Hi Lifehacker, As an IT pro with a large HECS debt, what's the best way to maximise your tax return? Is it better to splurge out on a laptop plus other claimable tech stuff yearly? Thanks, Taxed Tech
Laptop picture from Shutterstock
For those not across this: a HECS debt (more properly a HECS-HELP debt these days) is the sum you have to pay back for university tuition. Once you have earned more than a fixed amount in taxable income ($51,309 in 2013-2014), you'll pay back a percentage of that income (between 4 per cent and 8 per cent in 2013-2014). Each year, your unpaid debt is indexed by a fixed amount (2 per cent for 2013-2014) on 1 June.
Our general advice on these debts is always this: you have to pay off the minimum amount each year (and your employer should automatically deduct that amount), but there's rarely any sense in paying more than that. If you have other debts such as credit card debits (which often have a 15 per cent or more interest rate), it makes more sense to pay those off first. Very few commercial debts have anywhere near as low a rate of interest as the 2-4 per cent range which typifies HECS-HELP indexation, so our usual advice is to lower the highest-interest debts and let HECS-HELP take care of itself over time. Pay off the minimum (because you have to), but only pay off the excess HECS-HELP if you have no other debts.
The one exception (as some readers pointed out back in 2012) is when you are in the final year where you are paying off that debt. At that point, paying it prior to tax assessment can make sense because you can take advantage of the 5 per cent discount offered for advance repayments, which won't apply if you don't pay out the debt and rely on the tax system to do it for you.
That makes sense in your final year, but is arguably of less use in prior years. Again, it definitely isn't a sensible choice if you have higher interest rate debts such as credit cards or car repayments. (It's not clear whether the 5 per cent discount will be maintained after the next Federal budget; time will tell.)
With all that background set, the question becomes: is it worth making deductible purchases solely to lower the amount of HECS-HELP you have to repay in the first place? The exact answer will vary depending on your circumstances, but the big picture version is this: it only makes a big difference if you can dramatically change the percentage rate that applies, and to be honest that's often unlikely.
We'd point out first that laptop deductions are complex anyway: you can only salary sacrifice a laptop if it's your sole working machine, and it has to be paid for from your pre-tax income. But the issue here is really whether that sacrifice takes you down to a different repayment level. If it doesn't, it makes no special difference to your repayments. Even if it does, the advantage might not be worth the effort.
Here are the threshold amounts for the 2013-2014 financial year:
|$51,309 - $57,153||4.0%|
|$57,154 - $62,997||4.5%|
|$62,998 - $66,308||5.0%|
|$66,309 - $71,277||5.5%|
|$71,278 - $77,194||6.0%|
|$77,195 - $81,256||6.5%|
|$81,257 - $89,421||7.0%|
|$89,422 - $95,287||7.5%|
|$95,288 and above||8.0%|
If you're earning $52,000 a year and you can legitimately deduct your $1000 laptop, then you will fall back into the 'Nil' bracket and you won't have a HECS-HELP repayment that year. But if you're earning $56,000 a year, that deduction won't change your HECS-HELP percentage. You'll still pay a little less HECS-HELP and tax overall (because your income is smaller), but choosing to purchase a laptop purely to lower that debt wouldn't make a lot of sense. The same applies across the other brackets.
You also have to remember that if you don't pay the debt, it will be indexed. Let's use the $52,000 income and $1000 laptop example again. You won't pay 4 per cent of your $52,000 income, which amounts to $2080 — but you will have spent $1000 to do that. As well, your debt will be indexed by 2 per cent this year (and potentially more in the future).
Whether that adds up depends on the level of your debt. Here's how it works out for a range of debt figures in a simple sense. The lesson here? If your HECS-HELP debt is small, it makes sense, but if you have a large debt, indexation may offset the benefits of a cheap laptop:
|HECS-HELPsize||Index amount||Cost including $1000 laptop||HECS at $52000||Saving|
Obviously, you'll also pay less tax if your income is slightly lower, but that's an assessment that's a little too individual to address here.
Let's reinforce the key point: the relevant extra savings here only happen if your HECS-HELP level changes as a result of the deduction. At figures close to that level, a deduction might help. In the mid-range, they won't. And that's without considering that money you have to spend on HECS-HELP is money you can't spend on other investments. From that perspective, eliminating any debt, even one indexing at less than market rates, might be the sensible option. That becomes truer the higher your income is, given how rapidly HECS-HELP repayments increase.
Ultimately, your tax decisions are yours to choose and defend, and we're only providing background here: if you want individual, specific advice, consult a professional. You might have to buy a laptop for work anyway, in which case any saving is an added benefit, not a goal. But I find it hard to imagine too many contexts where spending money on a laptop purely to avoid paying off HECS-HELP in a given year will be very helpful in the long run. By all means claim legitimate deductions, but HECS-HELP is something you will have to pay off sooner or later.
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