Legal Ways To Reduce Tax Payable

Reducing the amount of tax payable is a goal for many people. There are a number of legal ways to reduce your tax bill, such as by claiming deductions and credits. Knowing which deductions and credits you can claim can save you a lot of money on your tax bill. 

This blog post will discuss some of the most common deductions and credits that can help reduce your tax liability. We will also provide information on how to claim these deductions and credits.

So, if you are looking for ways to reduce your tax bill, read on!

Reducing the amount of tax you have to pay is something that a lot of people are interested in. Thankfully, there are a number of legal ways to do this. However, keep in mind that you should always speak with an accountant or tax specialist to find out which strategies would work best for your specific situation.

Australian Taxable Income Reduction Strategies

There are only two things in life that are absolutely certain: death and taxes. While taking care of both your physical and mental health can help you live a longer and healthier life, planning and strategizing your finances can help you pay less in taxes over the course of your lifetime.

At tax time, everyone wants to pay as little as possible. Learning how to lower your taxable income is one way to retain more money in your pocket, which can help you pay off your bills more quickly and consolidate your debts more easily if you are looking into credit repair and debt consolidation.

This article will provide you with a list of simple techniques to lower the amount of income that is subject to taxation in Australia.

Use Salary Sacrificing

Salary sacrifice is one method that may be utilised by individuals in Australia who are interested in learning how to reduce their taxable income.

This practise is also known as “salary packaging,” and it can take place in a few distinct ways. By participating in salary sacrifice, a taxpayer can divert a portion of their income that was earned before taxes to a benefit that will be provided to them before they are taxed.

Motor cars and superannuation are two of the most typical advantages that might be exchanged for a pay reduction.

Therefore, a worker would give up a portion of their pre-tax compensation before they ever receive it. For instance, they could give up a portion of their paycheck in order to save money on the cost of purchasing a new vehicle, computer, insurance, rent, mortgage payments, and other advantages.

There are a few exceptions to this rule, but in general, these perks, which are also known as “fringe benefits,” enable Australians to reduce their annual tax liability by thousands of dollars.

For one thing, there is a limit on what can be pay sacrificed, often called salary bundled. Additionally, the Fringe Benefits Tax, sometimes known as FBT, may have an effect on the benefits that your company provides. As an illustration, some businesses will include an automobile on a novated lease as part of a salary package.

This agreement is between your employer, you, and a financer, and it is one way to get access to a new car while also minimising the amount of income that is subject to taxation.

You might want to consider salary packing your superannuation as well if you want to maximise the amount of money you get back from the government this year.

The practise of “salary sacrifice,” also referred to as “salary packaging,” is when an employee chooses to have their employer forego a portion of their compensation in order to pay for additional benefits.

In its most basic form, this is an agreement to receive a lower amount of income after taxes in exchange for benefits that can be obtained with income earned before the application of those taxes.

This is helpful for a couple of different reasons. To begin, it indicates that you need to make less money to pay for the same expense. Normally, you would be required to pay taxes on the money that you produce first, and only after that would you be able to utilise this “after-tax” income to pay for your expenses.

And secondly, the money that you used to pay for these expenses is deducted from your income before taxes.

This means that you will have less income that is subject to taxation, and as a result, you will pay less tax.

Salary sacrifice is an option for people whose annual income is more than the tax-free threshold, which is currently set at $18,200. However, those with middle to high incomes are more likely to benefit from salary sacrificing than those with lower incomes.

This is because individuals with lower incomes are more likely to require their salary to be allocated to them as income in order to cover their day-to-day expenses.

The following are some frequent examples of benefits that can be acquired using pre-tax dollars through the use of salary sacrifice:

• Costs associated with the education of your dependents
• The cost of child care
• Expenses related to health insurance
• Items of electronic technology, such as laptop computers and mobile phones, that will be utilised for reasons related to work
• Automobiles and trucks
• Repayments of loans

Salary Sacrifice Into Your Super

This is a notion that is quite similar to sacrificing a portion of your salary in exchange for other benefits; but, it allows you to keep more of your money, even though you might not be able to access it for a number of years.

An arrangement known as “salary sacrifice into your super” is one in which your employer agrees to reroute a certain portion of your income or compensation so that it is paid directly into your super account rather than being paid to you directly. This contribution is made on top of the standard amount, which is currently ten percent of your salary and is put into your retirement account automatically.

The portion of your pay that you choose to put into your superannuation rather than keeping for yourself is not considered taxable income for tax reasons.

