In 2021 Tax Tips

If you’re an Australian looking to reduce their taxable income, there are a few easy ways to do so. This blog post will go over three simple methods for reducing your taxable income and how much money each one could save you in taxes! 

How to Reduce Taxable Income

What are the easiest ways to pay less tax this year in Australia? We’ve rounded up 15 of the easiest ways to pay less tax that can help you reach your savings and debt reduction goals faster.

Use Salary Sacrificing

For those trying to learn how to save tax in Australia, salary sacrificing is one way. This is also called “salary packaging,” and it works a few different ways. With salary sacrificing, a taxpayer would put some of their pre-tax income toward a benefit before taxing. Some of the most common salary sacrifice benefits are motor vehicles and superannuation.

So, an employee would forgo part of their pre-tax paycheck before they get it. For example, they could use salary sacrificing to pay for a new car, computer, insurance, rent payments, mortgage payments, and other benefits. These benefits are also referred to as “fringe benefits,” They can save Australians thousands of dollars in taxes every year, with a few exceptions.

There is a limit on what can be salary sacrificed, also called salary packaged. Also, Fringe Benefits Tax, or FBT, can impact the types of benefits your employer offers. For example, employers will offer to salary package a car as a novated lease. This is an agreement between your employer, you, and a financer and is one way to access a new car while reducing your taxable income. If you want to increase your refund this year, you could also consider salary packaging your superannuation.

Keep Accurate Tax and Financial Records

The ATO is far more likely to ask many questions about your tax deductions than they were a few years ago. If they ask about your deductions, you’ll need to show them receipts for tax deduction claims. 

Unfortunately, not having a sound filing system can cause a lot of headaches for your tax time. This is because so many Australians miss deductions they can legally claim because of a lack of sound record keeping. If you make this mistake, the ATO will keep your hard-earned money that should have stayed in your pocket.

Many people wonder if they have to keep track of every single deduction. But the best thing to do when it comes to claiming deductions and satisfying the ATO is to keep track of the deduction receipts. This will make it easier for you to remember what you can claim. Record-keeping doesn’t have to be complicated.

Dedicate ten minutes of your time each week to download statements and update your logbooks. Make sure you keep all your receipts in a conveniently accessed, organised, and easy-to-use file folder or filing cabinet. Keeping accurate tax records will save you a lot of time searching for everything at the end of the fiscal year, and best of all, you’ll be able to claim your deductions and ultimately pay less in taxes.

Claim ALL Deductions

If you spend any money on anything related to earning income, you’ll want to claim it. Be sure you declare all deductions possible to pay less tax in Australia. 

Even things that may seem small and insignificant can add up to huge savings at the end of the financial year. For example, if you purchase something used for work but sometimes use it during your time off the clock, you can still claim the money you spent on it as a work-related tax deduction.

If you’re unsure whether or not you can claim a specific item as a work-related tax deduction, keep the receipt of purchase and ask your tax agent when you file. It’s always better to hang on to receipts and not claim the item than to toss the receipt and miss out on tax savings.

Minimise your Taxes with a Mortgage Offset Account

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If you have a home loan, a mortgage offset account lets you offset your non-deductible interest on the home loan with interest on the standard, taxable earnings of money in a deposit. With this arrangement, taxpayers can create a savings account with their lender. 

But instead of paying interest on the entire amount of the home loan, taxpayers are charged interest on the loan, minus the money in the savings account.

Add to Your Super (or Your Spouse’s) to Save Tax in Australia

Concessional super contributions are taxed at a rate of 15 per cent once they enter a super fund. This is different from taxed at a marginal rate, which is sometimes as high as 49 per cent. 

What are the different types of concessional contributions you can make? You can make the following concessional contributions to lower your taxes:

  •     Salary sacrificing
  •     Personal deductible contributions

There is no income tax limit on salary sacrifices. Self-employed taxpayers or unsupported taxpayers can make contributions to their supers and also claim a full tax deduction.

Get Private Health Insurance

You should only do this if it makes sense. For example, if you don’t carry private hospital insurance, but you’re single and make more than 90,000 dollars a year, or you’re a family and make more than 180,000 dollars per year, you will pay a minimum of one per cent Medicare Levy Surcharge. 

The Medicare Levy Surcharge is also collected on a mandatory two per cent Medicare Levy that most taxpayers have to pay anyway.

Basic, private healthcare plans can cost less than the one per cent of Levy Surcharge on your gross income, which would be less than the Medicare Levy you’d pay without insurance. So for some people, private healthcare might be worth it to lower your taxes. Depending on your needs and medical history, it might also be worth it for the often shorter wait times you’ll get with private healthcare.

Minimise Capital Gains and Minimise Taxes

Any significant assets sold in a given financial year, such as shares, or property, are subject to a capital gains tax. If the investment has been held for at least one year, you’ll be charged a 50 per cent capital gains tax on top of your marginal tax rate. Capital gains taxes have to be paid in the year they are realised. However, losses can be carried forward, but not back. Taxes payable within the financial year can also be decreased if you prepay deductible interest.

On investments, you can prepay expenses up to twelve months in advance. So, interest on investment loans and management fees can be claimed this financial year. If you have a substantial tax liability from the sale of an asset this fiscal year, prepaying can help you save money on taxes.

