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7 tips on dealing with fluctuating income

Written and accurate as at: Oct 10, 2022 Current Stats & Facts

Australia has long been known for its entrepreneurial spirit. Even a pandemic didn’t seem to dampen our desire to venture into self-employment. In 2021, there were 34 percent more small business registrations than in 2019*. And, around 1 in 3 surveyed Australians have said they would like to own their own business^.

Alongside the desire to go ‘solo’, more Aussies are working multiple jobs# and taking on side hustles, such as ride-share driving, to supplement their income. Around 250,000 Australians are part of the gig economy**. 

While being your own boss, or having multiple income streams, can have its appeal, a common downside can often be the creation of a ‘lumpy’ income situation—income that fluctuates between periods of highs and lows. If that’s something that you—or a family member—have to deal with, here are some tips that may help with managing income in good times, and bad.

Getting proactive in periods of higher income 

1. Build up an emergency buffer

Periods of higher income can be a good opportunity to bolster your emergency funds and build a safety net to fall back on in leaner times, or if, for example, unexpected costs come up. Putting your surplus money into a high-interest account can be one way to do this, however if you have a mortgage offset account, using it to hold your emergency funds may have the added benefit of reducing the interest payable on your loan. Bear in mind that while you may save money on your mortgage, you won’t earn any interest on your savings. 

2. Reduce non-tax-deductible debt 

Generally, and depending on your circumstances, it can make sense to pay down certain non-deductible debt, such as personal or car loans, before turning your attention to other debts, including tax-deductible debt. Doing this may eliminate the debts with the highest rate of interest—without losing any tax benefits—because these debts aren’t generally tax-deductible. Once these debts are dealt with, depending on the circumstances, it can make sense to consider mortgage repayment next. Even though a home loan is often considered a good debt, the interest payments aren’t generally tax-deductible.

3. Make extra contributions into super

In times of surplus income, thinking about the future and making extra contributions into super to boost your retirement savings can often be a sensible strategy. For some potential extra tax savings, you could consider making these contributions from your pre-tax income (up to the current concessional limit of $27,500 per financial year). These contributions are taxed at 15 percent* which, depending on your level of income, may be much lower than your income tax rate.

*However, if your combined income and before-tax super contributions are greater than $250,000, some or all of your before-tax super contributions will be subject to an additional 15% tax.

It’s also useful to note that you may be able to contribute more than the $27,500 limit if you haven’t used up the full concessional amounts in previous years.

Under the Government’s ‘catch-up’ scheme, you may be able to carry forward unused (concessional) cap amounts for up to five years. To be eligible to make catch-up contributions, among other things, your total super balance must be below $500,000 at 30 June of the previous financial year. 

Please note: Making extra contributions into super will mean that your money is locked away until you meet a condition of release for your super, so it’s important to be sure you won’t need that money until then.

4. Pre-pay loan interest and bring forward deductible expenses on an investment property

If you have an investment property, prepaying loan interest and bringing forward deductible expenses (e.g. repairs and maintenance) on the investment property loan can bring forward a potential tax deduction from the following financial year into the current one. Doing this could help to further reduce your taxable income and reduce your income tax bill at tax time.

This strategy could also be of benefit if, for example, you expect that your income will be lower in future financial years when compared to this one.

Getting protective in periods of lower income

5. Prepare a ‘slimline’ budget in advance

During lean periods when income is tight, one of the first things to do can be to revisit your expenses. But rather than wait until you’re in the thick of a money shortfall, consider preparing, in advance, a ‘slimline’ version of your budget. Doing this means you have time to look at your budget rationally, and with time on your side you can be in a better situation to make more considered choices. Once you have your slimline budget, it can be ready to click into place when your income level drops.

A simple way to get started on your slimline budget, can be to separate the ‘wants’ from the ‘needs’ and eliminate anything that isn’t an essential expense. Once you’ve done this, you can consider adding some ‘wants’ back in if you find you can afford it in periods of lean income.

6. Have your spouse make contributions into your super 

If your spouse (or partner) is in a position to make (non-concessional) contributions into super on your behalf, not only can this help keep the momentum going on the growth of your retirement savings, depending on both of your circumstances, your spouse may be able to save on tax.

Among other things, if you’re earning less than $40,000 a year, your spouse may be able to claim an ‘18 percent offset’ on their tax return, up to a maximum of $540. To be eligible for the maximum tax offset, your spouse would need to contribute a minimum of $3,000 to your super, and your annual ‘assessable’ income would need to be $37,000 or less. The tax offset available to your spouse is reduced for every dollar you earn over $37,000 and is phased out when your income reaches $40,000. Of course, even without this tax offset, your retirement savings will still benefit from a boost.

Other eligibility criteria apply, so consider seeking qualified and professional financial advice to help make an informed decision on whether this strategy is appropriate for you, and your spouse.

Remember, any contributions made by your spouse into your super will be locked away until you meet a condition of release. So it’s important to be sure you won’t need that money until then.

7. Sell assets in periods of lower income

If you’re planning to dispose of an asset in the near future, depending on the circumstances, it may make sense to delay the sale until you’re in a financial year when you expect your income to be lower. When your income (and potentially personal tax) rate is lower, this may help to reduce the amount of CGT payable, leaving you with more income in your pocket.

Please note: When it comes to the sale of an asset that triggers a capital gain (or capital loss), it’s important to consider your overall investment strategy when making any decisions (i.e. not just consideration from a tax planning perspective).

Dealing with ‘lumpy’ income can be a challenge, but there are plenty of strategies to help you manage the peaks and troughs. If you would like to chat to us about anything in this article, please get in touch.


*   https://www.afr.com/technology/behind-australia-s-new-small-business-boom-20220420-p5aeoc
^  https://news.nab.com.au/news/new-report-reveals-aussie-entrepreneurial-spirit-alive-and-well
#  https://www.abs.gov.au/statistics/labour/labour-accounts/labour-account-australia/latest-release

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