In 2021 Tax Tips

How To Reduce Taxable Income

This post is designed to be informative and helpful to you, the reader. It provides tips on how to reduce your taxable income in Australia.  The key thing we want to make clear is that this article isn’t about tax evasion or anything like that! 

We’re talking about legal ways of reducing the amount of money you need to pay in taxes each year by using deductions and credits you may not have been aware were available. So if there’s one piece of advice we can give, it would be: don’t just read this article, take action!

If you are looking for tips to reduce your taxable income in Australia, this blog post will be a great resource. We have compiled a list of different ways our team members have reduced their taxable income. 

Some people might not realise that they can claim certain expenses as deductions which leads to them paying less tax. This blog post is designed to provide the reader with some helpful hints and tricks when it comes to reducing their own taxes by claiming deductions. If you find any information within the article useful, please share it!

1. Tax Deductions for Work-Related Expenses

When investigating how to reduce taxable income, the first place to start looking is the tax deductions you qualify for.

According to the Australian Tax Office (ATO), individuals are allowed to claim deductions for some work-related expenses.

Employees are entitled to claim work-related expenses such as:

  • home office expenses;
  • self-education expenses;
  • tools, equipment and other assets; as well as
  • vehicle and travel expenses

2. How to Reduce Taxable Income Through Charitable Donations

One way to reduce your taxable income is to donate to a DRG organisation. A DRG (deductible gift recipient) is an ATO recognised organisation or fund that can receive tax-deductible gifts.

You are allowed to claim a tax deduction depending on the type of donation:

  • money: the contribution or gift is more than $2, and you’ve kept a record of it;
  • property or shares: see the ATO for the special rules relating to this type of donation; and
  • gifts under the Heritage and Cultural programs: see the particular circumstances where donations can be deductible

3. Tax Deductions for The Cost of Managing Your Tax Affairs

Did you know that if you hire an accountant to help with tax advice as well as the preparation and lodging of your tax return, you are allowed to claim a tax deduction for those expenses?

You are also entitled to claim for the for tax-deductible expenses you incur in managing your tax affairs in general, such as for:

  • travel costs associated with getting tax advice;
  • litigation costs;
  • obtaining a valuation for a deductible gift or donation of property; and
  • any interest imposed by the ATO

4. How To Reduce Taxable Income Through Personal Super Contributions

If you are able to make a personal contribution to your superannuation fund each year, you could qualify to claim a deduction for the contribution.

Note: you can’t claim a deduction for super contributions paid by your employer directly to your super fund from your before-tax income

To claim a deduction for personal super contributions, your income must be generated from:

  • salary and wages;
  • a personal business;
  • investments;
  • government pensions or allowances;
  • a foreign source;
  • trust distributions; or a partnership

However, bear in mind that claiming this as a tax-deductible expense will mean that the superannuation fund will pay the tax at 15% instead.

5. Salary Packaging

Also commonly known as salary sacrificing, salary packaging involves arranging with your employer to package your salary into certain benefits.

So, essentially, you are agreeing to receive less income after tax in exchange for your employer paying for certain benefits from your salary before tax.

Examples of benefits can include:

  • car payments;
  • loan repayments;
  • school fees for your children;
  • and Home phone costs

Example: 

Joan earns a salary amounting to $100,000.

She enters into an agreement with her employer to package her salary so that she receives $84,000 as income while $15,000 is paid towards her car and $1,000 is paid towards other expenses.

So, Joan’s taxable income is reduced to $85,000, resulting in her having to pay less income tax.

6. Pre-Paid Expenses

Your annual tax payable can be reduced by pre-paying some of your tax-deductible expenses such as prepaying the interest on an investment loan.

If you can pay some of your expenses in advance, you won’t have to worry about paying them the next year, and you can claim them as a tax deduction in the current year.

Note, however, if you do opt to prepay some of your tax-deductible expenses, the prepaid amount should not exceed twelve months.

7. Private Health Insurance Tax Offset

To encourage middle to high-income earners to reduce their dependability on the public health system and make the private healthcare industry more sustainable, the ATO introduced a private health insurance rebate.

The eligibility criteria to receive the tax offset includes:

  • being an Australian citizen;
  • having a taxable income of less than $140,000 as a single, or $280,000 as a family;
  • holding a complying health insurance policy; and
  • having a Medicare card

What’s more, is if you don’t have private healthcare insurance and you earn more than $90,000 (singles) $180,000 (families), you will pay a minimum of 1% Medicare Levy Surcharge. This is in addition to the compulsory 2.0% Medicare levy paid by most taxpayers.

So, you may want to look into considering private healthcare insurance to avoid the 1% surcharge and benefit from the tax refund.

There are two ways you can claim the health insurance rebate:

  • a discount on your premium; or
  • claim it through your tax return

If you’re looking for ways on how to reduce taxable income, we would suggest claiming it through your tax return.

8. Discretionary Trusts

Transferring assets into a discretionary family trust could lead to overall lower tax.

The trust is discretionary in nature because the trustee can independently exercise their decision making. In other words, the trustee can exercise his/her discretion when it comes to the distribution of income and capital among the beneficiaries.

