How to force yourself to save money each and every year using the ATO.
This strategy isn’t about generating new money, it’s about a ‘forced savings’ technique that will help those who don’t trust themselves to save their own money.
Basically you are letting the ATO keep a portion of tax you have paid, over and above what you likely will owe, in order to get a refund come tax time.
Here is how the tax free threshold savings strategy can grant you $6K or more (roughly) in 12 months.
What does ‘tax free threshold’ mean?
Every Australian is entitled to a ‘tax free threshold’. Basically you are not required to pay tax on the first $18,200 of money you earn in each financial year.
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So if you earn $50,000 a year, you only pay tax on $32,000 as the other portion is part of the tax free threshold.
As you earn more, you get taxed at a higher rate but regardless, every income earning Australian will technically pay zero tax on that first $18,200.
How the ATO lets you claim the $18,200 tax free threshold
Each time you start a new job, you are handed a form entitled ‘ATO withholding declaration’ which you use to inform your new employer (and the ATO) of your personal details, tax file number and whether you other key details.
Saying yes to claiming a tax free $18,200
On this form you have the option of ticking ‘claim the tax free threshold’ and when submitted to the ATO, it will adjust your incoming earnings to ensure you do not pay tax on the first $18,200 of earnings.
The benefits of selecting yes to claiming the tax free threshold
This improves your cash flow and provides you with a tax free respite on a significant amount of money. For those wanting to save money, they are required to do so per the usual way; come pay day, bank a certain percentage of money away for a rainy day.
If you don’t have the self control to save money this way, the tax free threshold strategy can help you.
Simply select ‘no’ to claiming the tax free threshold to force yourself to save
If you select ‘no’ on the ATO form and don’t claim the tax free threshold, you are taxed on that first $18,200. It means you are paying tax on a sum of money, at your regular tax rate, even though you don’t need to.
This will result in overpaying tax and a resulting tax refund at the end of the year.
Example of how much you could save using this strategy
I am not going to explain in full the amount of tax you will still pay, but simply show you the amount you will overpay by ticking the ‘don’t claim the tax free threshold’ on the ATO form.
If you earn $45,000
You would normally pay 32.5 cents per dollar over a certain amount of earnings.
In this instance, you would pay 32.5 cents per dollar on the $18,200 of earnings that are normally tax free.
32.5 cents x $18,200 = $5,915 in overpaid tax
If you earn $85,000
You would normally pay 37 cents per dollar over a certain amount of earnings.
Again, you are now paying 37 cents per dollar on the $18,200 which you technically don’t have to.
37 cents x $18,2000 = $6,734 in overpaid tax
Is it better to save your own money or let the ATO hold your money?
In an ideal world, we would always want our cash as soon as possible to put towards investments, debts and other money saving, money making initiatives. Holding capital (cash) is the key to wealth.
However in saying that, holding cash is only good if you do something useful with it. Instead we find ourselves turning to credit cards to pay for holidays because we haven’t done a good enough job of saving through out the year. We use the cash we do have to pursue pointless activities and often spend every dollar we possibly can.
Using a strategy like this will guarantee you a set amount of money saved per year. The trick is to not rely on the money, forget about it. You want to get to the end of the financial year, submit a tax return and get a nice cash injection to do something wise with.
Useful ways to use the forced savings
Change your bill cycle to align with the refund
Some people I know convert all of their yearly bills to be renewed in August, which means they can use this tax refund to completely pay a number of bills each year with cash. A great way to get ahead and break the reliance on credit for big bills.
Split the refund 50/50 – investing/spending
You could split the tax return in half, doing something wise and something fun with the money. Invest a minimum of $3k per year into shares or similar while using the other $3k to cover bills and purchases you may need. The choice is yours but every dollar you invest can help you create another dollar later on.