As the saying goes, there are only two certainties in life: death and taxes. With the new financial year upon us, now is the time to learn a few simple ways to save money on taxes. As we all know though, this can be a tedious process. It’s not as simple as applying for a no paperwork loan; filing your tax return may take some time and effort.
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If you are disorganised, filing your tax return can quickly become a chore. After all, it is stressful trying to find all your old receipts and any necessary paperwork. Even once you get all that organised, knowing what to claim can be difficult.
While taxes can be tricky, there are some easy ways to save money and maximise your tax return. With a little bit of understanding about the taxation system and a few simple tips, we will help reduce your stress this tax season.
How does income tax work?
As an Australian resident, you are required to pay tax on the income that you earn. In other words, you not only pay tax on your salary but also on any income earned through investments (e.g. share returns).
For most people, your employer will automatically deduct your tax from your weekly pay.
In Australia, the taxation of income is based on a progressive rate, separated into several income brackets. Therefore, the amount of tax you pay will vary depending on how much you earn. Once you figure out which bracket you fall under, you can calculate the tax you will pay for each additional dollar that you earn. The table below illustrates Australia’s marginal tax rates for the 2018-19 financial year.
|Taxable income||Tax paid on income|
|$0–$18,200||No tax paid|
|$18,201 – $37,000||19c for every dollar over $18,200|
|$37,001 – $87,000||$3,572 + 32.5c for every dollar over $37,000|
|$87,001 – $180,000||$19,822 + 37c for every dollar over $87,000|
|$180,001 and over||$54,232 + 45c for every dollar over $180,000|
Figuring out your taxable income
To figure out your income and the tax you will pay, there are few things to consider. The first thing you’ll need to work out is your assessable income. Depending on your financial situation, it can include your salary, government payments and share dividends.
Deductions offset your assessable income. A deduction is an expense that is subtracted from your assessable income, reducing the amount that is subject to tax.
For example, if you earn $60,000 and claim a deduction of $2000, your taxable income is $58,000. Deductions are key to reducing the amount of tax you pay as they reduce your taxable income. Deductions come in many forms, but we’ll get to that shortly.
Once you’ve got your assessable income and deductions sorted, calculating your taxable income is simple. Your taxable income is your assessable income minus all your deductions.
TAXABLE INCOME = ASSESSABLE INCOME – DEDUCTIONS
Now we’ve got that out of the way, let’s move onto hopefully saving you some money on your taxes.
Ways to save money on taxes: Aim to claim all possible deductions
If you spend your money on an item that is work-related and affects how you earn your wage, claim a deduction on it. If you’re looking to maximise your tax return, this is by far the easiest and most popular tip. So, if you’re not taking advantage, you’re missing out and costing yourself money.
Even if you make a purchase that is for both work and personal use, you may still be able to claim a portion of the costs. If you are ever in any doubt about a purchase, keep the receipt just in case. Your accountant will be able to let you know if you can claim it. Keeping a receipt is easy and costs you nothing, but if you throw it out, you might cost yourself a valuable tax deduction.
To be able to claim a deduction for work-related expenses, the ATO has three simple criteria that must be satisfied first.
- You must have spent the money yourself and were not reimbursed for the purchase
- It must relate directly to earning your income
- You must have a record to prove it (e.g. receipts)
While deductions are a great way to get the most out of your tax return, honesty is important. If you are making up claims or guessing about values, you could potentially face a reassessment or audit by the ATO. The last thing you want is to have a tax bill arrive because you tried to beat the system.
Which expenses are tax-deductable?
If your expenses can meet each of the three criteria, then they likely fall under one of the following categories which you may be able to claim as a part of your tax return.
- Vehicle and travel expenses – This does not include the normal cost of your commute. However, if you use your car for work (e.g. deliveries), you may be eligible to claim a deduction. Travelling to work vs. travelling for work is a simple way to make the distinction.
- Tools and equipment – For purchases of items that relate directly to the earning of your income, you can claim some or all of the costs. Some examples include a tradie’s tools or internet costs for individuals who work from home.
- Education expenses – If the study you are undertaking relates directly to your current job, you can claim several expenses, including textbooks, stationery and course fees.
