Smart Ways to Reduce Taxable Income and Save More Money
Paying tax is inevitable. But there are ways to minimise what you pay and help improve your financial health.
If you’re looking for smart ways to reduce taxable income, there’s more to consider than tax concessions and cuts. Good tax plans should be part of an overall investment strategy. To get the most from yours, here’s how to minimise your taxable income.
Take Advantage of Salary Sacrificing
Salary sacrificing for employees offers a way to reduce the amount of tax you must pay.
To benefit, you forgo part of your pre-tax pay before you receive it. This can be used to pay for your super, a new car, insurance, computer, mortgage or rent payments and more.
These benefits, known as fringe benefits, can save you thousands a year in tax. There are limits on what can be salary sacrificed or salary packaged. However, potential Fringe Benefits Tax (FBT) can impact on the type of items your workplace is prepared to offer.
One of the most popular options is to salary package a car in the form of a novated lease. These three-way agreements between your employee, financer and yourself can give you access to a new vehicle, as well as reduce your taxable income.
To increase your end-of-financial year payment, consider salary packaging your super as well.
Keep Tabs on Your Taxes
It isn’t hard to keep good tax records.
You just need to be prepared and document everything. To make tax deduction claims, keep all receipts using the Etax mobile app.
If you put aside 10 minutes a week to load receipts into the app, record keeping for each tax year can be easy.
Manage Your Debt
Even the smallest debts can become big problems if they’re not managed efficiently.
Consolidate any debts into one manageable payment so you can keep track. If there’s debt on mortgages, investment properties or credit cards, the interest expenses may be used to reduce your income tax paid.
If followed, debt repayment hierarchy will reduce these costs the most. However, always pay off the non-tax-deductible debt first with the highest rate and move down from there.
Claim all Deductions
It’s important to know what deductions you can claim. Once you know, claim all legitimate work-related deductions to minimise your taxable income.
Some of these expenses may include:
- Computer equipment
- Technical or industry-specific books and training
- Vehicle and travel expenses, including meals and accommodation. However, there are strict rules as to what cannot be claimed
- Home office expenses
Purchases used for personal and work can still be claimed if you only include the work-related part as a tax deduction. If you are a property investor or business owner, there are additional ways to reduce your tax here.
The tax department flags unusually high work-related claims throughout all industries, so know the threshold or seek advice if you’re unsure.
To reap the financial rewards, you must be able to provide proof for any claims of more than $300. If the amount is less than $300, you’ll need to show how you worked out the claim if asked by the tax department, but won’t need to provide written evidence.
Paying for some expenses in advance can bring your deductions forward to this financial year, reducing your taxable income and giving you a better bonus.
To take advantage, pre-paid expenses must be less than $1,000 or meet the 12-month rule. This rule allows you to claim an immediate deduction as a pre-paid expense, providing the service doesn’t exceed 12 months and finishes in the next income year.
Donate to Charity
If you’re feeling charitable, donations are a smart way to keep your taxable income low.
Every donation you make over $2 is tax deductible. However, it must be to a registered charity to claim.
Donations don’t always need to be in the form of cash either. Charitable gifts, such as clothing, property or household goods may also be deducted and can help offset capital gains through portfolio balancing.
Remember: Donations will not be distributed back onto your tax refund. Instead, the claimed amount is subtracted from your taxable income, giving you a percentage back.
Max Out Your Retirement Account
One of the most common tax-minimisation strategies some high-income earners use is contributing the maximum amount to their retirement accounts.
The good news is, this tactic is accessible to all income levels. You can max out your retirement fund or contribute a portion of your salary/bonus and claim as a tax deduction.
Use Medicare Levy Surcharge and Private Health Insurance to Maximise Your Refund
If you haven’t taken out private health insurance, it may be worth investigating.
Those without private health insurance pay a higher Medicare levy surcharge. Most taxpayers pay a mandatory 2% Medicare levy. However, if you don’t have private health insurance and earn more than $90,000 (singles) or $180,000 (families), you’ll also pay a minimum 1% surcharge on top.
No one wants to pay more tax than they need to. If you’re looking for strategies to save money, contact our team today to find out more about salary packaging and novated lease options.