Tax season is never something that people look forward to. For those of us in Australia, the process can be even more frustrating and difficult than it is for other countries - but that doesn't mean that there aren't ways you can make things easier on yourself during this time!
In this blog post, we'll go through ways in how individuals in Australia can reduce their taxable income so they can lighten their tax burden and possibly save some extra money. From making contributions to superfunds to tracking certain deductions and more, there are a range of options available that may help make life 'taxing' just a little bit less stressful.
So if you're ready to take back control over your finances this year, then continue reading our post; we guarantee that it'll arm you with all the right tools!
Let's get started!
Why Is It Crucial To Plan Your Taxes?
1. It results in more flexibility as well as an improvement in the flow of money
Take the appropriate actions with regard to your tax bracket. You will be capable of maintaining a greater flow of cash to your household while simultaneously reducing the amount of tax that you owe to the ATO.
This could potentially spare you thousands of dollars a year and provide you with the freedom to direct your financial resources towards other critical areas without having to dip into your savings account.
2. You are able to make use of all the deductions and exemptions that are available
If you are not well-versed in tax matters, it is possible that you may fail to take advantage of some of the available exemptions, deductions, and allowances. A trustworthy tax accountant might be kept up-to-date on any current developments, and they would inform you when and how to reap the benefits of these concessions when filing your tax return and finalising your tax refund.
3. You continue to be updated while maintaining compliance
When it comes to tax preparation, several people choose to take the path of least resistance since the last thing they desire is for it to seem as though they are engaging in tax evasion or other questionable business practices. A tax accountant can seek for possibilities within the confines of tax compliance and offer you with the tax deduction benefits it requires to enhance when submitting your tax return. This is something that a tax preparer cannot do.
The following are some suggestions that can help you decrease your tax liability. These suggestions include both common tax suggestions and more specialised tax return suggestions. These suggestions encompass taxpayers with high net worth as well as professional investors.
Tips to Paying Less Tax
1. To Donate
It is constantly a good thing to give, especially since any amount over $2 given to a charity that is registered can be deducted from your taxes. Donating your hard-earned cash is a worthwhile method of spending it, and the fact that you can deduct that contribution from your taxes is merely a bonus.
You will receive a receipt after making a donation, which you should keep for your records. Then, when tax season comes around, all you need to do to claim a deduction for your charitable contributions is total up all of the receipts you have saved.
Keep in mind that the money you donated will not be returned to you immediately when you obtain your tax refund; rather, the sum will be subtracted from your income that is subject to taxation. The amount of the donation will be returned to you as a proportion of the total.
2. Use the Salary Sacrificing Option to Your Advantage
Employees have the option of reducing the amount of tax they have to pay by sacrificing a portion of their paycheck.
If you want the advantage, you have to give up a portion of your pre-tax earnings before you get it. This could be utilised to pay for your super, a new vehicle, insurance, computer, loan or rent payments and much more.
These advantages, which are often referred to as fringe benefits, have the potential to reduce your annual tax liability by thousands of dollars. There are restrictions placed on the kinds of things that can have their salaries reduced or packed together. Nevertheless, prospective Fringe Benefits Tax (FBT) may have an effect on the kinds of products that your place of employment is willing to provide to its employees.
One of the most well-liked choices is to include a car purchase in one's wage package in the shape of a novated lease. You may be capable of reducing the amount of income that is subject to taxes by entering into these three-way agreements with your financer, your employer, and yourself. These arrangements may also provide you with entry to a new car.
Consider including your super in your salary negotiation in order to boost the amount of money you receive at the conclusion of the fiscal year.
3. Ensure That You Monitor Your Taxes
Maintaining accurate financial records does not need to be a challenging endeavour.
You simply have to be ready and record everything. To make tax deduction claims, retain all receipts using a smartphone app intended for this.
Leaving aside 10 minutes every week to load receipts into the program will help with keeping records for every tax year, leaving your tax burden much simpler to face.
In the case of an ATO investigation or inspection, you will be requested to produce adequate and pertinent documentation, including documentation to corroborate the claims made.
Please make sure you have recorded required documentation like sales receipts, expense invoices, banking information, credit card information, listings of creditors and debtors, employee records (wages, super, tax declarations, contracts), automobile records, logbooks, stock take lists, and asset acquisitions.
