15 Easy Ways to Reduce Your Taxable Income in Australia
You’re guaranteed two things in life – death, and taxes. While taking care of your physical and mental health can lead to a longer, healthier life, financial planning, and strategising can reduce your tax liabilities. Everyone wants to pay less come tax time. For those who’re looking into debt consolidation and credit repair, learning how to reduce your taxable income can keep more money in your pocket and help you pay off your debts faster. Our list of 15 easy ways to reduce your taxable income in Australia can help.
How to Reduce Taxable Income
What are the easiest ways to pay less tax this year in Australia? We’ve rounded up 15 of the easiest ways to pay less tax that can help you reach your savings and debt reduction goals faster.
1. Use Salary Sacrificing
For those trying to learn how to save tax in Australia, salary sacrificing is one way to do it. This is also called “salary packaging,” and it works a few different ways. With salary sacrificing, a taxpayer would put some of their pre-tax income toward a benefit before they are taxed. Some of the most common salary sacrifice benefits are motor vehicles and superannuation.
So, an employee would forgo part of their pre-tax paycheck before they get it. For example, they could use salary sacrificing to pay for a new car, computer, insurance, rent payments, mortgage payments, and other benefits. These benefits are also referred to as “fringe benefits,” and they can save Australians thousands of dollars in taxes every year, with a few exceptions.
For one thing, there is a limit on what can be salary sacrificed, also called salary packaged. Also, Fringe Benefits Tax, or FBT, can impact the types of benefits your employer offers. For example, employers will offer to salary package a car as a novated lease. This is an agreement between your employer, you, and a financer, and is one way to get access to a new car while reducing your taxable income. If you want to increase your refund this year, you could also consider salary packaging your superannuation too.
2. Keep Accurate Tax and Financial Records
The ATO is far more likely to ask a lot of questions about your tax deductions than they were a few years ago. If they ask about your deductions, you’ll need to show them receipts for tax deduction claims. Unfortunately, not having a sound filing system can cause a lot of headaches for your tax time. So many Australians miss deductions they can legally claim because of a lack of sound record keeping. If you make this mistake, the ATO will keep your hard-earned money that should have stayed in your pocket.
Many people wonder if they have to keep track of every single deduction. But the best thing to do when it comes to claiming deductions and satisfying the ATO is to keep track of the deduction receipts. This will make it easier for you to remember what you can claim. Record-keeping doesn’t have to be complicated.
Dedicate ten minutes of your time each week to download statements and update your logbooks. Make sure you keep all your receipts in a conveniently accessed, organised, and easy-to-use file folder or filing cabinet. Keeping accurate tax records will save you a lot of time searching for everything at the end of the fiscal year, and best of all, you’ll be able to claim your deductions and ultimately pay less in taxes.
3. Claim ALL Deductions
If you spend any money on anything related to earning income, you’ll want to claim it. Be sure you declare all deductions possible to pay less tax in Australia. Even things that may seem small and insignificant can add up to huge savings at the end of the financial year. For example, if you purchased something that is used for work, but you also sometimes use it during your time off the clock, you can still claim the money you spent on it as a work-related tax deduction.
If you’re unsure whether or not you can claim a specific item as a work-related tax deduction, keep the receipt of purchase and ask your tax agent when you file. It’s always better to hang on to receipts and not be able to claim the item than to toss the receipt and miss out on tax savings.
4. Feeling Charitable? How to Pay Less Tax with Donations
Every donation you make to a registered charity greater than two dollars is considered tax-deductible. After donating, the organisation should send you a receipt. Make sure to file that away for tax season. Once tax time rolls around, add up your charitable receipts and enter that into the “charity donations” section in your tax return. But remember that donations do not come back via a tax refund. Instead, the amount of the monetary gift is reduced from your total taxable income, meaning you’ll get back a percentage of the donation.
5. Minimise your Taxes with a Mortgage Offset Account
If you have a home loan, a mortgage offset account lets you offset your non-deductible interest on the home loan with interest on the standard, taxable earnings of money in a deposit. With this arrangement, taxpayers can create a savings account with their lender. But instead of paying interest on the entire amount of the home loan, taxpayers are charged interest on the loan, minus the money in the savings account.
6. Add to Your Super (or Your Spouse’s) to Save Tax in Australia
Concessional super contributions are taxed at a rate of 15 percent once they enter a super fund. This is different than if they were taxed at a marginal rate, which is sometimes as high as 49 percent. What are the different types of concessional contributions you can make? You can make the following concessional contributions to lower your taxes:
Personal deductible contributions
There is no income tax limit on salary sacrifices. Self-employed taxpayers or unsupported taxpayers can make contributions to their supers and also claim a full tax deduction.