For example, a trustee is able to make distributions to beneficiaries of the trust who fall within lower tax brackets. Or, if the trust makes any capital gains, it can be distributed to the beneficiaries with capital losses or those who qualify for the capital gains tax 50% discount. In each instance, the results could be lower tax.

For information on discretionary trusts and their advantages, you can access our essential family trust guide.

Ways on How to Reduce Taxable Income for Individuals in Australia

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Tax words and calculator stacked coins on invoice bill paper for time tax filling paid debt payment at office business finances

Although paying tax is inevitable, most people want to determine how to reduce taxable income.

Did you know that through effective tax planning, you could pay less tax and walk away with more money in your pocket each financial year?

But what does effective tax planning entail? What are the simplest ways to determine how to reduce taxable income? Are you entitled to tax deductions or offsets?

While there is no one-size-fits-all strategy when it comes to individual tax planning, we’ve put together this article to guide you on a few ways to reduce your income tax.

Tax Deductions for Work-Related Expenses

When investigating how to reduce taxable income, the first place to start looking is the tax deductions you qualify for. 

According to the Australian Tax Office (ATO), individuals are allowed to claim deductions for some work-related expenses. 

Employees are entitled to claim work-related expenses such as: 

  • home office expenses; 
  • self-education expenses; 
  • tools, equipment and other assets; as well as
  • vehicle and travel expenses

How to Reduce Taxable Income Through Charitable Donations

One way to reduce your taxable income is to donate to a DRG organisation. A DRG (deductible gift recipient) is an ATO recognised organisation or fund that can receive tax-deductible gifts.

You are allowed to claim a tax deduction depending on the type of donation: 

  • money: the contribution or gift is more than $2, and you’ve kept a record of it; 
  • property or shares: see the ATO for the special rules relating to this type of donation; and 
  • gifts under the Heritage and Cultural programs: see the particular circumstances where donations can be deductible

Tax Deductions for The Cost of Managing Your Tax Affairs

Did you know that if you hire an accountant to help with tax advice as well as the preparation and lodging of your tax return, you are allowed to claim a tax deduction for those expenses?

You are also entitled to claim for the for tax-deductible expenses you incur in managing your tax affairs in general, such as for: 

  • travel costs associated with getting tax advice; 
  • litigation costs; 
  • obtaining a valuation for a deductible gift or donation of property; and
  • any interest imposed by the ATO

Reducing Taxable Income Through Personal Super Contributions

If you can make a personal contribution to your superannuation fund each year, you could qualify to claim a deduction for the contribution. 

Note: you can’t claim a deduction for super contributions paid by your employer directly to your super fund from your before-tax income

To claim a deduction for super personal contributions, your income must be generated from: 

  • salary and wages; 
  • a personal business; 
  • investments; 
  • government pensions or allowances; 
  • a foreign source; 
  • trust distributions; or a partnership

However, bear in mind that claiming this as a tax-deductible expense will mean that the superannuation fund will pay the tax at 15% instead.

Salary Packaging

Also commonly known as salary sacrifice, salary packaging involves arranging with your employer to package your salary into certain benefits. 

So, essentially, you are agreeing to receive less income after tax in exchange for your employer paying for certain benefits from your salary before tax.

Examples of benefits can include: 

  • car payments; 
  • loan repayments; 
  • school fees for your children;
  • and Home phone costs

Example: 

Joan earns a salary amounting to $100,000. 

She enters into an agreement with her employer to package her salary so that she receives $84,000 as income while $15,000 is paid towards her car and $1,000 is paid towards other expenses. 

So, Joan’s taxable income is reduced to $85,000, resulting in her paying less income tax.

Pre-Paid Expenses

Your annual tax payable can be reduced by pre-paying some of your tax-deductible expenses, agree such as prepaying the interest on an investment loan. 

If you can pay some of your expenses in advance, you won’t have to worry about paying them the next year, and you can claim them as a tax deduction in the current year. 

Note, however, if you do opt to prepay some of your tax-deductible expenses, the prepaid amount should not exceed twelve months.

Private Health Insurance Tax Offset

The ATO introduced a private health insurance rebate to encourage middle to high-income earners to reduce their dependability on the public health system and make the private healthcare industry more sustainable. 

The eligibility criteria to receive the tax offset includes: 

  • being an Australian citizen; 
  • having a taxable income of less than $140,000 as a single, or $280,000 as a family; 
  • holding a complying health insurance policy; and 
  • having a Medicare card

What’s more, is if you don’t have private healthcare insurance and you earn more than $90,000 (singles) $180,000 (families), you will pay a minimum of 1% Medicare Levy Surcharge. This is in addition to the compulsory 2.0% Medicare levy paid by most taxpayers. 

So, you may want to look into considering private healthcare insurance to avoid the 1% surcharge and benefit from the tax refund.

There are two ways you can claim the health insurance rebate: 

  • a discount on your premium; or
  • claim it through your tax return

If you’re looking for ways on how to reduce taxable income, we would suggest claiming it through your tax return.

