Kerry Packer during a 1991 parliamentary inquiry. “I am not evading tax in any way, shape or form. Now of course I am minimising my tax, and if anybody in this country doesn’t minimise their tax, they want their heads read — because as a government I can tell you, you’re not spending it that well that we should be donating extra.”
One of the best ways for high-income earners to build wealth and maximise returns after tax is a thoughtful, well-structured tax strategy. To get ahead, you need to understand the tax rules and know how to use them to your benefit legally.
Australia has a progressive tax system, meaning the higher earners pay a higher marginal tax rate than their low-income earners. High-income earners often have the additional layers of superannuation tax, healthcare levies, GST, and stamp duty on top of income tax. So it is no surprise that many look for ways to reduce their taxable income legally.
The Australian Government encourages legitimate, ATO-compliant tax planning. But your strategies really should focus on those that actually improve your long-term financial position, not just your tax bill. Too often we see people pursue complex or risky arrangements purely for tax benefits, only to end up worse off financially.
A common example is negative gearing. You own an investment where the costs in loan interest, land tax, council rates, insurance, maintenance, and management fees outweigh the rental income. You pay the shortfall out of pocket, with the hope that the property will increase in value over time. While this can work well, it requires discipline, a strong investment, and an understanding that future capital gains may still be liable for capital gains tax.
Tax reduction should never compromise sound investment fundamentals. This is not just about paying less tax; this is about growing your net wealth after tax. A qualified financial planner can help you structure your investments and tax strategies to achieve both.
Understanding Tax for High Income Earners
In Australia, the highest marginal tax rate of 47% is payable by high-income earners on taxable income above AU$190,000. This is made up of 45% income tax plus the 2% Medicare Levy.
Superannuation is an attractive structure for high-income earners because concessional (tax-deductible) contributions are generally taxed at only 15%, rather than at personal marginal rates.
Division 293 tax
For clients with income in excess of A$250,000, Division 293 tax increases the rate on concessional contributions to 30%. Higher, yes, but still a long way from the top marginal rate and thus still quite a valuable tax-planning opportunity.
Franked dividends
Fully franked dividends can enhance tax efficiency, too. Fully franked dividends include franking credits, which represent tax already paid by the company, usually at 30%, applied against personal tax to reduce the amount of extra tax payable and improve your after-tax return.
Whats a Franking credit?
When Australian companies earn profits, they normally pay tax at a rate of 30%. If these profits are paid to shareholders as dividends, then the company attaches a franking credit to show the tax that has already been paid.
This is a system that avoids double taxation. The franking credit is offset against your personal tax, and you only pay the difference between your marginal rate and the company tax rate.
Structures
The structure under which investments are made is crucial in determining their after-tax returns. Choosing an appropriate structure can help minimize tax significantly, thus improving long-term wealth outcomes.
Trust structures
With a trust, you can hold investments and share the income with family members. If that income is distributed to someone on a lower tax rate, the family pays less tax overall. Just keep in mind that trust income must usually be distributed each year, or it may be taxed at a much higher rate. There is also additional accounting fees and work involved with a trust. So keep that in mind.
Company structures
Companies used for investment purposes are normally subject to a 30% flat rate of tax. Income derived can be retained within the company or distributed to shareholders as dividends, usually with franking credits attached (as discussed above).
One limitation, however, is that companies do not get the 50% CGT discount like individuals or trusts. Thus, it may not be appropriate for long-term capital growth assets.
Assets held in a lower income spouses name
Putting investments in a lower-earning partner’s name can be a simple way to save tax because the earnings are taxed at their lower rate. You may also receive the 50% capital gains discount if the investment is held for more than 12 months. Just remember: if their income increases in the future, the tax savings could shrink.
Superannuation
Super is a very tax-friendly place to invest. The earnings are taxed at just 15%, and if you hold an asset for more than a year, the capital gains tax drops to 10%. This can be even lower in retirement. There are proposed additional rules for super balances over $3m and $10m which we will discuss in a future article.
The trade-off is that your money is locked away until you meet a condition of release — generally once you’re over 60 and retired. Because the rules can be complex, it’s important to get personal advice, but for many high-income earners, superannuation remains one of the best ways to manage tax and grow wealth. If you’d like help building a strategy that makes the most of your fund, speak with our team for SMSF advice.