On the other hand, the super fund will impose a tax on these donations equal to 15% of their total value. It is very likely that this will be far less than the marginal tax rate that most Australians are subject to.

For example, in 2021, the maximum amount of money that could be salary sacrificed into superannuation and taxed at the low rate of 15% rather than at your marginal tax rate was $27,500. This was due to the fact that the concessional contributions cap was set at that amount.

Make Personal Super Contributions

It is possible for an individual to claim a tax deduction for after-tax contributions that they make into their super fund.

This means that they use money on which they have already paid income tax and then voluntarily contribute this money into their super account.

To make this happen, you will need to jump through a few hoops, such as submitting a Notice of Intent to Claim or Vary a Deduction for Personal Super Contributions form to your super fund and obtaining an acknowledgement from your fund.

However, if you do this, you will be able to claim a deduction for your personal super contributions. In order for your personal contributions to your retirement account to be tax-deductible, you will first need to satisfy a set of qualifying requirements. 

Give To A Cause

Donating to a DRG organisation is one approach to lower the amount of your income that is subject to taxation.

A DRG, also known as a deductible gift recipient, is an organisation or fund that is recognised by the ATO as being eligible to receive tax-deductible donations.

Depending on the kind of donation you made, you may be eligible for a tax deduction as follows:

• money: the donation or present is valued at more than two dollars, and you have maintained a record of it;
• see the Australian Taxation Office for the specific guidelines that apply to the donation of property or shares; and
• donations given in the name of the Heritage and Cultural programmes: check out the specific conditions under which donations are tax-deductible.

Many people in Australia are unaware that any contribution to a registered charity that is greater than $2 is eligible for a tax deduction.

Donations that you make, which may take the form of stocks or bonds, are also considered gifts.

However, in order for a gift or donation to be eligible for a tax deduction, it must be presented to an organisation that meets the requirements to be considered a deductible gift recipient (DGR).

DGRs are substantially the same as any other organisation that is registered to receive deductible charitable contributions.

Regrettably, not all charitable organisations are DGRs that have been registered. For instance, because many crowdfunding initiatives for charitable purposes, to which people are increasingly donating money, are not operated by DRGs, the donations made to these campaigns cannot be deducted from donors’ taxes.

Checking an organization’s DGR standing is something that may be done at their ABN. Check out the definition of “deductible gift receivers.”

After making a donation to a DGR, the organisation ought to send you a receipt for your contribution.

When it comes time to file your taxes, you should put this away in a file cabinet so that you can keep track of your charitable donations, tally them up, and then claim them in the “charity donations” portion of your tax return.

It is essential to emphasise the fact that you will not get a tax return for the total amount that you give to a charitable organisation. Instead, the value of your gifts will be subtracted from your taxable income; this means that you will receive a portion of the money that you have donated.

Given that you already pay a higher rate of income tax on the amount of your taxable income that is subject to taxation, the amount that you will get back from the contribution will increase in direct proportion to the tax bracket that you are currently in.

A good number of Australians would be taken aback to learn that monetary contributions of $2 or more made to charitable organisations in the form of bucket donations are eligible for tax deductions.

But if you don’t have a receipt, you can’t get credit for a donation that’s more than ten dollars.

If you give more than two dollars to an organisation that is recognised as a charity, then your contribution is eligible to be deducted from your taxable income.

After making a donation, the organisation ought to email you a receipt for your contribution. Be sure to put that in your records for the upcoming tax season.

When it comes time to file your taxes, sum up all of the receipts you received from the nonprofit organisations you supported and enter that amount into the “donations to charities” part of your tax return.

However, keep in mind that you will not receive a tax deduction for your contributions. Instead, the amount of the monetary gift is subtracted from the total amount of your taxable income; this means that you will receive a portion of the donation back.

Super Co-Contribution

If you make between $500 and $1000 per year and fall into the medium or lower income bracket, there is a very simple and straightforward way for you to increase your wealth by an additional $500.

The super co-contribution is a programme that the Commonwealth government utilises as an incentive for qualified individuals with low to middle incomes to put money down for their retirement. The amount of the co-contribution will be determined by the total amount of income you earned as well as the total amount of your personal payment to superannuation.

Suppose that your total income for the financial year in which you make your personal contribution to superannuation is less than or equal to the lower-income threshold ($39,837 in 2021), and that you make a personal contribution of $1,000 or more. In this scenario, you will not be eligible for the lower-income threshold concession.

In that scenario, the federal government will deposit the maximum allowable co-payment of $500 into your retirement savings account.

