As the tax year concludes and many individuals prepare their personal income tax return, we start to realise how much income tax we pay to the Australian Taxation Office (ATO). When you factor in GST and Excise Taxes, the total tax burden can be surprising.
Once you realise how much tax you paid last financial year, it’s worth consider financial planning strategies & tax planning to reduce your tax payable.
Now imagine what you could do with the tax you could save:
- Increase Savings: Put more money aside for future goals.
- Reduce Your Mortgage: Pay down your home loan faster.
- Start an Investment: Build wealth through smart investments.
- Boost Your Superannuation Balance: Strengthen your retirement savings.
- Replace Your Car: Upgrade your vehicle.
- Fund Education Expenses: Invest in learning opportunities.
- Enjoy a Holiday: Treat yourself to a well-deserved break.
As you can see, the things you could do with an appropriate financial planning strategy is only limited by your imagination.
However, it’s important to remember that pursuing tax deductions solely for the sake of reducing tax can be pointless unless there’s a tangible benefit for you. Otherwise, making a charitable donation will achieve a similar outcome.
What are some of the things you can do to assist you with minimising your income tax & claim deductions?
What strategies are used to reduce taxable income?
Below is a list of some of the things you that you can consider to reduce your income tax:
- Ownership of your investments
- Investment franking credit refunds
- Prepaying expenses and interest on investment loans
- Insurance premiums (if structured correctly)
- Working from home expenses
- Superannuation contributions
- Salary sacrificing to superannuation
- Tax deductible super cap of $30,000
- Carry forward superannuation contributions
- Making super contributions for your spouse
- Investment property depreciation
- Using your motor vehicle for work
- Work related expenses
- Realising capital losses
- Deferring investment income and capital gains
Remember, each decision you make should align with your financial goals, and you should seek advice from your financial planner and accountant to ensure that it is suitable for you.
Ownership of your investments
A longer-term financial planning strategy can be reviewing who owns your investments. Any change of ownership needs to be carefully planned due to capital gains tax and stamp duty implications. You will need to seek advice from your Accountant prior to making any changes.
Investments may be owned by a Family Trust, which has the key advantage of providing flexibility in distributing income on an annual basis and an ability for up to $416 per year to be distributed to children or grandchildren tax-free. Investments may also be owned in the name of a lower income earning spouse.
Investment franking credit refunds
Franking credits, also referred to as imputation credits, are tax credits that represent the tax a company has already paid on its profits before distributing dividends to shareholders. In Australia, shareholders can use these credits to offset their tax liability or, in some cases, receive a tax refund to prevent double taxation.
For example, let’s say a company earns a profit before tax of $1 per share. The company tax rate is 30 cents, so it will pay 30 cents per share in tax to the government. And it will send investors a cash dividend of $0.70 per share plus a credit for the $0.30 of tax paid.
Prepaying expenses and interest
Expenses relating to managing your investments can be prepaid before 30 June 2025. For example. you can prepay up to 12 months of interest before 30 June on an investment loan and claim a tax deduction in the applicable financial year. Also, other expenses in relation to your investments can be prepaid before 30 June, including, accounting fees, ongoing advice fees, repairs, memberships, subscriptions, journals, etc.
Insurance premiums (if structured correctly)
For most people, your greatest wealth building asset is your ability to earn an income. For this reason, many people have Income Protection Insurance. It is generally used to replace up to 75% of your salary if you are unable to work due to sickness or an accident. The insurance premium maybe a tax deductible to you.
Furthermore, you also have the benefit of protecting you and your family’s lifestyle if you cannot work due to sickness or an accident. Like investment loan interest, your income protection premiums can also be pre-paid for 12 months to increase your deductions. This can reduce the after-tax cost of funding your Income Protection insurance costs making is much more affordable.
Working from home expenses
If you work from home, some of your expenses could be tax deductable. From 1 July 2022, the ATO allows you to claim a deduction using a “Revised Fixed Rate Method” which is an amount of $0.67 per work hour for the year. This amount is used to cover most expenses when working from home. You are required to keep a detailed record of how you calculated the number of hours you are claiming. You can also claim expenses using an “Actual Cost” method. You are required to keep all of your related invoices and receipts during the entire year to prove all claims.
Superannuation contributions
While you might not have the extra cash now, it’s important to know that you might be able to make additional contributions to your superannuation account. It may also be possible to increase your super balance and reduce your taxable income at the same time. However, it’s important to know that you will not be able to access these funds until you meet a condition of release, which for most people will be retirement at age 65, so if you are 40 with a mortgage it may not be the best option for you.