Proven Tax Reduction Strategies for High Income Earners
Concessional contributions
One of the simplest ways high-income earners can reduce tax is by putting more into super. You can contribute up to $30,000 a year, including employer contributions, and claim a tax deduction.
If you’re over 60, there are strategies that enable you to take some money out of super and put it back in to create a deduction without actually reducing your balance. And if your super balance is under $500,000, then you can “catch up” on the unused contribution caps from the last five years and make a much larger deductible contribution in one hit.
Capital gains rather than income
Some high-income earners prefer to hold assets that generate long-term capital growth, rather than ongoing taxable income. For example, land typically produces no rental income but may appreciate significantly over time. Because there is no annual income is no annual tax payable on it. When the asset is finally sold—often in retirement, when personal income may be lower—the owner may benefit from the 50% capital gains tax discount if the asset has been held for more than 12 months, reducing overall tax payable.
However, it is essential not to let tax savings override investment fundamentals. In many cases, assets that generate both income and capital growth can deliver better long-term wealth outcomes than assets relying exclusively on capital appreciation.
Donations or Foundations
Giving to charity, or creating your own foundation, is a totally legitimate way to take a tax deduction. Just remember that it can lower your taxable income, but it doesn’t grow your wealth-so it’s best for people who are motivated by philanthropy rather than financial return.
Negative gearing
Negative gearing is a strategy that can help reduce your tax and build wealth, enabling you to borrow to invest. If the costs of holding an investment, for example, interest, exceed the income it receives, a net loss may be tax-deductible, reducing your taxable income.
If the investment performs well over time, income may eventually exceed expenses. At that stage, the investment would be positively geared, and you will start paying tax on the net income. This is usually a good thing in the sense that your investment is performing well.
Because the tax treatment will vary with the location of assets, it’s very important to consider an appropriate ownership structure-e.g., individual, company, trust, superannuation-when implementing a negative gearing strategy.
It’s also important to look at what type of investment is being acquired. High-income earners typically borrow to buy either property or shares; each has its own set of advantages and disadvantages.
Property
Property generally provides lower rental income than the dividends shares pay, which can make negative gearing work more effectively. You can often claim depreciation, plus repairs and maintenance, as tax deductions. Bigger improvements can’t be deducted straight away, but they may reduce capital gains tax later on.
Shares
Shares are much more flexible: you can invest as little or as much as you like and buy or sell portions whenever you need to. You can also shape your portfolio to focus on income – through higher dividends – or growth, which may help improve tax outcomes in the short term.
Planning a Capital Gains Tax (CGT) event
Tax can be reduced considerably by careful planning around a CGT event.
A common example is where a client inherits a large parcel of shares that a parent had held for many years. These shares may have substantial unrealised capital gains. If sold all at once, the sale could trigger a large capital gain in a single financial year, resulting in a higher tax bill.
In many instances, this is more effectively managed by spreading the sale over a series of years. Selling the assets piecemeal over time allows the capital gain to be recognised over several tax years, which has the effect of reducing the marginal tax payable.
This strategy may further be improved by making annual concessional super contributions, up to $30,000, which may reduce the taxable capital gain each year.
Proper planning, in effect, can yield major tax savings and more favorable long-term results.
Common Mistakes High Income Earners Make
A big mistake we see is people focusing solely on reducing tax, rather than on what really counts — growing wealth after tax. A tax deduction doesn’t automatically make a strategy worthwhile.
The next most common problem is a do-it-yourself approach. People set up their own companies or trusts and then find out that sorting the structure out creates a capital gain and thus costs them far more than they expected. If set up properly in the first place, the tax could well be deferred, or even reduced – often to retirement years when income is lower. Timing matters too. Coming to see us on 27 June gives only a few days to take action before the end of the financial year, and some strategies simply won’t be possible in time. We also see clients make super contributions without checking the rules. Exceeding contribution caps can create extra tax and paperwork. Finally, selling an investment property before consulting a professional can increase your tax bill. Once the contract is signed, the tax outcome is locked in — so talk to us first if you’re thinking about selling.
Work With a Tax-Savvy Financial Adviser
Everyone’s financial situation is different, and we love helping clients understand how the tax system works and how the right structures and strategies can reduce tax and improve wealth over time. The right advice early on can make all the difference to your after-tax outcomes. If you want to make the most of your income, it pays to work with a financial adviser for high income earners who understands how to optimise tax efficiency.
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