How To Pay Less Tax
MBA, BSc, DipFP
Financial Planner / Managing Partner
11 Ways To Legally Pay Less Tax
Tax is one of the major causes of leakage in any financial plan. While you must comply with tax laws, there are myriad ways you can structure your finances to allow you to legally pay less tax, which will have a positive effect on your overall financial plan.
In Australia there are 5 tax ‘brackets’. How much tax you pay is based on your income from any source, whether it be a PAYG paycheque, rental income or share dividends.[i] These brackets range from zero percent tax on income under $18,200, to 45% tax on income over $180,000.
The higher your taxable income, the more benefit you can derive from tax minimisation strategies.
Types Of Tax Savings
There are essentially two kinds of tax savings you can make, Deductions, and Offsets/Rebates, and they operate quite differently.
- Deductions – are used to reduce your taxable income, or the income you are paying tax on. So, if you have an income of $100,000 and you donate $1000 to charity, you will only pay tax on $99,000. Examples of deductions are out of pocket expenses, donations to charity, and income protection premiums.
- Offsets/Rebates – These provide a dollar for dollar or percentage benefit, meaning every dollar you spend, usually within prescribed limits and conditions, reduces the tax payable on your income. Examples here are health insurance premiums, and superannuation payments.
So let’s have a look at how to reduce the amount of tax you pay, either by reducing your taxable income, or by reducing the tax payable on a portion of your income.
11 Ways To Reduce Your Tax Burden
1 – Superannuation
One of the most effective ways to reduce tax is through Super contributions. Over and above the 9.5% of your salary contributed by your employer, making either salary sacrifice or after-tax contributions can be of benefit to you. Salary Sacrifice (or concessional) contributions will be taxed at 15%[ii] and therefore save you tax in the current financial year.
After tax (or non-concessional) contributions will save you tax come retirement time. It is essential to get professional advice on when and how to invest extra money in Superannuation as the rules change based on income and age/proximity to retirement.
2 – Salary Packaging
Packaging up your salary to include not just income, but items like a car, laptop, or phone, can be beneficial as it reduces your actual income. You will, however, have to pass some Fringe Benefits Tax conditions. Professional advice on this, as with all things financial, is worth seeking.
3 – Negative gearing
Negative gearing is a polarising topic. Some people love it, others hate it. But there is no denying that if done correctly, it can benefit you as part of your overall financial plan. The trick is you need to be confident that the capital gain you eventually receive from your investment will be greater than the losses over the period you held it, otherwise you will have lost money.
Negative gearing can be applied to a range of investments, including property and shares.
4 – Keep An Eye On CGT
Capital Gains taxes must be paid in the financial year in which they are incurred, so if you know you will have a gain in a particular year, using some of the other tax minimisation strategies we have talked about to offset this gain makes a lot of sense. It is also worth noting that Capital Losses can actually be carried forward, so if you get the timing right it is possible to offset one against the other.
5 – Private Health Insurance
If you are over 30 and you do not have private health insurance, you will be required to pay additional tax in the form of the Medicare Surcharge if you earn more than $180,000 as a family. Depending on your income this will be 1-1.5%. Hospital insurance costs on average $2000.[iii] You could potentially save over $700 per year in tax if you find the right insurance.
6 – Income Protection Insurance
Speaking of insurance, premiums for Income Protection Insurance are tax deductible. Whilst premiums are often paid monthly, you can also pre-pay. So if you know you will have a large tax bill in any given year for whatever reason, you can opt to pre-pay your premiums to offset against that bill.
7 – Tax Offsets
The Australian Tax Office offers offsets and rebates in a range of areas, and you may be eligible for one or more depending on your financial circumstances.[iv] Professional advice here could save you significant amounts of money when it comes to tax time.
8 – Mortgage Offset Account
If you have savings and a mortgage, put as much as possible into an offset account. This account will not earn interest and will therefore not contribute to your taxable income. It does, however, mean you won’t be paying interest on your mortgage up to the value of the amount in the offset account, thereby reducing the overall interest you pay on your mortgage.
9 – Deductions
As we said earlier, deductions can reduce your ‘taxable income’. These include things like home office expenses, using your own car, professional membership costs, out of pocket expenses to do with earning your income, and uniform or laundering costs. Make sure you claim all your legally allowable deductions. Each one might not seem like much, but they soon add up, and the more you can reduce your taxable income, the lower your tax liability will be.
10 – Donations
You can claim a tax rebate on every $2 or more donation you make to charity. So it is important to keep any receipts for donations, especially the larger ones, for use at tax time.
11 – Professional Advice
Lastly, using a professional Financial Adviser or Tax Agent to prepare your tax is, in itself, a tax deduction. This will ensure you maximise your offsets and deductions, whilst at the same time remaining within the letter of tax law.
If you would like professional advice on how to reduce your tax burden now and into the future, Manly Financial Services have the expertise to help. Give us a call on (02) 9976 3388 or contact us below and we will be in touch shortly.