Want to grow your earnings this EOFY?
Paying taxes is inevitable, but paying more than you have to is not. You can save yourself a considerable amount by strategizing and planning properly. Tax and financial planning are not only for businesses. There may not be as many things that can be done, but there are still many ways to maximise your deductions and save your earnings.
To start, it is of note that the 2021 individual tax rates for Australian residents, excluding the 2% Medicare levy, are:
So how can you drop your threshold and minimise your taxes?
1.Claim all your deductions
As a working individual, you are entitled to claim deductions for any work-related expenses. Depending on your industry, this can mean quite a wide variety of things. As long as it is directly related to earning an income, you paid and weren’t reimbursed for it, and you have a proof of purchase, you can claim it as a deduction.
If you are unsure which expenses qualify for a deduction, our trained professionals are happy to help.
This is more a way of choosing how your money is spent rather than saving it, but if donating is something you already do, or want to do, it’s a good way to redirect your tax money.
Giving away anything over $2 to a Deductible Gift Recipient (DGR) is claimable as a deduction in your taxes – as long as you hold on to the receipt. The donation must be monetary and a true gift – i.e. you get no material benefit in return.
3.Create a mortgage offset account
A mortgage offset account generates no tax burdens. It is a tax-free savings account created by setting your savings and current accounts against your mortgage debt. As such, you can deposit your savings as well as your income into this account and then use this to pay off your mortgage.
A mortgage offset account does not gain any interest on the money you’ve placed in it. Instead, it reduces the interest you pay on your home loan. The more money you have in the offset, the more interest it can deduct – capping at the same amount of your loan whereby you stop paying interest entirely. This allows you to offset your non-deductible loans, while keeping your deductible loans in existence – such as loans for a rental investment property.
4.Hold investments in a discretionary family trust
A discretionary family trust allows you to distribute the income to trust beneficiaries with lower marginal tax rates to reduce your personal tax liability. This is beneficial for high income earners with family members earning lower or no income. A properly drafted discretionary trust allows trustees to make income as well as capital asset distributions to the most appropriate members in terms of tax status.
As such, any capital gains that are made can be distributed to beneficiaries holding loss offsets or to those who can use the 50% discount. Franked dividends can also be paid to beneficiaries who can use the imputation credits to reduce tax on other income.
Certain deductible expenses that can be prepaid allow for a deduction for up to 12 months in advance. An example of this is prepaying insurance premiums or the interest on an investment loan. Make sure these payments are made before the 30th of June so they can be included in the current year’s deductions.
6.Maximise your super contributions
You may make up to $25,000 of concessional contributions per financial year to your superannuation. These contributions include the 9.5% super guarantee that your employer is legally mandated to make, any salary sacrifice arrangements you have, and any additional contributions you make.
Any concessional contributions you make are taxed at 15% regardless of your marginal rate. As of the 1st of July 2021, the cap will be increased to $27,500.
7.Invest via an SMSF
Investment income gained through your super fund is taxed at a maximum of 15%. Capital gains are taxed at 10% of their value. This not only allows you to reduce your assessable income, but also decreases the tax rate you pay on these gains immensely. The only downside is that you cannot access this income until after you retire.
8.Make spousal contributions
If you earn a higher income than your spouse, you can reduce your tax by contributing some of your income into your partner’s super account. This allows you to claim an 18% tax offset on contributions up to $3000.
Not all employers will allow salary sacrifice agreements, but where possible, this is a very tax-effective strategy. By “sacrificing” a chunk of your pre-tax salary or wage into your super, you reduce the total of your assessable income and turn this reduction instead, into a concessional contribution.
A more beneficial way to do this is to purchase an insurance premium (such as life insurance, which is non-deductible) via your super, and salary sacrifice the annual payment so your super isn’t bleeding money to fund it.
This can be one of two different types of insurance plans:
If you are a high earner, it is probably a good idea to insure your income. This is even more important if you are the sole provider in a family and bringing in a six (or more) figure salary. Income protection also makes sense if you have monthly loan repayment obligations that you cannot go remiss on if you were to find yourself out of a job.
Income protection insurance is a two-edged-sword: it will offer you peace of mind while decreasing your assessable income, as it is tax deductible.
Having private health insurance means that you do not have to pay the Medicare Levy Surcharge. It is important to note that there are two types of medicare payments that the ATO charges for:
Accordingly, if you earn $300k annually, your surcharge will amount to $4500, while the average health insurance premium is approximately $2000 – thereby saving you $2500 and allowing you better service at the hospital.
It is of note that only the hospital cover insurance plan will negate the Medicare levy surcharge.
If you own investment property that you provide for rent, and the expenses that you devote to maintaining and managing this property as well as the interest on the mortgage you have on it exceed the rental income it generates, this property is said to be negatively geared. This therefore reduces your taxable income and the amount of tax you pay.
12.Plan your investments
Planning the timing of the sale of an investment asset as well as the ownership structure and its split can be beneficial in reducing your taxes. For instance, it might be beneficial to hold investments in your partner’s name if said partner has a lower marginal tax rate than yours. Additionally, holding an asset for longer than 12 months automatically reduces the capital gain tax payable when you sign a contract for its sale to half.
However, if an investment is negatively geared, it may be more beneficial to hold it in the higher earner’s name. It is of note that shifting an asset between family members or entities may trigger the capital gains tax or stamp duty, that is why it is extremely important to plan your investments with an accountant who understands these intricacies.
13. Get expert advice
Last but definitely not least, one of the most beneficial things you can do to your finances is to get help from an expert. It is their job to know all the ways that you could reduce your taxes without making any mistakes or liabilities. Not only will they ensure that you get the maximum returns possible, but they will also ensure that you do it legally and without any liability. And the best part is, a registered tax agent’s fee is completely tax deductible, so it pays for itself!
Our team of award-winning tax agents and advisors are dedicated to providing you the very best and most efficient services possible to empower you to reach your full financial potential. We strive to make our clients wealthier, stronger, and happier. Our aim is simple: your financial success. Call us now and take the first step of your financial success journey.
Disclaimer: Information included in this post is of general nature, it has been prepared without taking into account your specific situation. It is not intended to be and does not constitute financial advice, investment advice, trading advice, or any other advice. You should not make any decision, financial or otherwise, based on any of the information presented here without undertaking independent due diligence and consultation with a professional accountant or financial adviser.