Understand your pre and post-tax income not only benefits in knowing what tax you’ll be obligated to pay, but also is essential in understanding how it can be leveraged to reduce your tax bill.
Money is hard to come by. Most Australian’s spend hours, days and years earning enough money just to live, let alone having tax reduce their take home pay after all the effort. But did you know that your pre-tax money can be used to offset your post tax income, saving your money from going into the Australian government’s coffers.
There are golden opportunities that can be taken advantage of that not many know about. If you don’t understand pre and post tax dollars, then a few minutes of your time reading this blog might be valuable to you.
What Is Pre-Tax Income
Pre-tax income, or gross income, is the total of all of your income streams. It is the full amount of your wages or salary, plus any other income streams such as bank interest, share dividends, insurance pay outs, income from rental property, foreign income, side gigs, payouts from trusts funds, including gifts.
Superannuation or salary sacrifice options are then removed from your pre-tax amount and the tax you’re obligated to pay is calculated. This is your per-tax income and what you’re assessed on.
Post-tax income is your income after tax has been deducted.
Australian’s pay income tax on progressive tax rates. That means that the more money you earn, the more tax you pay. The current rates for Australian residents for taxation purposes for 2022-23 is:
|Taxable Income||Tax on this income|
|$18,201 – $45,000||19 cents for each $1 over $18,200|
|$45,001 – $120,000||$5,092 plus 32.5 cents for each $1 over $45,000|
|$120,001 – $180,000||$29,467 plus 37 cents for each $1 over $120,000|
|$180,001 and over||$51,667 plus 45 cents for each $1 over $180,000|
These above tax rates do not include the additional 2% medicare levy that may also be payable and should therefore be factored in.
Your after pay income will be considerably lower than your pre-tax income, but it can be considerably increased if you know what to do and how to do it.
The Australian government will allow you to claim tax deductions. These are costs you’ve incurred during the course of earning your income. Many Australians’ miss out on valuable tax deductions because they either think they won’t get that many, or that it won’t make a real difference. We say, ‘why pay more tax than you have to’. Every little bit you can claim does count, and in some cases can slide you into a lower tax bracket where your tax payable will be greatly reduced. Not only that, it might slide you into a lower tax bracket where you’ll be eligible for further tax offsets.
Tax deductions can be found in every job or career. Some are specific to the way you earn an income, but there are some general categories of deductions which affect many people, and include:
- Working from home expenses
- Vehicle /car expenses
- Travel expenses
- Clothing and laundry expenses
- Self-education expenses
- Subscriptions, journals and licenses
Concessional Superannuation Payments
Your employer is already obligated to pay you a minimum of 10.5% of your wage or salary into your super fund. This is known as the super guarantee. There are a few rules that have changed recently. Read here to find out more (link to super blog). It’s worth checking that your employer is paying you the right amount, because it is effectively your pay that is going missing if they don’t.
The Australian government allows you to make extra payments, known as concessional payments, over and above what your employer does, into you super fund. Not only will this increase your superannuation over time, but the amount you contribute is generally subject to a lower tax rate.
Concessional payments are capped at $27,500 for individuals per year and are only taxed at 15%. The amount you pay will be deducted off your total taxable income, dropping your income and the tax calculated on that amount. You benefit by paying less tax and boosting your retirement savings.
Pro Tax Tip: Generally, those earning over $55,000 will benefit from making concessional payments. It might also drop you into a lower tax bracket, making you eligible to receive low income tax offsets.
You can also make after tax payments into your super fund. These are known as non-concessional payments. Amounts are capped at $110,000 for a single and $330,000 for a couple. You aren’t taxed when you make non-concessional payments because it’s from money that’s already been taxed, however you’re only taxed at a rate of 15% in investment earnings in your super account, which is a lot lower than the tax rate of investment earnings outside of your super account. Your non-concessional super contributions are returned to you tax free when you reach your preservation age and receive a super income stream.
Pro Tax Tip: If you’re a low to middle income earner, you may be eligible for the government to make a matching contribution, called a co-contribution. The government will work out how much when you lodge your tax return and will pay the co-contribution directly into your super fund.
Novated Car Lease
A Novated car lease is an agreement between your employer, the finance company and yourself. The finance company will lend you money to purchase your car and your employer arranges regular repayments deducted directly from your wage or salary. The running costs and part of the lease payments are deducted from your pre-tax (or gross) salary, reducing your taxable income. You pay less tax, leaving you with more disposable income.
Compared to a normal car loan where you pay the amount loaned from your post-tax income, a Novated lease may suit you better.
Pro Tax Tip: You might incur Fringe Benefits Tax (FBT) when you receive the tax benefit from a Novated lease because the government considers this arrangement as a benefit but you can make a percentage of your contributions to your repayment from your post-tax dollars to reduce the fringe benefit amount. For every dollar you pay, you reduce the fringe benefit by the same amount.
ITP Accounting Professionals has helped Australian singles, couples, spouses and partners for over 50 years. There’s not a lot they don’t know about tax. Call 180 367 487 or book online to chat with a friendly professional. Don’t pay more tax than you have to.