How to save money on tax in Australia
Want to save money on your next income tax return? Here’s what you need to know.
The end of the financial year is something many of us dread, because it means that the time to file your income tax return is just around the corner. This can be a painful and slow experience, as you gather all the receipts and paperwork necessary to lodge your return in time. It can also be a costly nightmare if you’re left with a hefty tax bill.
The good news is there are plenty of simple things you can do to save money, and maybe even get a refund from the ATO. Let’s take a closer look at how Australia’s income tax system works and what you can do to lower your tax bill.
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How does income tax work?
Australian residents are required to pay tax on the income they earn. This means you pay tax not only on your salary, but also on any income you earn from investments.
Most people pay tax throughout the year as they earn their income. For example, if you’re a full-time employee, your employer will deduct a tax amount from each of your regular pay packets and send it to the ATO on your behalf.
Income in Australia is taxed at a progressive rate, which means that the amount of tax you pay varies depending on your total income. The following table shows Australia’s marginal tax rates for 2019–20:
Resident tax rates 2019–20
|Taxable income||Tax on this income|
|0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $90,000||$3,572 plus 32.5c for each $1 over $37,000|
|$90,001 – $180,000||$20,797 plus 37c for each $1 over $90,000|
|$180,001 and over||$54,097 plus 45c for each $1 over $180,000|
Foreign resident tax rates 2020–21
|Taxable income||Tax on this income|
|0 – $90,000||32.5c for each $1|
|$90,001 – $180,000||$29,250 plus 37c for each $1 over $90,000|
|$180,001 and over||$62,550 plus 45c for each $1 over $180,000|
How do I reduce my tax?
While the amount of tax you pay is determined by the income you earn, you can reduce the amount of tax you pay by claiming deductions and taking advantage of tax offsets provided by the Federal Government.
Check out our selection of great tips to help you reduce your tax bill.
Claim tax deductions
A tax deduction is an expense you incur in order to earn an income. By keeping your receipts and claiming these tax deductions on your tax return, you can reduce the total income on which you have to pay tax, which in turn means a lower tax bill.
Some of the expenses you can claim as tax deductions:
- Work-related expenses. For example, tradespeople can claim the cost of tools, and people who work from home can claim phone and Internet expenses.
- Self-education expenses for work-related study that leads to a formal qualification.
- Vehicle and travel expenses directly connected with your work. This usually does not include travel to and from work.
- Home office costs.
- Donations to charity. All charitable donations of $2 or more are tax deductible, so giving to a registered charity can not only make you feel good, it can also benefit your hip pocket.
- Costs associated with managing your tax affairs, such as paying your accountant to prepare your tax return.
The ATO outlines a few key points that you must satisfy in order to claim an expense as a work-related deduction:
- You must have paid for the expense out of your own pocket and not have been reimbursed.
- The expense must be related to your job.
- You need to have a record, such as a tax invoice or a receipt, to prove expenditure.
Take advantage of tax offsets
The Commonwealth Government offers a range of tax offsets to help make tax time more affordable for certain people. They are available for:
- low income earners
- people who have a dependent relative
- people who receive government benefits
- pensioners and older Australians, and
- people who have private health insurance.
Tax offsets, sometimes referred to as tax rebates, are applied after your tax obligations have been calculated, and can help lower your tax bill. Speak to your accountant about any offsets or rebates you may be eligible to claim.
Salary sacrificing involves putting some of your pre-tax income towards paying for a particular benefit. Also known as salary packaging, it is an arrangement you make with your employer, and can be used to pay for anything from superannuation and child care, to health insurance, child care fees, and even your home loan.
As you pay for these expenses directly from your pre-tax salary, it reduces your overall taxable income, saving you money.
Contribute to your super
Another great way to save money on taxes is to salary sacrifice a portion of your pre-tax pay into your super fund. Salary sacrifice contributions to super are taxed at a special rate of 15%. Not only does this help you save for a secure retirement, it also means a better deal when you lodge your tax return.
However, there is a limit on how much you can contribute to super via salary sacrifice each year, so check with the ATO for more details.
If you’re a low-income earner or self-employed, making after-tax super contributions can also be a good idea. It allows you to take advantage of up to $500 of government co-contributions a year, while self-employed people can claim their voluntary super contributions as tax deductions.
