While savvy Australian’s look at ways to cut their expenses, tax is often overlooked. Tax is actually one of your highest yearly expenses, and the truth is most don’t look at ways to cut their taxes. You might think that there aren’t many ways tax can be reduced, but the truth is, it can – and it’s quite easy! A little bit of knowledge and professional advice is all you need.
Claiming all of your tax deductions is the first step to reducing your tax. A tax deduction is an expense you’ve incurred for work purposes that you can claim against your taxable income. They are work-related expenses that reduce your overall income.
For example, if you earned $45,000, you’re obligated to pay $5,092 income tax and $900 of Medicare Levy Surcharge. Your net income is $39,009, however if you claimed $1,000 worth of tax deductions and lowered your overall income to $44,000 per year, the income tax you pay is lowered to $4,902 ad your Medicare Levy to $880. That’s a saving of $170.
In Australia, the total income you must pay tax on includes money you made from:
- Salary and wages
- Pensions and annuities
- Government payments
- Capital gains
- Grants and payments
- Income from trusts, partnerships or businesses
- Foreign income
Most tax deductions come from:
- Work-related expenses
- Union fees / subscriptions / books / journals
- Self education
- Working from home
- Travel expenses
- Vehicle expenses
- Work clothing and laundering
- Charitable donations (GDR charities)
- The costs if managing your tax and money affairs
Pro Tax Tip: A singular deduction may not add up to much, but hundreds of deductions spent over the course of a year does add up. Don’t discount any tax deduction. Claim everything you can.
An insurance bond, or investment bond is a managed fund and are taxed at 30%, which is lower than most marginal tax rates. They are considered pre paid investments. The life insurance company pays tax on the earnings and after 10 years you can withdraw the
For tho who haven’t heard of such a thing, salary sacrifice lowers your taxable income towards a benefit they receive – such as a motor vehicle, work equipment and their own superannuation. Bonus!
Salary sacrifice is when you set a part of your salary aside that pays for a new work car, computer, insurance, rent payments, mortgage payments and other benefits – known as fringe benefits. These types of expenses come off your taxable income and lower the tax you pay.
All workers in Australia have a superannuation fund for when they retire. This is a special account that is opened by yourself or your employer into which a part of your wage is paid – at 10%. You can also contribute more into your superannuation account through salary sacrifice. These are known as concessional and non-concessional superannuation contributions.
Concessional payments are pre-tax payments made into your super account. There is a cap on the amount you’re able to pay into your account, which is $27,500 per year for all individuals regardless of age. Concessional payments are taxed at a lower rate of 15% which is lower than your nominal tax rate on income outside of super.
The non-concessional cap is $110,000 per year for all individual regardless of age. These payments are made voluntarily from your post-tax income. This is a way to boost your retirement fund because super funds generally have a higher rate of return than normal bank accounts. You can ask your employer to pay extra or transfer the fund yourself. Voluntary contributions can be made until age 75, but once you reach 67 you’ll need to work at least 40 hours within 30 consecutive days during the financial year.
Pro Tax Tip: High income earners may benefit paying concessional payments into their spouses superannuation accounts. Spouses can claim a tax offset of up to 18% on super contributions up to $3,000 made on behalf of their non-working or low-income partner.
Keep Accurate Records
When you claim your tax, the Australian Taxation Office (ATO) has three golden rules:
- The expense must be work related
- You must have already incurred the expense before you claim
- You must be able to prove your claim
This is done by keeping your receipts, tax invoices, bank statements, contracts – anything you can in writing that proves your claim. Without this proof, you won’t be able to claim the expense even if you honestly did incur it.
Having a sound filing system, app, logbooks for your home office and car, or accounting software is your best friend. It very hard to keep track of every deduction, unless recorded on the day, and this is where hundreds of dollar remain unclaimed and are given to the ATO. Ten minutes a day can save you hundreds, if not thousands of dollars of claimable income and pay less tax.
Donations not only make you feel good, but they also reduce your taxable income. Every donation over $2 can be claimed. You should get a receipt when you donate, but you can claim $10 worth of bucket donations without a receipt.
Donations are technically not a tax deduction, but come straight off your taxable income, meaning you get back a part of your donation.
Pro Tax Tip: Only Gift Deductible Recipients (GDR charities) can be claimed. They have gone through a registration process to prove everything if above board. If your charity isn’t DGR registered, you can’t claim the donation.
Mortgage Offset Account
Outside of your yearly tax debt, your other biggest expense is your mortgage. Making sure you have the best mortgage with the lowest interest should be your number one priority.
Pro Tax Tip: Regularly review your mortgage with that of other lenders to make sure you’re paying the least amount of interest.
Offset accounts can help you to save on your debt. An offset account is a saving account attached to your mortgage account which can be used to reduce your interest charges against your mortgage. This allows you to offset your non-deductible interest on your home loan interest. The idea is to use the savings account for your daily expenses, allowing the bulk of your wage to offset the total balance f your loan. You only pay interest on the balance. Savings can be achieved without being out of pocket or changing your lifestyle.
Private Health Insurance
If you’re a single and earn over $90,000 or a couple earning over $180,000 and don’t have private hospital cover, you’ll be obligated to pay a minimum 1% Medicare Levy Surcharge (MLS) on top of the mandatory Medicare Levy (ML) of 2% all Australian taxpayers are charged. Depending on your cover, private hospital cover may be lower than the MLS.
Pro Tax Tip: Check with your tax account to crunch some numbers before you take private hospital cover. Depending on your needs, private heath cover could be worth it and lower your taxes at the same time.
The above list is by no means comprehensive, but it’s something worth considering. After all, why pay more tax than you have to! The ATO isn’t set up to reduce anyone’s tax, that’s why it’s important to seek the advice of a tax agent. These professionals are on your side – and in the know. They’ll help you come up with ways you can reduce one of the biggest expenses of the year. Not only that, their fees are also tax deductible!
Book your appointment online or phone 1800 378 487 and chat with a professional today.