, $37,800 for someone on $100,000 and $58,700 for someone earning $130,000. We have used an earnings rate of 8.5% per annum (after tax). 

The potential benefit of using the extra money to top up your super 

Assumes earnings of 8.5%p.a. after tax 

Key takeaways 

The upcoming stage 3 tax cuts create a unique personal finance opportunity. On a weekly basis, they are not huge sums of money and they can easily get lost in the business of day-to-day life. 

However, for those people who choose to deliberately capture some or all of the benefit, and use it to improve their financial position through extra mortgage repayments, investing regularly in growth assets or making tax-deductible superannuation contributions, the benefits over 10 years are potentially significant – up to $24,834 for someone on $70,000, up to $37,816 for someone on $100,000 and as much as $58,699 for someone on $130,000.