While income tax is unavoidable, there are several ways to avoid paying too much tax on the money you work hard to earn. Many taxpayers have decades-old ideas about the tax code and what is acceptable. Here is an up-to-date collection of tips to minimise your tax bill.
1. Maintain Impeccable Tax and Financial Records
The notion of careful record keeping may seem basic, but many people have poor or no records to help at tax time. Keeping up with your financial records does not have to be a huge project. Once you are organised, you can maintain your files in just minutes a week. Remember to keep your receipts or scan them into a file on your computer. You will not miss out on savings when you see your situation at a glance.
2. Salary Sacrificing
Australians can save thousands by taking advantage of salary sacrifice. What began in the 1970s as a way to reward valued employees who were ineligible for raises is a way to save on your taxes. While not every employer offers the option, employees with access include full-time, part-time, and casual employees.
Salary sacrificing works by your employer agreeing to use a portion of your pre-tax income on items such as electronics, cars, work tools, or computer software. This lowers the amount of income you are earning and, in turn, reduces your tax bill. In some cases, you can reduce the earned income enough to drop into a lower tax bracket.
It is essential to keep in mind that the salary sacrifice is still taxable, but the rate is 15%. This amounts to a significant reduction for many people. The higher your tax bracket, the more substantial your savings.
Remember that salary sacrifice may not be a good option if you are in a tight financial situation or a low tax bracket. You should check with a financial advisor before deciding on whether or not this is a good choice.
3. Charitable Donations
A way to help others and lower your taxable income, charitable donations of $2.00 or more are tax deductible. The charity of your choice should send you a receipt for your gift. Keep the receipt, and at tax time, add it and other donation receipts, then place the total in the charity donations space on your tax form. Your taxable income will be reduced by the total amount of your donations.
4. Do Not Include Non-Taxable Income
The ATO excludes several types of income from your taxable income. The rules are specific, so contact your financial advisor if you are unsure what income is tax-exempt. Some examples of income sources that are not taxed include,
Australian Government payments such as the childcare subsidy and carer allowance
Australian Government pensions. This includes disability support pensions from Centrelink provided to those who are younger than the pension age
Federal Police personnel and Australian Defence Force allowances and overseas pay
Specified awards, grants, and scholarships
Australian Government education payments, such as allowances for students younger than sixteen
Lump sum payments you receive upon surrendering mortgage protection or an insurance policy
Lump sum payments for work-related injuries or terminal illness payments
5. Claim All Deductions
The tax code is subject to change over time, so it is essential to ensure that you are claiming all of the deductions you are entitled to under the most recent version of the code. Remember to include small deductions, as these often add up to surprisingly significant amounts. Consult with your financial adviser or tax specialist if you are unsure what you can claim.
6. Income Protection Insurance
Having an income protection insurance policy is a smart idea, especially if you are the sole earner. You get peace of mind knowing your assets and lifestyle are safe if misfortune strikes. Additionally, there is another benefit to having this kind of cover. It is tax deductible. With an income protection policy, you can secure your income while lowering your taxable income.
7. Lower Your Capital Gains Tax (CGT) Liability
You can save substantial money on CGT if you time your sale correctly. If you have an asset for more than 12 months, you get a 50% reduction in your CGT. You should remember that if you sell property, the CGT is payable the year you sign the contract.
8. Purchase Assets in Your Partner’s Name
The strategy only helps minimise your taxes if you have a higher marginal tax rate than your partner. However, if this is the case, the net income from the investment will be taxed at a lower rate.
9. Maximise Any Tax Offsets
Also known as tax rebates, tax offsets give considerable savings to those who qualify. While the Low-Income and Low to Middle-Income offsets are two of the better known, there are several offsets available, including:
Private health insurance rebate and offset
Australian Government permits offsets for those who receive allowances, government payments and the beneficiary tax offset
Offset for maintaining an invalid or invalid carer over the age of 16
Seniors and pensioners tax offset
Zones offset for living in a remote area
Offset for serving overseas as a member of a force
Tax offset for lump sum payment you received in arrears
Offset for paying foreign income tax
10. Super Contributions to Minimise Taxable Income
There are several ways you can contribute more money to your superannuation and lower your tax bill. Because limits and other specifics often change, you should consult with your financial advisor before making any changes.
Concessional Contributions – While these can be pre-tax funds contributed by yourself or an employer, you can also make additional tax-deductible contributions. The tax rate within your superfund is 15%, so this can be sizeable savings.
The cap for the current tax year is $27,500. But, the Government is continuing with the Carry-Forward Unused Concessional Contributions Cap scheme. Under this programme, those who are eligible can utilise unused cap space from prior fiscal years. This opens the door to potentially contributing more than $27,500 as tax-deductible contributions in the current financial year. To be eligible to take part in the scheme, you must have less than $500,000 in your super as of 30 June of the previous year.
Keep in mind that if you want a contribution to be tax deductible, you must submit a Notice of Intent to claim to your super fund. Additionally, you must receive a written acceptance of the tax-deductible amount before lodging your tax return for the financial year.
Salary Sacrificing for Super Fund – Many Australians take advantage of salary sacrificing to a super fund as a way to build their super and lower their taxable income. Check with your employer to be certain they take part in salary sacrificing. Technically, this is a concessional contribution, so be mindful of the cap, or you will be taxed at more than 15%.
Super Contribution Splitting – If your spouse earns less than $37,000, your fund may permit you to take money from your super and put it in your spouse’s account. Because the funds you send to your spouse’s account have counted towards your cap, the money will not impact their account cap.
11. Work with a Professional
While some of the tips are not complicated, others can be tricky. When you work with an experienced financial advisor, they can offer you the certainty that you are making the best choices. And you can relax knowing you are conforming to the ATO rules.
There are numerous things you can do to save on your taxes. Some ways are simpler than others, yet people often feel overwhelmed when considering which options are best for them. Reaching out to Freedom Wealth Services is a way to ensure you are making the right choices that will provide the outcome you desire. We have helped hundreds of Australians find ways to save money on their income tax. Contact us and see how we can help you.
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