Discretionary Trusts

Transferring assets into a discretionary family trust could lead to an overall lower tax.

The trust is discretionary in nature because the trustee can independently exercise their decision making. In other words, the trustee can exercise his/her discretion regarding the distribution of income and capital among the beneficiaries.

For example, a trustee is able to make distributions to beneficiaries of the trust who fall within lower tax brackets. Or, if the trust makes any capital gains, it can be distributed to the beneficiaries with capital losses or those who qualify for the capital gains tax 50% discount. In each instance, the results could be lower tax.

Make a Contribution to Your Super

This first method is perhaps the easiest and quickest way to pay less tax. It actually entails salary sacrificing or salary packaging where you put some of your pre-tax income into your superannuation. 

The key step here is to make sure that you have already done so before you are taxed. So, the idea is to forgo a portion of your pre-tax salary before receiving it. Salary sacrifice means that you’re swapping your income tax rate with your superannuation contributions tax. The latter is lower and usually 15% for most people. 

Therefore, if you expect that you will get an end-of-financial-year extra salary, you may want to put that money into your super instead.

Make sure that you set the salary sacrifice with your employer before the confirmation of your bonus entitlement. This detail is vital because salary sacrificing is only applicable to the future and not your past income.

Maintain Accurate Financial Records

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You’ve heard it time and again from the ATO and here at TaxReturn.com.au. It’s essential to have all your tax records in a safe place. That way, you can easily access them when they’re needed, specifically when claiming deductions. 

This method may seem so simple but don’t skip it. The ATO has become more inquisitive than ever when it comes to tax deductions. The last thing you want is to lodge a claim and end up with no proof that you deserve the deduction.

Keeping a record of your financial documents does not have to be complicated. Just spend about 10 minutes every week to log your expenses, download statements, and have your receipts in one folder.

Claim All Your Deductions

Thousands of Australians don’t claim their deductions, missing out on the opportunity to save each year. That means the ATO gets millions and millions of dollars, which the citizens could actually get in their tax refunds. 

One reason for this is that they don’t keep financial records. They also think that their expenses are pretty insignificant, which are acceptable to lose as deductions. But the reality is that those small amounts can add up and become huge savings once you get to the end of the financial year.

So, if you spend money on anything relating to your job and how you earn your income, you should claim all the deductions you’re entitled to. The first step here is to ensure that you have declared all deductions, which is crucial to pay less tax in Australia.

Don’t worry if you’re unsure whether or not the item you spent money on can be claimed. Remember that you can claim it as long as it’s work-related and you have the receipt of purchase, which makes claiming so much easier. We also have guides that tell you what you can and cannot claim based on your profession or industry.

Become More Charitable

If you’re feeling charitable, follow your instinct. You’re not only helping organisations in making the world a better place, but you’re also saving some money during tax time. Every donation you make is tax-deductible, as long as they meet the following conditions:

  • You have donated to a registered charity
  • You have given more than two dollars
  • You got the receipt from the organisation to file it away for the next tax season.

During tax time, don’t forget to add the charitable receipts that you have and enter them into the “charity donations” section, which you can find in your tax return.

Before you get excited about tax refunds from your donations, you should note that contributions will not come back to you as a tax refund. Instead, what happens is that the gifts you have given to charities will be given back in the form of a deduction from your taxable income. Nevertheless, it’s getting a cashback from your good deed. It’s a win-win.

Pay Off Your Mortgage 

Did you know that you can minimise your taxes using your mortgage offset account? It works if you have a home loan. With your mortgage offset account, you can offset your home loan’s non-deductible interest by taking advantage of the interest on the taxable earnings in a deposit. 

This arrangement permits Australian taxpayers to have a savings account with the lender. The difference is that you don’t need to pay the interest on the loan’s total amount. Instead, you will pay for the loan interest and get deductions through the money in your savings account.

Paying down your mortgage is excellent, and you get the bonus of not getting taxed on the money you just spent. This overpayment is even accessible through the redraw facility of your account. It’s helpful in case you require extra funds in the future.

Meanwhile, if you bought a property or have any investment, it can affect your taxes, either positively or negatively. So be sure that you understand the benefits and possible repercussions when investing your money. 

You should always talk to a financial planner, even if you believe you’re a skilled investor. Your investment should let you generate income now and in the coming years. You do not want to invest or not invest just to save a small amount of money from your taxes.

Know Which Income Amounts are Non-Taxable and Which Aren’t

The ATO has declared that some types of income are exempted, which means that they are not taxable. Therefore, you want to make sure that those income types are not included in your tax return

Unfortunately, if you make this mistake, the agency will consider the non-taxable income when calculating tax losses from the earlier income years. You must deduct the non-taxable payments and adjust the taxable income of your dependents. Some examples of non-taxable gains include:

  • Australian Government pensions like Centrelink’s disability support pensions for people who are younger than the pension age
  • Payments and allowances from the Government, including child care subsidy
  • Payments for the Federal Police or Australian Defence Force
  • Specific awards, grants, and scholarships
  • Education payments from the Government like allowances for students who are 16 years old and younger
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