Scrambling to sort out your taxes at the end of the financial year isn’t going to do you any favours.
Instead, you should practise effective tax and financial planning throughout the entire year – especially if your goal is to reduce your tax liabilities.
Everyone should be working towards reducing their taxable income and save money as a result, so we’ve compiled this comprehensive list of strategies to help you do so.
1. Claim Tax Deductions for Your Work-Related Expenses
All monies spent on work-related expenses are potentially claimable.
If you bought an item in your personal capacity that is used for work purposes, like a laptop or headphones, you can declare the item and claim it as a work-related tax deduction.
The best thing to do is save all receipts, even if you don’t know whether the item is claimable or not. Small expenses add up, so don’t underestimate how much money you can save from tax deductions in the long run.
Here are some work-related expenses classified by the Australian Taxation Office (ATO) as tax deductions:
- tools and equipment, such as electronics,
- self-education expenses, including stationery,
- working from home expenses, such as wifi and electricity,
- clothing expenses, including laundry and dry-cleaning, and
- transport and travel expenses.
2. Ask Your Employer for Salary Sacrificing
You can ask your employer to sacrifice your salary and use an agreed upon amount to pay certain expenses before sending the money into your account.
This strategy means that you’re only charged income tax on the balance that reaches your account once your expenses have been paid. Receiving a smaller salary means a smaller taxable income, so doing this ensures you pay less tax in total.
Expenses that can be paid via salary sacrificing include:
- children’s school fees
- car payments
- loan repayments
3. Prepay Expenses Yourself
If you have the means, you can prepay tax-deductible expenses a year in advance. This is done by bringing your deductions forward to the current financial year.
The total prepaid expenses must be under $1,000. There is a 12-month rule which entails that you can claim immediate deductions as a prepaid expense on the condition that the service finishes in the following income year, not exceeding 12 months.
4. Make Personal Super Contributions
A wise option, especially if you’re a high-income earner, is to make contributions to your super yourself – this way you’re doubling your savings.
This way, you will pay only 15% tax on your super rather than a larger percentage on your salary in the form of income tax.
Take note that you have to make a personal contribution, your employer using your pre-tax income to pay directly into your super doesn’t count.
If you want to use this method of tax savings, your income must be generated from:
- a personal business,
- salary or wages,
- government pension or allowances,
- trust distributions,
- a partnership, or
- a foreign source.
5. Take Out Private Health Insurance
In an effort to lighten the load on the public healthcare system, most taxpayers are required to pay a Medicare levy of 2.0%. The Australian Government has made an incentive for middle and high-income earners: you can receive tax rebates by taking out private health insurance.
Most taxpayers are required to pay a Medicare Levy of 2.0%. Single people who earn above $90,000, or families that earn $180,000, are required to pay at least a 1% Medicare Levy Surcharge as well as the compulsory 2.0% Levy if they don’t have private healthcare insurance.
So, taking out private healthcare insurance means you avoid the 1% surcharge, plus you receive a tax refund.
You can qualify for a tax offset on your private health insurance by meeting these conditions:
- you’re an Australian citizen,
- you have a Medicare card, and
- your taxable income is under $140,000, or under $280,000 as a family.
6. Make Charitable Donations
A wonderful way to get a tax refund is by donating to a deductible gift recipient (DGR) organisation recognised by the ATO.
You can donate cash or a gift to the organisation, but in both cases, you must have a receipt. The donation must also be valued at more than $2.
Other donations that are tax-deductible that the ATO allows include:
- property (as long as it was purchased within the previous 12 months before gifting, and is valued at over $5,000),
- heritage gifts,
- trading stock, and
- shares valued at $5,000 or less.
The process doesn’t work that the money you spent on the donation will be received through a tax refund. Instead, the amount of money gets minused from your total taxable income, so a percentage of the donation comes back to you.
7. Get a Tax Agent
Having to manage your taxes can be complicated, and claiming deductions from your taxable income without a professional to help can lead to trouble.
The ATO doesn’t hesitate to investigate any tax claims that they find suspicious – even if they were only done wrong by accident.
A tax agent will lodge your taxes on your behalf, so mistakes are much less likely to occur due to their qualifications and experience. And, their industry knowledge and expertise allows them to provide you with strategies to help you reduce your taxable income.
Plus, the services surrounding tax agents are considered tax-deductible expenses, such as:
- preparing and lodging your tax return,
- giving tax advice,
- travel costs associated with receiving the tax advice,
- litigation costs,
- valuing a gift or property donation, and
- any interest imposed by the ATO.
Doing effective tax planning can reduce how much income tax you have to pay monthly, plus it can increase your tax return when it comes to the end of the financial year.
You can use these strategies to minimise your tax:
- claim work-related expenses,
- sacrifice your salary,
- prepay expenses yourself,
- make personal contributions to your super,
- take out private health insurance,
- make charitable donations to DGRs, and
- use a tax agent.
Krishan is the founder and director of KNS Accountants. He has over a decade of experience across the world of accounting, specialising in SMEs, capital gains tax and self-managed superannuation funds. Krishan is a member of the Institute of Public Accountants, a registered Tax Agent with the Tax Practitioners Board and an ASIC-registered SMSF Auditor. He holds a Bachelor of Commerce degree from Macquarie University, Public Practice Certificate and is a certified Xero and Quickbooks advisor.