Forced Money Saving Tax Free Threshold Strategy
Those of you who struggle to put aside money each month for savings may prefer a technique that forces you to save money instead. Forced savings can be achieved by utilising the Australian Tax Office (ATO) by basically paying over and above what you will likely owe in tax.
This forced money saving technique can reward you with up to $6,000 within twelve months and will continue to do so every year, so below we are going to explain how you can use it to your advantage. This idea pulls on the basis that every Australian is entitled to a tax-free threshold.
Each and every Australian citizen is entitled to a free tax threshold to a limit of $18,200 per each financial year. Someone earning $40,000 per annum will only pay tax on $21,800, which is the amount after the tax-free threshold has been factored in.
Each time you start a new job for example you will be required to fill out an ‘ATO withholding declaration’ form, which is used to inform your employer and the government of your personal details, tax file number and further information. It’s important to look out for the tick box; ‘claim the tax free threshold’ on this form to ensure you don’t pay tax on the first $18,200 you earn if you would prefer not to use this forced saving strategy.
Advantages of Claiming the Tax Free Threshold
If you tick the box to not pay tax in the first $18,200 then there are advantages such as the following:
- Cash flow is improved immediately.
- Additional money can be used to pay off debt.
- Additional money could be injected into investments.
Advantages of Not Claiming Tax free Threshold
This means you will be taxed on the first $18,200 at your regular rate even though you don’t need to be. This will later result in a tax refund from ATO, which you won’t have the option to spend until the end of the year when you receive it.
If for example you earn $50,000 per annum, on average you will pay 32.5¢ per $1 earned. Not selecting to claim the tax-free threshold will result in you paying 32.5¢ per dollar on the first $18,200 that results in $5,915 in overpaid tax.
Those who earn salaries closer to $90,000 would pay 37¢ per dollar in tax and would therefore overpay 37¢ x $18,200 = $6,734 dollars.
Ultimately the decision boils down to whether you feel you should have your money as soon as you possibly can because then you are in control of it. However, using this strategy will guarantee you a set amount of money saved per year preventing you from spending it on pointless activities and expenses.
A Good Example
There are a number of people who adjust their annual bills to be payable in August so they can use their tax refund to pay off bills for an entire year ahead of time. This can be one great way to break the reliance on credit cards to cover bills throughout the year.
Using the refund when it comes to split into investments can be a great way to transfer guaranteed savings into investments without the temptation of spending a single cent and hopefully improving your assets and savings.