The 2020 Federal Budget and What It Means For You as an Individual

Finance Advice | 4 Nov, 2020

2020 has been an extraordinary year for Australia and the world. We’ve faced a global pandemic, the loss of life and jobs and a deepening recession. So, it’s no surprise that the 2020 federal budget has been designed to help us rebuild the economy, create jobs and secure Australia’s future.

But how does it do this? And how does it affect you?

How Does the 2020 Federal Budget Affect You Individually?

The 2020 federal budget affects individuals in two main ways. The first is by reducing tax rates. The second is through an amendment to the responsible lender obligations.

Tax Reductions

In the current budget more than 11 million Australians will receive tax cuts in 2021. The tax cuts will come through an extended Lower Middle Income Tax Offset and expanded personal income tax brackets. These two schemes work together to increase the tax cuts available to certain taxpayers.

Lower Middle Income Tax Offset (LMITO)

The LMITO was introduced in 2018 to lower the amount of tax that taxpayers earning between $45,000 and $90,000 have to pay. Over the past couple of years, this may have accounted for up to $1,080 increase on tax return for eligible Australians.

The LMITO is set to expire in 2022, and was scheduled to be replaced by the second stage tax cuts. However, in the recent budget the second stage tax cuts have been brought forward to 2020. So, there will be a two-year period where both those schemes will be available.

Tax Brackets Expanded

The second stage tax cuts effectively increase the upper limit on some tax brackets and so provide tax cuts for impacted taxpayers.

As of now, the 19% personal income tax bracket will expand from an upper limit of $37,000 to $45,000. And the 32.5% marginal tax rate bracket will go from an upper limit of $90,000 to $120,000.

So, what are my tax savings?

In the simplest terms, if you’re earning more than $37,000 and up to $45,000, you’ll make a tax savings of up to $1,080 (which is coincidentally the same dollar amount as the LMITO). If you’re earning more than $45,000 and up to $120,000 you will save the same $1,080 but also up to an additional $1,350, possibly saving you a total of $2,430.

Your tax reductions work in conjunction with the LMITO, meaning that in certain circumstances you can save that additional $1,080 as well.

This analysis is simplified, of course. So, if you’d like to know what savings will apply to you specifically, speak to your accountant or financial adviser, or visit the Government’s tax relief estimator.

Benefits from Tax Savings

One of the main benefits of reduced tax rates is that they should improve your borrowing capacity. So, if you’re looking to purchase your first home, upgrade your current hom, or are considering an investment property, now is a great time to ask us to re-cast the numbers for you.

Amendments to Responsible Lender Obligations

Responsible lending was introduced shortly after the Global Financial Crisis in 2009. Its main aim was to shift the responsibility for making good lending choices from the borrowers, to the lenders. While this is good in theory, in some cases it led to banks combing through banking transactions and analysing every individual expense, such as Netflix expenses and UberEATS charges.

The proposed reforms on the Responsible Lender Obligations would make it easier for everyday Australians to access credit – such as home loans, credit cards and business loans – by rolling back rules that require banks to conduct meticulous checks of people’s expenses before administering a loan.

Benefits from Responsible Lender Obligations Amendments

Current responsible lending regulations allow little consideration for ‘discretionary’ expenses. They also don’t make allowances for clients who have consistently demonstrated good control over expenses.

As the amendments flow through to lender policies this will result in clients being increasingly responsible for understanding their own expenses and ability to repay loans. And, ultimately, that will lead to higher borrowing capacities generally.

Note for Business Owners

The 2020 federal budget also has some proposed amendments that could affect your business strategy in the upcoming tax years. Have a look at our article, ‘The Federal Budget 2020 and What It Means For Your Business’[insert link] for more details.

Government Ratification

At this stage the individual taxation rates have already been ratified by the government. However, the remaining elements of the federal budget 2020-21 will need to be ratified before coming into effect.

Now is an excellent time to speak to your specialists – your accountant, financial adviser or finance broker – to find out how you can utilise these tax breaks, and other economic support to your best advantage.

We’d love to help you take advantage of the tax and other benefits in the 2020 federal budget. Get in touch.

 

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