‘Saving money’ and ‘taxes’ are usually terms not used together. Many people regard tax as an expense that must be paid because that’s the way the system works. After tax has been paid, they don’t think they have enough money to put towards retirement or into another area of their financial portfolio. They have bills to pay, money to spend, let alone scraping money to save and they don’t want to lower their income any more than they have to.
What if there was another way? What if there was a way to save for retirement, invest and also save money on tax? Would that be of interest?
Before we begin, let’s take a look at what makes up your taxable income.
Simply put, taxable income is all streams of money that make up the total income you earn. This can come from wages or a salary, bank interest, dividends, rentals, foreign income or trust accounts. Your pre-tax income is added together on which you pay income tax, as well as the Medicare Levy, and in some cases if you earn over a certain threshold, the Medicare Levy Surcharge.
Pro Tax Tip: The Medicare Levy Surcharge is added as an extra tax to pay if you earn over $90,000 for a single or $180,000 for couples and is an extra up to 1.5% on your income if you don’t have private health insurance.
Australian’s pay income tax on a progressive tax system. 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|
There are some income streams that are not taxable and are classed as ‘Exempt Income’. If you receive any money from these income streams, you may still need to declare it when you lodge your tax return but you won’t need to pay tax on it. Exempt income includes:
- Some Government pensions including disability support or an invalidity service pension
- Some Government allowances such as carer allowance and child care subsidy
- Certain overseas pay and allowances for the Australian Defence Force and Federal Police
- Australian Government education payments
- Some scholarships, bursaries, grants and awards
- Some lump sum insurance policy pay outs
Some income is classed as ‘Non-assessable, Non-exempt Income’ (NANE). This is income that the Australian Taxation Office (ATO) doesn’t asses. You won’t pay tax on this type of income and it won’t affect any tax losses you may have. NANE income includes:
- the tax-free component of an employment termination payment (ETP)
- genuine redundancy payments and early retirement scheme payments shown as ‘Lump sum D’ amounts on your income statement
- super co-contributions
- a payment made on or after 1 January 2020 by a state or territory for loss of income as a result of you performing volunteer work with a fire service of a state or territory in the 2019–20 income year
- Disaster Recovery Allowance you receive as a result of the bushfires commencing in Australia in the 2019–20 income year
- Ex-gratia disaster income support allowance for special category visa (subclass 444) holders you receive as a result of the bushfires commencing in Australia in the 2019-20 income year
- payments by a state or territory relating to the 2019–20 bushfires under the Disaster Recovery Funding Arrangements 2018
Tax-deferred vs Taxable Income
The government wants to help you retire. Yes, you heard that right. Your superannuation fund is your compulsory retirement fund where gains are made over the course of your working life.
Generally, you can’t access your super fund until you reach your preservation age.
|Date of Birth||Preservation Age||Reaches Preservation Age|
|Before 1 July 1960||55 years old||before 1 July 2015|
|1 July 1960 to 30 June 1961||56 years old||1 July 2016 to 30 June 2017|
|1 July 1961 to 30 June 1962||57 years old||1 July 2018 to 30 June 2019|
|1 July 1962 to 30 June 1963||58 years old||1 July 2020 to 30 June 2021|
|1 July 1963 to 30 June 1964||59 years old||1 July 2022 to 30 June 2023|
|1 July 1964 and later||60 years old||from and after 1 July 2024|
Your employer is required to pay a certain amount into your choice of super fund. Your employer must pay 10.5% of your wage into your choice of super fund. The minimum payment is called the super guarantee. (If you want to know what your Super Guarantee is, read: 2022 Super Guarantee Explained)
You can also contribute into your super fund from both your pre-tax and post-tax income. There are two types of contribution you can make and are known as concessional and non-concessional payments. Both have tax benefits.
Concessional payments are made from income that had not yet been taxed. Once the payments are in your super fund, they are taxed at the low rate of 15%. The amount is currently capped at $27,500 per year. If you exceed the cap, you’ll have to pay extra tax.
Non-concessional payments can be made into your super fund from money you’ve already paid tax on. There is a cap of $100,000. Making non-concessional payments can have benefits if you pay super into your spouse’s super fund as a strategy to reduce the amount of tax you need to pay. It also benefits your retirement savings because of the benefits of super fund investing. You’ll pay tax when you withdraw your money as a super stream when you reach your preservation age, but you’ll have added benefits of growth until then which will outweigh your future tax obligations.
Pro Tax Tip: Paying extra money into your super fund makes you an investor. Your super fund grows using large scale stock exchanges, property and other investments and are run by financial whizzes.
How Does This All work?
Making concessional payments could result in a tax saving of 32% as well as increasing your super savings. (Super saving are compounded over time, so extra payments can be extremely beneficial if you start early enough.)
To claim the tax deduction when you make a concessional payment, you need to submit a ‘Notice of Intent’ form to the ATO. Make sure you receive an acknowledgment from your super fund before any payments are made into your super fund. You’ll also need to declare the amount when you lodge your tax return.
The best benefits are made when you can reduce your taxable income into the lower marginal tax rate. Give yourself enough time before the end of financial year to organise these payments.
Pro Tax Tip: You may be able to make salary sacrifice contributions straight from your wage or salary if you’re an employee. That way it’s all done automatically for you.
Sally earns a wage of $95,000 before tax. This excludes her employer’s super contribution. Sally decided to make a concessional payment of $10,000 into her super fund, saving her $3,450 in tax. (These figure are estimates only)
|Sally’s income||Without concessional payments||With concessional payments|
|Less salary sacrifice to super||Nil||$10,000|
|Less tax and Medicare levy||$23,242||$19,792|
|Take home (net) pay||$71,758||$65,208|
|Employer super contribution||$9,975||$9,975|
|Plus salary sacrifice||Nil||$10,000|
|Less contributions tax||$1,496.25||$2,996.25|
|Net super contribution||$8,478.75||$16,978.75|
Sally’s take home pay will drop by $6,550, but she will save $1,950 in income tax and super and enjoy an extra $8,500 in her super which will compound over time, increasing her overall income.
Contributions could also be made to drop you into a lower marginal tax bracket, saving the amount of tax you’ll be obligated to pay.
Although this blog outlines a way in which you can save money, a professional who can look into your circumstances and give advice is always the best option. They’ll crunch the numbers for you and tell you exactly what you need to do and how much you should contribute.
ITP Accounting Professionals help 300,000 Australian save money on their tax bill every year. There’s not a lot they don’t know about tax. They’ll be able to help you out, not only saving your tax dollars, but turning them into savings. Phone 1800 367 487 and chat with a friendly professional today.