Bring forward expenses
If you know ahead of time that you will have sizable tax-deductible expenses, timing those purchases just right can make a huge difference to your income tax return. For example, making expensive purchases before the end of the current financial year can help reduce your overall income, which could in turn move you down to a lower tax bracket.
Pay off your home loan
If you regularly deposit money into a savings account instead of putting it towards your mortgage, you may want to think about making additional home loan repayments. You will need to pay tax on the interest earned in a savings account, so why not put those savings towards paying off your home loan? After all, not only will this reduce the total cost of the loan, but you will usually be able to access those extra repayments through the loan’s redraw facility if you ever need extra cash.
Alternatively, you could look at putting any extra cash you have into an offset account. This is linked to your mortgage and reduces the interest payable on your home loan, as well as helping you avoid the tax payable if you kept the funds in a savings account.
If you’re already heading for a big tax bill in the current financial year, try deferring some of your income until the following year. For example, if you wait until 1 July to send invoices for recent work, you won’t need to pay tax on that income until the next year. This gives you the chance to minimise your overall tax liability before that time arrives.
Know when to sell assets
Are you planning to sell any assets that are subject to Capital Gains Tax (CGT), such as shares or an investment property? If so, remember to consider how long you have owned the asset, because if you’ve owned it for less than 12 months you will have to pay more CGT. If it’s been in your possession for more than 12 months, a 50% CGT discount applies.
If you have a fluctuating income, you can also sell the asset in a year when you expect to earn a lower than normal income, allowing you to ensure your tax bill stays at a reasonable level. If you make a capital loss, those losses can be carried forward to future years to offset potential gains.
Claim your investment expenses
If you own an investment property or shares, most of your expenses related to those investments can be claimed as tax deductions. This includes interest payments you make on any loans, as well as things such as insurance expenses and property management fees.
However, remember that short-term tax benefits should be just one of many factors you consider when choosing an investment. It’s also crucial to take into account the long-term capital growth and/or income generation. Ask your accountant about the most tax-effective way to manage your investments.
Team up with your partner
It’s important to adjust your finances and investments to suit your financial situation. For example, let’s say you earn a substantially higher income than your spouse, but you both have funds invested in separate high-interest savings accounts. If you move all your savings into the account held by the lower income earner, you will pay less tax on the interest earned on that account.
Keep all your receipts
If you make a work-related purchase but are not sure whether you can claim it as a tax deduction, keep the receipt just in case. You can check it with your accountant at a later date. In fact keeping good records in general, will help you save time and money when 30 June comes around. Find a filing system that works for you and keep it up to date all year round.
Consider your insurance needs
If your ability to earn an income is crucial to your financial wellbeing, income protection insurance can provide a replacement income if you become ill or injured and are unable to work. If your policy is held outside super, your premiums are tax deductible.
It’s also important to examine your health insurance cover. If you’re a high income earner, that is, you earn more than $90,000 per year for singles or $180,000 for couples and families, and you don’t have private health insurance hospital cover, you’ll have to pay the Medicare Levy Surcharge. This surcharge ranges from 1–1.5% of your income and can make a huge difference to your tax bill.
Get yourself an accountant
This is probably the simplest tip in the guide but it’s also the most important. An experienced and reliable accountant will have an in-depth knowledge of Australia’s taxation system and how you can minimise your tax bill. They will be able to assess your finances and help you find and claim every possible deduction.
You can even claim your accountant’s fee in your tax return the following year. It’s a win-win situation. Consider the services of a registered tax agent in Australia.
How and when do I lodge my tax return?
The income year starts on 1 July and ends on 30 June. You have until 31 October to lodge your tax return for the previous income year. For example, your income tax return for the 2019–20 income year must be submitted by 31 October 2020.
There are several ways you can lodge your tax return with the ATO:
- Online using the MyTax service
- By completing a hard copy tax return form
- Through a registered tax agent
What is a tax plan?
If the end of the financial year is fast approaching, your accountant may offer to help you develop a tax plan. This is typically conducted any time between March and June each year, and involves looking at your overall financial situation for the current income year, and working out ways you can reduce your tax bill.
When developing a tax plan, your accountant will assess your income for the year to date and examine your current financial position. They will calculate an estimate of what your income and expenses will be for the entire year. Then they will suggest strategies and methods you can use to minimise your tax bill when it’s time to lodge your return. These may well include many of the tips outlined above.
A tax plan can be a very useful tool to help you save money, so speak to your accountant about creating a plan to suit your personal financial situation.
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