- Home office expenses – If you work from home then costs including the purchase of a computer and phone can be claimed. However, only a proportion of the expense that relates directly to work can be claimed.
- Clothing expenses – To claim clothing expenses, the clothes in question must be unique and distinctive. Examples include high-vis clothing or clothing that is specific to your occupation, like chef’s pants.
This is not an exhaustive list but provides a great overview. If you’re looking for more information, the ATO has produced a series of handy guides detailing the expenses that are tax-deductible for a wide range of professions.
Ways to save money on taxes: Organise your finances
We all know the panic of trying to track down all the receipts for the things we’ve bought in the past year. Not only does it take hours, but there’s always a few that are lost or forgotten. Each year, Australians cost themselves hundreds or even thousands of dollars that could have been refunded through lost or forgotten receipts. Lost money could have gone to saving for a holiday or to paying off a short term loan you might have had.
Getting organised doesn’t need to be too hard or time-consuming. As each expense comes in, add it to your file. Keep all your files categorised and in chronological order. This ensures you can account for every receipt and you won’t miss out on any deductions. Maybe create a spreadsheet to keep track of all your expenses and a running total. These tips aren’t hard to implement but could help you save a bunch of money on your taxes.
One important piece of advice is always to keep a backup. When you get a receipt, take a photo of it. You will always have the digital copy up your sleeve if the receipt fades or gets lost. Electronic copies can also be attached to your tax return in an instant, saving you plenty of time.
If you want to move your record-keeping into the digital age, some great apps can assist you. You can save all your receipts to ensure that nothing is forgotten about throughout the year. Just take a photo of each item as it comes up and once tax time rolls around you’ll be organised and ready to file your return right away.
Increase your super contribution
If you’re looking to save money on taxes while also helping to secure your future, then increasing your super contributions could be the way to go. Salary sacrifice super contributions do not incur the fringe benefits tax, the only tax paid is the 15% contributions tax. If due to your income bracket, your marginal tax rate is higher than this, the difference between the two rates will be what you save. The higher your current tax rate is, the more money you will save.
Like anything though, there are some things to consider. While increasing your super contributions will help out your future self, if you need to access the money immediately, there is a chance you may be unable to or may be required to pay tax on the accessed funds. There is a $25,000 annual cap for before-tax super contributions. You will be required to pay additional tax on the excess funds, should your contributions push you over this cap.
If you’re not sure how to get started, have a chat with your employer. Most companies offer employees the option to salary sacrifice into their superannuation funds. If you decide it is something you that works for you, then arrange with your employer. It is simple and easy to do.
The viability of salary sacrificing though is dependent on your financial situation, so make sure you do your research before making any decisions. For low-income earners, salary sacrificing provides minimal benefit.
Go to the professionals
While it is possible to file your tax return, sometimes it’s better to let the professionals do their job. While you may think to do it yourself will save you some money, you could potentially be missing out. Tax agents know what’s best for you and will do all they can to save you money at tax time.
As we’ve talked about, the best tip for getting the most out of your tax return is claiming everything you can. This is where tax agents come into their own. They know the system better than you do so they’ll be able to make sure you are claiming everything you’re entitled to. There may be a range of things you can claim that you weren’t even aware of.
Tax professionals also provide the peace of mind that everything will run smoothly. If you try to enter your deductions and do it incorrectly, you could potentially face a fine from the ATO. Tax agents are there to ensure information is correct, so you don’t have to worry. Rather than spending your time trying to do tricky calculations regarding your expenses, leave it to the professionals. It will save you time and reduce your stress, and they can do the work they enjoy.
If you think you have a good idea of what you’re doing and that filing your tax return will be relatively straightforward, nothing is stopping you from doing it yourself. However, if you have any reservations, it’s usually best to consult the professionals.
Health insurance: private health cover vs the Medicare levy surcharge
If you, as a single person, earn more than $90,000 or more than $180,000 as a family and don’t have private health cover you likely cost yourself money at tax time. The 1% medicare levy surcharge is levied against anyone who exceeds these thresholds and does not have private health insurance.