4. Claim Everything
You are permitted to make a claim for anything that is connected to performing your work. Ensure that you incorporate the portion of the acquisition that is relevant to your work in the item that you deduct from your taxes. For example, if you bought something that is partly for your job and partly for your personal life.
Keep the receipt if you are uncertain whether or not an item is eligible for reimbursement, and ask the individual who is assisting you with your claim for clarification. We strongly advise keeping all of your receipts for as long as possible; if you find that you are unable to deduct something from your taxes, you should get rid of the receipts.
It is essential to have a good understanding of the tax deductions that are available to you. As soon as you get this information, you may begin to minimise the amount of your taxable income by claiming all permissible deductions linked to your employment.
The following are examples of some of these costs:
- Computer gear
- Books and courses pertaining to a given technology or business
- Expenses incurred for the use of a vehicle and for travel, including board and lodging. There are, nevertheless, stringent guidelines that dictate what can't be claimed.
- Home office overhead costs.
If you limit your tax deduction to the portion of an expense that is relevant to work, you may still be able to deduct personal expenses associated with the purchase. In addition, there are extra possibilities for you to lower your tax liability if you're the proprietor of a company or an investment in real estate.
It is important to be aware of the threshold for work-related claims in order to avoid being flagged by the tax office; if you are uncertain of the level, you should seek counsel.
It would be best if you were capable of providing documentation for any claims that are worth more than $300 in order to be eligible for the financial benefits when it comes time to pay your taxes. If the sum is less than $300, you will be required to demonstrate how you calculated the claim but will not be required to produce written documentation to the tax office if they ask you about it.
5. Timing Expenses
If you submit all of your receipts for costs before the month of June is over, you will be able to claim them on this return and start enjoying the advantages right away. However, if you buy the item after July, you will have to wait an entire year before you are eligible to receive the discount.
Right now is the ideal moment to take a step back and evaluate the way you are currently handling your financial matters. There is still time for you to gather all of your documentation and receipts, even if you have fallen behind or gotten careless with them. This will allow you to obtain the largest possible refund possible.
6. Maintain a Vehicle Record Book
Always be conscious of keeping a 12-week diary of your busiest travel period if you are someone who commutes for work-related reasons (for example, to or between clients or offices). After doing so, you will be able to compute the proportion of your car costs that are tax deductible for the upcoming fiscal year.
This can provide a result superior to the "cents per kilometre" approach, frequently used as a fallback when incomplete records are available. In addition, if you keep a logbook throughout the year, you will have the choice of a more advantageous manner to enhance your car deductions when it comes time to file your taxes.
Contribute to your tax-deductible superannuation account before a certain date, say the 25th of June, to guarantee that the fund will collect the cash by the 30th of June, which will allow you to take advantage of tax breaks and co-contributions.
7. Take Control of Your Financial Situation
If they are not handled in an effective manner, debts of any kind can quickly snowball into major headaches.
Consolidate all of your debts into a single, more affordable payment so you can stay on top of everything. For example, you might well be able to minimise the amount of income tax that you owe by deducting the interest expenditures from mortgages, investment properties, or credit cards on which you have debt.
If it is adhered to, the debt repayment system will cut these costs more than anything else. Nevertheless, it would be best if you always started by paying off the non-tax-deductible debt with the greatest interest rate and then worked your way down the list.
8. Franking Credits
The vast majority of dividends that come from investments in Australian shares come with something called "franking credits." Franking credits are unlike other "tax offsets" in the sense that they have the potential to result in a cash return in the event that they are more than the total amount of tax that you are responsible for paying for the year. In addition, because the tax rate on contributions to superannuation is just 15%, the tax benefit of franking credits is increased when they are invested in a self-managed fund.
9. Prepay Deductions
Your deductions can be brought forward to this fiscal year if you pay for certain costs early. This will reduce the amount of your income that is subject to taxation, which will result in a greater bonus.
To qualify for the benefit, the prepaid expenditures must be less than $1,000, or they must comply with the 12-month criterion. You are permitted under this regulation to claim an instant deduction as a prepaid expenditure, provided that the service does not last more than 12 months and is completed within the next tax year.
10. Investment Insights
It would be best if you never jumped into an investment without first consulting a financial adviser; this step should never be skipped. Each investment you make must provide benefits for you immediately and throughout the investment's lifespan. If your investment ultimately results in a loss of capital, it has little value in reducing your current tax bill by a negligible amount.
