Kerry Packer once famously told the government that
“if anybody in this country doesn’t minimise their tax, they want their heads read … you’re not spending it that well that we should be donating extra”. Fortunately, there are plenty of smart ways to reduce your personal tax bill, even if you are not a billionaire.
1. Maximise tax deductions
Do you travel for work, make donations to registered charities or have income protection insurance? These are all potential tax deductions – one of the easiest ways to slash your tax bill.
According to the Australian Taxation Office (ATO), taxpayers are entitled to claim deductions for some expenses directly related to earning an income.The ATO has a long list of deductions, including dry-cleaning costs, income protection insurance, self-education expenses and travel costs, with fact sheets for specific occupations.
The basic rules for claiming a deduction are that it must be claimed in the tax year it occurred; you cannot claim an expense which you will be reimbursed for; and written evidence is usually required, so don’t throw away those receipts.
2. Prepay expenses, delay income
Cut tax by prepaying 12 months of tax-deductible expenses before June 30, allowing you to bring the deduction forward. Examples include prepaying a year’s worth of interest on a loan for shares or other investments, or paying for next financial year’s income protection insurance, giving you peace of mind as well as reduced tax.
If you own an investment property, you could consider getting minor repairs and maintenance work done before the financial year-end.
Similarly, where possible try and defer income until after June 30 to avoid paying tax on it this financial year. For example, delay issuing invoices until after July 1, or review term deposit maturity dates or other income to determine if it can be postponed.
3. Claim tax offsets
Even better than deductions, tax offsets directly reduce the amount of tax payable on your taxable income.
If you work in a remote part of Australia for at least half the year or serve overseas as part of the Australian Defence Force or federal police you can benefit from a specific offset. Other offsets exist for private health insurance, superannuation, senior Australians and pensioners, as well as low-income earners and those with a dependent spouse born before July 1952.
However, most offsets are subject to income restrictions, so get your accountant to check these before making a claim.
4. Salary sacrifice
Salary sacrificing is a popular method of reducing tax, particularly for medium to high-income earners. You will need to ask your employer to redirect a portion of your before-tax pay as a contribution to superannuation, which is taxed in the super fund at just 15 per cent.
These are known as “concessional contributions” and are particularly beneficial for those paying the highest marginal tax rate, although there are limitations on the maximum amount you can contribute.
Even without salary sacrificing, you can gain a tax benefit from investing in super. If you earn below $33,516 and make a $1,000 after-tax contribution to super, the government will add another $500 to your super balance. The government co-contribution drops for every extra dollar you earn over $33,516, ceasing at $48,516.
If you are self-employed you can make contributions to super and claim a full tax deduction, although subject to a cap.
5. Borrow to buy property or shares
Australians love property, with nearly 2 million people a year declaring rental income, while around half the adult population own shares. A benefit to investing in assets such as property (excluding your own home) or shares is that the interest paid on borrowings are tax-deductible, with the higher your marginal tax rate, the greater the benefits.
However, seek professional advice before jumping in, since gearing magnifies losses as well as profits, and adverse changes in asset prices or interest rates could wipe out expected returns.
If you have a home loan, take advantage of the mortgage offset account to reduce the interest you pay and, accordingly, the tax payable on that interest. Instead of parking surplus cash in a savings account and getting taxed at your marginal rate, put any spare funds into the offset account. Not only will you reduce the loan interest and term, you will also save paying tax on interest you would have otherwise earned if you had left it in a savings account. The extent to which this is a viable strategy will depend greatly on the nature of the asset you are financing with the loan and the alternative uses you would put your funds to if not in an offset account.
When it comes to reducing your personal tax bill, there are many strategies available, providing you act before June 30. Don’t forget to check the ATO website on the latest rules and consult an accountant or tax adviser to get information relevant to your circumstances (their fee is usually tax deductible too!) or find out more information on income protection insurance.
Like Packer said, reducing your personal tax bill is a no-brainer, even if Canberra would welcome some extra donations.