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 and the tax rules change just about every year so planning early can result in thousands of dollars of savings when tax time arrives.
June 30, 2021 seems a very long time into the future but it will be here before you know it. Tax rules change constantly so if you leave it until the end of the financial year to plan your deductions it can be too late and you can miss out on thousands of dollars in tax savings.
What are the easiest ways to pay less tax this year? We’ve rounded up some of the easiest ways that can help you reach your savings and debt reduction goals faster.
Salary Sacrifice
This is also called 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 pay-check 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 finance company, 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.
Add to Your Super (or Your Spouse’s)
If you make a personal super contribution, you may be able to claim the contribution as a tax deduction and reduce your assessable income.
The contribution will generally be taxed in the fund at the concessional rate of up to 15%, instead of your marginal tax rate which could be up to 47%.
Depending on your circumstances, this strategy could result in a tax saving of up to 32% and enable you to increase your super.
What are the different types of concessional contributions you can make? You can make the following concessional contributions to lower your taxes:
Salary sacrificing
Personal deductible contributions
However please be aware of these key considerations when it comes to making Concessional contributions
• Personal deductible contributions count towards the ‘concessional contribution’ cap (which is $25,000 in 2020/21) and tax penalties apply if you exceed the cap. • You can’t access super until you meet certain conditions. • If you did not use up your concessional contribution cap in 2018/19 or 2020/21 and meet certain conditions, you may be eligible to carry forward the unused cap amount. This could enable you to make concessional contributions exceeding the annual cap in 2020/21 or future financial years.
Seek advice
To find out whether you could benefit from this strategy, you should speak to a financial adviser and a registered tax agent.
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 outside of work, 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 specialist 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.
Use a Mortgage Offset Account
If you have a home loan, A mortgage offset account allows individuals with a home loan to offset their non-deductible interest on the loan with the interest on the normal 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.
Be Charitable
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.
Pay for your Income Protection personally
The ATO allows you to claim the costs of your income protection premiums for policies taken out separate to your Superannuation. So, if you have income protection as part of your super package, the premium is not tax deductible. If your insurance is a policy outside of your Super, the costs ARE deductible.
(Which for many people means, it makes sense to move income protection out of your super and into a private policy.)
Income protection is one of the most basic forms of life insurance. If you are unable to work and you have income protection, your insurance company will typically pay you 75% of your income for a period of time. How long? It depends on the policy and fees you agree to.
Many of us insure our cars, our houses and our possessions, but how many of us protect our weekly income with income protection insurance? The answer is, no many! In fact only 2% of Australians claim a tax deduction for income protection.
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.
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.
Seek the Advice of Tax Professionals
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 using an accountant or tax agent to help you with your taxes, you’ll get the largest tax refund possible without running afoul of the ATO.
General Advice Warning
Any advice contained in this website is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice in regard to those matters.
To find out whether you could benefit from any of the strategies above, you should speak to a qualified financial adviser and a registered tax agent.
If you need any help, don’t hesitate to get in touch for a chat.
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