Mortgage interest costs You can claim a tax deduction for the interest you pay on your mortgage, which is part of the investment strategy known as negative gearing. Negative gearing occurs when the cost of owning an investment property outweighs the rental income it generates.
Reduce your interest
When you receive your tax refund, if you're a live-in homeowner, it's often not a bad idea to put the lump sum straight onto your mortgage. The faster you pay it off, the less interest you will pay over the life of your loan.
You may be able to lower your mortgage payment by refinancing to a lower interest rate, eliminating your mortgage insurance, lengthening your loan term, shopping around for a better homeowners insurance rate or appealing your property taxes.
"The Australian Government has tax incentives that allow home or business owners to redirect up to 50% of their income tax to pay off their mortgage faster and reduce debt. If you qualify, you could be taking advantage of government tax incentives to save up to half of your tax."
You can salary package multiple expenses depending on your employer. Even if you are already making the most of salary packaging for your bills, car, meals and entertainment or childcare fees, you may be able amend your current arrangement to include mortgage repayments.
Overall, salary sacrificing could be a great way to grow your retirement savings but it's not right for everyone. If you're still unsure if salary sacrificing is right for you, speak to a financial adviser who can help assess your personal circumstances and provide tailored advice.
The Low to Middle Income Tax Offset, which expired on June 30, 2022, previously saw Aussies who earned up to $126,000 per year receive an offset in their tax return, as shown below. But with the offset no longer available, taxpayers who once received it could now be seeing their tax refunds cut by up to $1500.
The low- and middle-income tax offset (LMITO), which was responsible for big returns during the COVID-19 years, has expired. But its cousin, the low-income tax offset (LITO) is still around and is worth up to $700 depending on your income, with those earning up to $66,667 eligible for a tax break.
There's no need to pay off your mortgage by a certain age, although one common rule of thumb says you should pay off your mortgage before you retire. The idea is that getting rid of one of your biggest monthly expenses means you need less income to cover your living expenses.
You could make smaller overpayments each month or overpay with a lump sum whenever you have the cash to hand. Either choice should lead to mortgage savings, but they both have their pros and cons. The main advantage of regular monthly overpayments is that it's more predictable.
Prepayment penalties are usually equal to a certain percentage you would have paid in interest. This means that if you pay off your principal very early, you might end up paying the interest you would have paid anyway. Prepayment penalties usually expire a few years into the loan.
Effect of paying an extra $1 a day
Paying an extra dollar a day on our hypothetical $500,000 mortgage will reduce repayment time by three months and save about $5,470 in interest.
Interest on mortgages tends to accrue daily, so repaying weekly will save you more interest than repaying fortnightly, but not much. Both generally tend to be better than paying monthly. Synchronising your mortgage repayment frequency with how often you get paid is a great way to help you to budget.
Introduced in 2018/19 budget, the LMITO gave those earning between $37,000 and $126,000 a tax benefit of up to $1,080 depending on how much they earned. The offset increased, and those earning between $48,001 and $90,000 during the 2021/22 financial year got the full $1,500 offset.
Under the proposal, all low and middle income earners who earn less than $126,000 a year will qualify, with 4.5 million workers receiving a full lump sum of $1080. And the money could be in your pocket soon; anyone who has already lodged a tax return will score the offset in their payment from next week.
If you make $165,000 a year living in Australia, you will be taxed $49,417. That means that your net pay will be $115,583 per year, or $9,632 per month. Your average tax rate is 30.0% and your marginal tax rate is 39.0%. This marginal tax rate means that your immediate additional income will be taxed at this rate.
If you make $80,000 a year living in Australia, you will be taxed $18,067. That means that your net pay will be $61,933 per year, or $5,161 per month.
If the calculated LITO offset is greater than your tax payable, the excess is not refundable, and it also can't be used to offset Medicare Levy. The new LITO of $700 replaced the $445 offset from 1 July 2020, and applies together with the LMITO of up to $1,080 which ended 30 June 2022.
Is the tax offset scrapped for 2023? For the 2022-23 income year (1 July 2022 – 30 June 2023), the low and middle income tax offset is no longer available. This means that your tax payable will be calculated at the full amount, without any reduction applied.
If your employee wants to sacrifice 100% of their wages then you would set the calculation basis to 100% of gross wages. It's important to note that this will effect all employees who have that payroll category selected.
Under a salary sacrifice arrangement, you should pay less tax than you would have without an arrangement. However, before entering into a salary sacrifice arrangement you should consider impacts and associated costs.