Tax deductible super cap of $30,000
From the 1 July 2024, the tax-deductible super contribution limit (or “concessional contribution cap”) is now $30,000 for all individuals under age 75. Individuals need to pass a work test if over age 67.
To save tax, you could consider making the maximum a tax-deductible super contribution this year before 30 June 2025. The advantage of this strategy is that superannuation contributions are taxed at between 15% to 30% compared to the personal income tax rates of between 18% and 47% (including Medicare levy).
Carry forward superannuation contributions
Carry-forward contributions are not a new type of contribution, they are simply a new rule from the 1 July 2018 that allow super fund members to use any of their unused concessional contributions cap on a rolling basis for five years, if their superannuation balance is below $500,000.
This means if you don’t use the full amount of your concessional contribution cap ($25,000 from 2020 to 2021, and $27,500 for 2022 through to 2024), you may qualify to carry-forward the unused amount and take advantage of it up to five years later.
Carry-forward contributions are calculated on a rolling basis over five years, but any amount not used after five years expires. These carry-forward rules only relate to concessional contributions into super, not non-concessional contributions, as they have different caps.
Making super contributions for your spouse
You can make super contributions on behalf of your spouse (married or de facto), provided you meet eligibility criteria, and your super fund allows it. This is known as contribution splitting (usually you both would have to be with the same super fund).
Doing this not only helps to boost your spouse’s retirement savings, but it can also help you save tax if your spouse has limited income.
Also, you may be eligible for a tax offset of up to $540 on super contributions of up to $3,000 that you make on behalf of your spouse if your spouse’s income is $37,000 p.a. or less.
The offset gradually reduces for income above $37,000 p.a. and completely phases out at $40,000 p.a. and above.
Property depreciation report
If you have an investment property (Residential, Industrial, or Commercial), a Property Depreciation Report (prepared by a Quantity Surveyor) can allow you to claim depreciation and capital works deductions on capital items within the property and on the property itself.
The cost of this report is generally recouped several times over by the tax savings in the first year of property ownership.
Using your motor vehicle for work
You are required to keep an accurate and complete Motor Vehicle Logbook for at least a 12-week period. The start date for the 12-week period must be on or before 30 June. You should make a record of your odometer reading as at the start and end of the period and keep all receipts/invoices for your motor vehicle expenses. Once prepared, a logbook can generally be used for a 5-year period.
An alternative (with no logbook needed) is to simply claim up to 5,000 business kilometres (based on a reasonable estimate) using the cents per km method.
Work related expenses
It’s important to retain receipts of all work-related expenses such as uniforms, training courses and learning materials as these may be tax-deductible.
Realising capital losses
Tax is normally payable on any capital gains (i.e., the sale of an investment). You many consider selling any non-performing investments you hold before 30 June 2025 to crystallise a capital loss. This may reduce or even eliminate any potential capital gains tax liability. Unused capital losses can be carried forward to offset future capital gains.
Deferring investment income and capital gains
If practical, you may wish to consider delaying or deferring the receipt of investment income from an asset until a later financial year, when your taxable income is lower. This may also be relevant for the sale of any asset which will trigger a taxable capital gain.
For property sales, it’s important to note that the Contract Date (not the Settlement Date) is generally the key date for working out when a sale or purchase occurred.
Solace Financial can help you boost tax benefits
As you can see from this article, there are many options which can be used to reduce personal income tax. However, everyone is different so it’s important to ensure that whatever option you use aligns with your longer-term goals and financial plan.
The most important thing to get in place first is an understanding of your goals and objectives. Once these have been determined, you can then set out to establish the foundations of your financial plan for the future.
If you would like to explore possible options to reduce your taxable income while at the same time increasing your financial position, we can help! Getting started is very easy, simply contact our office or book a consultation with one of our financial advisers.
FAQs
What are the current tax rates for Australia?
Resident tax rates 2024–25
| Taxable Income | Tax on this income |
| $0 – $18,200 | Nil |
| $18,201 – $45,000 | 16c for each $1 over $18,200 |
| $45,001 – $135,000 | $4,288 plus 30c for each $1 over $45,000 |
| $135,001 – $190,000 | $31,288 plus 37c for each $1 over $135,000 |
| $190,000 and over | $51,638 plus 45c for each $1 over $190,000 |
What is a tax deductable expense?
Tax deductable expenses refer to expenses you personally pay that are eligible to be itemised on your tax return. These deductions are used to lower your taxable income and may result in a larger tax refund.