7. Get Private Health Insurance
You should only do this if it makes sense. If you don’t carry private hospital insurance, but you’re single and make more than 90,000 dollars a year, or you’re a family and make more than 180,000 dollars per year, you will pay a minimum one percent Medicare Levy Surcharge. The Medicare Levy Surcharge is also collected on top of a mandatory two percent Medicare Levy that most taxpayers have to pay anyway.
Basic, private healthcare plans can cost less than the one percent of Levy Surcharge on your gross income, which would be less than the Medicare Levy you’d pay without insurance. For some people, private healthcare might be worth it to lower your taxes. Depending on your needs and medical history, it might also be worth it for the often shorter wait times you’ll get with private healthcare.
8. Minimise Capital Gains and Minimise Taxes
Any significant assets sold in a given financial year, such as shares, or property, are subject to a capital gains tax. If the investment has been held for at least one year, you’ll be charged a 50 percent capital gains tax on top of your marginal tax rate. Capital gains taxes have to be paid in the year they are realised. However, losses can be carried forward, but not back. Taxes payable within the financial year can also be decreased if you prepay deductible interest.
On investments, you can prepay expenses up to twelve months in advance. So, interest on investment loans and management fees can be claimed this financial year. If you have a substantial tax liability this fiscal year from the sale of an asset, prepaying can help you save money on taxes.
When it comes to taxes and property, another tax exemption from Capital Gains Tax is if your property is your principal place of residence or PPOR. You can claim the principal residence exemption from Capital Gains Tax for your house. To get it, you’ll need to have lived in the house, or the property must have a dwelling on it that you live in. Learn more about how to reduce Capital Gains Tax for property used for business and investment purposes.
9. Prepay Expenses
If you pay for some income-related expenses in advance, it can reduce your taxable income by moving your deductions forward to the next financial year. This will give you a higher tax refund. All prepaid expenses need to be less than a thousand dollars or meet the 12-month rule for prepaid expenses. The 12-month rule lets you claim a deduction as a prepaid expense as long as the service doesn’t exceed twelve months and stops in the next financial year.
10. Delay Income
Learn how to reduce tax with this neat little trick. You can defer receiving income until June 30, which will help you avoid paying taxes in the current financial year.
11. Don’t Include Non-Taxable Income
The ATO considers some income that is exempt or non-taxable, and you don’t want to include it on your tax return. But, certain exempt income could be taken into account when tax losses of earlier income years are calculated. You can deduct some income and the adjusted taxable income of any dependents you have. Exempt or non-taxable income includes the following:
Some Australian Government pensions, including disability support pensions from Centrelink to those who are younger than pension age
Some Australian Government payments and allowances, e.g., the childcare subsidy and carer allowance
Overseas pay and allowances for Federal Police personnel and Australian Defence Force
Australian Government education payments, including allowances for students younger than sixteen
Specific scholarships, awards, and grants
Lump-sum payments from the surrender of an insurance policy, mortgage protection, or as payment for a terminal illness or work-related injury
12. Make Use of Offsets
Tax offsets, also known as tax rebates, can reduce your taxable income if you meet certain eligibility requirements. While in theory, these offsets could reduce your tax bill to zero, they won’t get you a tax refund. Income tests are some of the most common tax offsets.
13. Meet ATO Deadlines
If you register with a tax agent, tax returns can be lodges as late as May of the next financial year as long as you aren’t in dispute with the Tax Office. But for everyone else, all returns must be lodged by October 31. Meeting all ATO deadlines can help you avoid conflicts and penalties. Self-lodgers with simple finances and circumstances typically submit their taxes online with the Tax Office. The account will be populated with your previous year’s return and any information provided from your bank, workplace, government agencies, etc. The Tax Office collects this information until the beginning of August, so you’ll want to wait until after that to lodge online.
14. Follow the Rules
Paying taxes can indeed be a painful experience, but fudging the numbers and breaking the rules will set you up for trouble down the road. Taxpayers who have tried to make deductions that weren’t true have gotten into hot water with the ATO. The ATO will investigate large, and sometimes small, tax deduction claims that look suspicious.
15. Use a Tax Agent
A professional tax agent can save you a lot of time when it comes to lodging your taxes. They also have inside knowledge and industry expertise on taxes and refunds. By hiring a tax agent to help you with your taxes, you’ll get the largest tax refund possible without running afoul of the ATO.
If you’re learning more about credit repair and trying to reduce debt, lowering your taxable income and getting a refund come tax time can keep more money in your account. Instead of giving that money to the taxman because you didn’t know what deductions you could take, you can use that refund to pay off debts and rebuild your credit faster.
You’re guaranteed two things in life – death, and taxes. While taking care of your physical and mental health can lead to a longer, healthier life, planning, and strategizing can reduce your tax liabilities. Everyone wants to pay less come tax time. For those who’re looking into debt consolidation and credit repair, learning how to reduce your taxable income can keep more money in your pocket and help you pay off your debts faster.
Call 1800 123 TAX for a chat…………….