Imagine that your annual income is somewhere between the lower criterion of $38,377 and the higher threshold of $56,112; this would put you in the middle income bracket. In that instance, the amount you receive will gradually drop as your income grows closer to the higher income threshold.

This will continue until your income reaches the higher threshold. If your income is greater than or equal to the higher income threshold, then you will not be eligible for a co-contribution. This applies even if your income is lower than the lower income threshold.

If your individual contribution is less than $20, then the minimum co-contribution amount that you will get is $20. This applies even if your donation is more than $20.

You are not necessary to submit an application in order to be considered for this co-contribution.

On the other hand, the government will automatically deposit the co-contribution into your super account after tax time if you qualify, your super fund has your tax file number, and you made a personal contribution.

If all of these conditions are met, your super fund will be able to access your account.

Maintain Accurate Records of Your Taxes and Financial Transactions

When compared to a few years ago, the likelihood of the ATO asking you a lot of questions on your tax deductions has significantly increased.

In the event that they enquire about your deductions, you will be required to provide receipts for any tax deduction claims you make. Unfortunately, not having a reliable filing method might result in a great deal of stress when it comes to doing your taxes. 

Due to poor record keeping, a significant number of Australians fail to claim deductions that are within their rights to do so. If you commit this error, the Australian Taxation Office (ATO) will withhold the money that you have worked so hard to obtain even though it should have been yours to keep.

There are a lot of people who are curious about whether or not they are required to keep track of each and every deduction. However, in order to successfully claim deductions and satisfy the requirements of the ATO, it is essential to maintain accurate records of the deduction receipts. Because of this, it will be much simpler for you to recall what you are eligible to claim. Keeping records doesn’t have to be a difficult or time-consuming process.

Keeping all of your receipts is a simple practise that might end up saving you hundreds of dollars when it comes time to file your taxes. If you make a purchase but are unsure whether or not you can write it off as a work-related expense, you should always save the receipt just in case you want to make a claim for it later. 

It is possible that your tax accountant will tell you that the expense is tax deductible, or at least partially tax deductible, because it was incurred in connection with your work.

Do not throw away a receipt for something that you believe you cannot claim as a work-related expense since doing so could cause you to miss out on the potential to reduce the amount of income that is subject to taxation.

Devote ten minutes of your time each week to updating your logbooks and downloading new statements. Make sure that you save all of your receipts in a file folder or filing cabinet that can be quickly accessed, is well-organized, and is simple to use. If you keep proper tax records, you won’t have to spend as much time hunting for everything at the end of the fiscal year.

On top of that, you’ll be able to claim your deductions, which will result in a lower total tax liability for you.

Structure, Structure, Structure

Before you begin your next venture, whether it be a business, investment, or job opportunity, you should decide which structure will serve you and your goals the most effectively.

Is it under the auspices of a company or a trust, a sole proprietorship, a partnership, or perhaps your own self-managed superannuation fund?

Take into consideration the tax rate that is imposed on the taxable income of each organisation.

The rate for individuals and partnerships ranges from 0% to 47%, while the rate for corporations ranges between 26% and 30%. The rate for self-managed superfunds is 15%, whereas the rate for trusts ranges from 0% to 47%.

Each entity is subject to a plethora of rules and regulations, which make it possible to combine different entities in order to increase one’s potential tax benefits. I adore examples, so let’s use one:

Using A Discretionary Trust To Reduce Taxes

Jane brings in a yearly salary of $230,000 and is a mother to two grown children, ages 19 and 18. Both are now attending school and intend to keep learning for the next five years. Additionally, she is partnered with someone who brings in a yearly income of $180,000.

Jane and her partner are interested in making an investment in real estate that is projected to result in a net profit of $30,000 each year as well as a capital gain of $500,000 after five years.

In addition, it is anticipated that the costs associated with the children’s upkeep and education will total $300,000 over the following five years.

Their astute advisors suggest that they purchase their investment property through a Discretionary Family Trust, with all members of the family serving as beneficiaries of the trust.

The trustee of a discretionary trust has the authority to decide how much of the trust’s taxable income should be given to the beneficiaries of the trust.

As a consequence of this, the trustee is in a position to take advantage of the beneficiaries’ lower marginal tax rates and, as a consequence, reduce the total tax payment.

There is no other source of income for the children, so the trust gives them each $15,000 annually to help pay for a portion of their living expenses and education.

The children do not receive any other money. They sell the property at the beginning of the fifth year, and the profit from the sale is $480,000; of this amount, each child receives $240,000. The gain on the property’s capital is allocated as follows: Together, Jane and her partner are making more money than they did five years ago.