The tax benefits aside, private health cover has advantages by itself. Shorter waiting times and private rooms, to name a few. So you can potentially save yourself money and improve your healthcare at the same time.
If you’re looking for the perfect plan, it’s important to shop around and do your research. Make sure that the cover you get matches your needs and is affordable for you. There are many private health insurance providers out there, so try and find the best deal. After all, you can have great health coverage and save yourself money on your taxes.
Ways to save money on taxes: Charitable donations
If you want to make yourself feel good and potentially save money on your taxes, why not get into the spirit of giving. In Australia, any donation to a charitable organisation over $2 is tax-deductible. With so many great charities out there doing incredible work, it won’t be hard to find one that you connect with. To be able to claim the deduction, the donation must have been made to a registered charity and you must have the receipt.
Every time you donate to one of your favourite charities, ask for a receipt. File these receipts away and come tax time, add them all up to find the total. You can then enter it as part of your tax return under the charitable donations section.
While you won’t get your whole donation back, any amount that you do donate will be subtracted from your taxable income, meaning you get a percentage back as part of your tax refund. So, you help out those in need and get rewarded. A win-win situation for you. Maybe it will help you become even more generous in the future.
Marginal capital gains and losses
While there’s never a good time to incur losses, if you have a few under-performing shares or investments that are costing you money, tax time can be a great time to offload them. In Australia, capital gains on property or share sales are subject to what’s called the Capital Gains Tax.
So, if gains are taxed, how does selling losing investments save you money on your taxes? Well, the capital gains tax applies to the net gains that you have earned in that year. By selling losing investments, you will reduce the gains that you’ve had. As a result, you will reduce the amount of capital gains tax that you pay.
Obviously, nobody ever wants to have losing investments. If you do, though, tax time represents a great opportunity for you. Take the time to clean up your share portfolio and save money on your taxes at the same time.
In a perfect world though, you’d never have to employ this strategy because all your investments would be profitable and successful. Unfortunately, the world is far from perfect, making this strategy a great option for you if you need it.
It is important to note that capital losses cannot be deducted from your taxable income to reduce the amount of income tax you pay. They can only offset against your capital gains.
Look into investment bonds
Investment bonds are long-term investment opportunities offered by insurance companies in which your money is pooled with other investors and managed by the company. Risk on these bonds can range from low to high which will obviously affect your returns.
Investment bonds are only taxed at the corporate tax rate of 30%. If your marginal tax rate is higher than this, you’re saving money. In addition to this, if you can last 10 years without making a withdrawal, there is no further tax payable. Essentially, for a period of 10 years, you provide the company with an easy loan of your money and, as a result, you get a nice little payout at the end.
If you find yourself in a position to be able to invest more money, that’s ok too. Investment bonds allow you to make additional annual contributions. However, your additional contributions must not exceed 125% of the contribution that you made in the preceding year. The 10 year period will reset if your contributions exceed the 125% rule, meaning you have to wait another 10 years to receive the tax benefit.
If you need to withdraw your money from the investment bond it is possible to do so. However, you may be required to pay tax on the income if you withdraw before the first ten years are up. If you are able to make it ten years without making a withdrawal, your earnings will be tax-free.
Investment bonds won’t be for everyone because they are a long-term strategy but if you do have some patience they can be a great tax saver.
Ways to save money on taxes: The Family Trust
If you’re a high-income earner, a family trust is almost unparalleled in its tax-saving abilities. Family trusts are used to control how investment income (shares, etc.) is distributed among a family. Family trusts are also extremely flexible. Income can be distributed to dependents in the most tax effective way.
In order to save yourself money, you need to employ a strategy called streaming. The first step is to direct all business and investment income into the trust. The trustee will then allocate the income in the trust to individuals. The trustee will usually make payments to those in the trust with the lowest income. By doing this you can take advantage of the lower marginal tax rates paid by those in lower-income brackets.
This tip only applies to those who earn higher incomes but it is an incredibly effective way to save money. If well-managed, a family trust can potentially save tens of thousands of dollars that otherwise would have gone to tax. It can also help out those in your family earning less. The trust gives them additional income which they can save or use to pay off any payday loan debts they may have.