You are going to be responsible for paying tax on any assets or shares that you've sold in the past that have resulted in a profit for you. Therefore, reduce the number of your assets that are now operating at a loss in order to maintain this to a bare minimum.
Be wary of the practice of selling shares that are now trading at a loss and then buying them again once the next tax year begins. The ATO has been given the directive to cancel any advantages that are included in this group and issue sanctions as part of a crackdown on the practise that is commonly referred to as 'wash sales.'
11. Main Residence
When it comes to amassing personal, and family wealth in Australia, the primary home capital gains tax discounts are widely regarded as the most advantageous tax cut available. If you're willing to invest in real estate, once you have purchased the home, you should make it your primary residence.
If your life takes an unexpected turn, you have the option of moving out of the house and renting it out for up to six years while still being able to claim it as your primary residence for tax reasons. Nevertheless, such dangers can be handled. Therefore expats ought to be conscious of the recent adjustments that have been made to these regulations, which make them less tax concessionary for individuals in this category.
12. Make Use Of A Trust In Your Will
After a person's death, testamentary trusts make it possible to distribute their income tax efficiently. Testamentary trusts are established inside and through a person's Will, but they only become active once the person has passed away.
Any taxable income that is produced by a testamentary trust is either retained by the trust itself or distributed to the recipients in a way that minimises the recipients' tax liability.
On the amount of income they get from the trust, recipients are subject to taxation at their own personal marginal rates. However, on the other hand, recipients under the age of 18 are subject to taxation at the standard adult rate rather than the tax rate that applies to penalties for minors. Therefore, when it comes to taxes, this is where the opportunity for savings is quite significant.
13. Make Arrangements For Your Funeral
If funeral costs are paid in advance or money is invested in a funeral bond, the taxpayer may be eligible for large tax savings in the future.
Bonds with a face value of up to $12 000 are regarded as "exempt assets" for the purpose of the age pension means test administered by Centrelink and the Department of Veterans Affairs.
In order to qualify for the tax benefits of funeral bonds, the total amount deposited must be for "reasonable" costs associated with the funeral.
When folks prepay for their funerals, they are able to be extremely particular about what they desire, and they are also capable of paying at the prices that are in effect today.
14. Make the Most of Your Retirement Account
Investing the utmost amount possible in their retirement accounts is one of the most prevalent tax-minimisation tactics that high-income individuals adopt to reduce their tax liability.
The encouraging thing is that individuals of any economic level can utilise this strategy. You can either put away the maximum amount possible in your retirement account or invest some of your salary or bonus money and deduct that amount from your taxes.
15. Negative Gearing
The process of creating investment losses (often as a result of interest charges), which can then be written off against your paycheck or wage income to produce a tax return, is referred to as "negative gearing." For example, suppose you believe that your investment's value will rise over time. In that case, a tax-efficient method can be used to "negatively gear" a real estate portfolio or shares portfolio.
In principle, the increase in value results in a capital gains tax on an eventual sale (at concessional rates), but in the near term, tax refunds can help in covering losses. Nevertheless, the long-term increase in value is a capital gains tax.
The most important aspect of negatively gearing is guaranteeing that the investment will pay an income stream in order to qualify for a tax deduction on the interest. Always get professional guidance before making any investments to guarantee that the interest can be deducted.
16. Maximise Your Refund by Using the Medicare Levy Surcharge and Private Health Insurance
Investigate getting private health insurance if you have not yet done so if you don't already have it.
Individuals who do not have their own private health insurance are subject to a higher Medicare levy premium. The vast majority of taxpayers pay a mandatory Medicare charge of 2%.
On the other hand, if you do not have private health insurance and make more than $90,000 (singles) or $180,000 (families), you will be required to pay an additional surcharge of at least 1% on top of your regular premiums.
17. Expert Guidance
When you possess more knowledge about your taxes, you will have an easier time creating a budget. Consult a tax accountant who is an expert in the field before formulating your strategy for dealing with the ATO.
Doing your homework will guarantee you can get the most out of your tax return, so talk to your tax advisor about the tax-deductible costs and get clear on what you can and cannot claim.
They will frequently be knowledgeable about deductions that you aren't.