When compared to purchasing the property in the parents’ own names as part of a partnership, the following is the amount of additional tax that would be owed by the family as a result of the trust distributions over the course of the next five years, assuming that tax rates do not change, that they maintain private health insurance, and that any tax offsets are disregarded:

Trust Structure	Personal Structure
Year 1	$0	$14,100
Year 2	$0	$14,100
Year 3	$0	$14,100
Year 4	$0	$14,100
Year 5	$63,734	$112,800
TOTAL	$63,734	$169,200

Over the course of the next five years, this will result in a tax savings of a net amount of $105,466. However, there is yet another tax that we will eventually have to take into consideration, and that is the land tax. Due to the fact that the property is held in a family trust, there is no tax-free threshold; therefore, 1.6% of the land’s worth is subject to taxation. If we assume that the value of the land will remain constant over the next five years at $500,000, then the additional Land Tax will be $8,000 per year, for a total of $40,000.

Significant tax savings for the family still remain, amounting to around $65,466 over the course of the next five years.

Because there would be no tax on the gain made in the super fund and no land tax, the savings would be even greater if the investment were purchased in a Self-Managed Super Fund (SMSF), and the property was sold when the fund was in the pension phase.

This is because the Self-Managed Super Fund would not be subject to Land Tax. This is based on the assumption that the total balance held by each participant in the fund is less than $1.7 million…… There are so many guidelines to take into account!!!

This example demonstrates the enormous benefits that may be gained by getting the structure right, as well as why getting the structure right is the first step in effectively reducing taxes.

There are a lot of different ways to restructure your interests so that you can get big future tax savings and cut down on risk. However, this does come with a price, and the implications of doing so are both complicated and specific to each circumstance and group.

Your knowledgeable tax accountant will be able to make recommendations and provide cost estimates that are tailored to your circumstances.

Obtain Personal Health Insurance

You must only proceed in this manner if it is rational to do so. If you do not have private hospital insurance and make more than $90,000 per year as an individual or more than $180,000 per year as a family, you will be required to pay a Medicare Levy Surcharge of at least 1% of your income.

This applies to both single people and families. In addition to the statutory Medicare Levy of two percent, which the vast majority of taxpayers are required to pay regardless, the Medicare Levy Surcharge is also collected.

It is possible for basic private healthcare plans to cost less than one percent of the Levy Surcharge on your gross income. This would be less than the Medicare Levy that you would pay if you did not have insurance coverage. It may be beneficial to certain individuals to pay more for private health insurance in order to pay less taxes.

If you have specific requirements and a lengthy medical history, it may also be worthwhile to consider private healthcare due to the typically lower wait times you’ll experience there.

The Australian Taxation Office (ATO) has instituted both a medicare levy surcharge and a private health insurance rebate in order to incentivize individuals with moderate to high incomes to get private health insurance and make use of the private hospital system.

Their goal is to lessen the strain placed on the public healthcare system while simultaneously improving the financial viability of the private healthcare sector.

Through a programme known as the private health insurance rebate, the government of Australia will provide a financial contribution towards the cost of your monthly premiums for private health insurance.

Your eligibility will be determined by how much money you make.

The amount of the rebate that higher-income taxpayers are entitled to receive may be lowered, or they may not receive any rebate at all.

On the other hand, residents of Australia who earn more than $90,000 annually for singles or more than $180,000 annually for couples may be subject to the Medicare levy surcharge, the amount of which fluctuates from 1% to 1.5% each year.

This is a disadvantage. if they do not have sufficient hospital coverage through their private health insurance. For many people in Australia, the cost of obtaining private health insurance will be lower than the cost of paying the additional taxes that are associated with not having private health insurance. 

Invest In An Investment Bond

Investment bonds, also known as insurance bonds, are investments that are considered to be “tax paid” and can be utilised as a strategy for the accumulation of wealth. They are a form of life insurance policy that is comparable to a managed fund and are distributed by life insurance firms as well as building societies.

Earnings such as income and capital gains made from a bond are not included in the individual’s personal income because the bond provider pays tax at an internal rate of 30%, therefore there is nothing for the individual to declare on a tax return in regards to these types of earnings. After ten years, no additional tax is required to be paid.

Investors are permitted to contribute additional capital to the fund provided that the total amount of their further contributions does not exceed 125% of their initial capital contribution. When this occurs, the 125% rule is triggered, which resets the 10-year benefit for the newly invested amount to the first year of the period.