When it comes to taxes and property, another tax exemption from Capital Gains Tax is if your property is your principal place of residence or PPOR. For example, you can claim the principal residence exemption from Capital Gains Tax for your house. To get it, you’ll need to have lived in the house, or the property must have a dwelling on it that you live in. Learn more about how to reduce Capital Gains Tax for property used for business and investment purposes.

Hold investments in a discretionary family trust

A discretionary family trust can benefit high-income earners seeking to redistribute some of their income to family members in lower tax brackets.

A properly drafted discretionary trust allows trustees to distribute to the most appropriate members regarding their tax status, i.e. distribute more income to beneficiaries on lower tax brackets or those with no other income to utilise the $18,200 tax-free threshold.

Any capital gains made can be distributed to beneficiaries with capital losses available or who can use the 50 per cent discount. Franked dividends may also be paid to beneficiaries who can use the imputation credits to reduce tax on other income.

Trusts can also use the 50 per cent discount on CGT on the sale of an asset if held for more than 12 months.

 Invest in an investment bond

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Investment bonds (also known as insurance bonds) are ‘tax paid’ investments that can be used as a wealth-building strategy. They are a type of life insurance policy with the features of a managed fund sold through life insurance companies and building societies.

Earnings, such as income and capital gains made from a bond, are excluded from the individual’s income since the bond provider pays tax at 30 per cent internally, leaving nothing to declare on a tax return. After ten years, no further tax is payable.

Investors can top up the amount in the fund as long as their subsequent investment does not exceed 125 per cent of the initial investment. Doing so triggers the 125 per cent rule, which sets back the 10-year benefit to year one for the newly invested amount.

Review your income package

Consider salary sacrificing to reduce your taxable income. Salary sacrificing involves agreeing with your employer to pay for some items or services straight from your pre-tax salary.

Individuals can salary sacrifice many things such as electronic devices, motor vehicles, childcare, private health insurance, super, etc.

Most employers will offer salary sacrifice to super, but it is best to talk to your employer to see what other benefits they offer.

Salary sacrificing is available for anyone who earns more than the $18,200 tax-free threshold. However, it is most suitable for individuals on mid to high incomes.

Simple (and perfectly legal) tax-saving tricks

You can get started on a few things immediately to prevent paying unnecessary tax at the end of the financial year.

Remember, consider each of these as part of your overall financial situation, goals and limitations. Then, discuss them with a tax accountant if you are unsure.

  • Prepay deductible expenses. Pay expenses this financial year and reduce your taxable income. Less income equals less tax.
  • Cash in on the capital gains tax discount. A capital gain is the profit made when an asset is sold. You’re required to pay tax on any profit as it’s treated as income. Discounts may be applied to individuals, trusts and superannuation funds, but planning is key.
  • Create a company, as they’re a separate legal entity and are subject to different and often lower tax rates than for individuals.
  • Set up a trust for tax effectiveness and asset protection. There are many types of trusts with differing benefits.
  • Start a self-managed super fund (SMSF). Save on fees and minimise contributions and investment income taxes. Take advantage of the unique tax-effective investment strategies that apply exclusively to self-managed super funds.
  • Claim car expenses by logging all business-related kilometres you travel.
  • Use negative gearing. Negative gearing reduces your taxable income. It offsets the losses when the income received from an investment property is less than the loan repayments and maintenance costs.
  • Salary package superannuation contributions. Reduce your taxable income by diverting your salary into a super fund.
  • Plan ahead. A well thought out tax strategy will keep you in total control of your end of the year tax bill – no surprises. Don’t pay more than you need to.

Tax tricks that will get you into trouble

The ATO is on the lookout for these tax avoidance tricks, so if you’re heading in the direction of any of these, stop now.

  • Excessively large deductions or tax offsets when compared to investment income.
  • Mixing private expenses with business expenses
  • Investing now, with no return until later years, if ever
  • Complex financing arrangements with no obvious commercial purpose
  • Creating a loan that may never need to be repaid
  • Claiming deductions that may never be paid for

Tax avoidance schemes to dodge at all costs

Unfortunately, when it comes to financial matters, there are always a few unsavoury characters lurking in the wings, waiting to lead the unwary astray. So beware of any scheme that sounds too good to be true.

“Tax avoidance schemes range from mass-marketed arrangements (advertised to the public) to boutique arrangements (specialist financial arrangements offered directly to experienced investors). Some are marketed to individuals and may exploit people’s social or environmental conscience and generosity. Others target self-managed super funds.” – Australian Taxation Office.

Tax avoidance schemes typically include complex transactions or distort the way funds are used to avoid tax or other tax obligations.

Be on the lookout for structures to arrangements that:

  • Incorrectly classify revenue as capital
  • Exploit concessional tax rates, such as those available to superannuation funds
  • Illegitimately release super funds early
  • Inappropriately move funds through several entities (such as a series of trusts) to avoid or minimise tax that would otherwise be payable.

Paying more tax than you need to is not something you want to do. It’s giving money away – and you’ve got plans for your money and your future.

Tax planning may sound complex, or you may think you’ve got most things covered. But, it’s the tiny details that matter. And when you’re earning an above-average income, tiny details can mean enormous savings.

Many smart professionals and business owners manage to squeeze even more out of their income by paying the absolute minimum tax they’re obligated to.

But planning is essential. The longer you put on the list of things to do tomorrow, the more money you’ll give away at tax time.

So act now. Review the advice in this post and pick one thing to do this week – reviewing your home and investment loans is a great place to start.

Take a step in the right direction, and you’ll be basking on that beach in Fiji before you know it.

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