Legal and logical ways you can benefit from tax minimisation
It’s a fact – Australia is one of the most heavily taxed countries in the world. And as any tax payer knows, there’s little sign that our politicians will be motivated to do much about changing that fact any time soon!
So it’s understandable that more and more workers are looking for ways to get ahead financially by minimising the amount of tax they pay – which in most cases sees around a third of their income going straight to the tax man.
Note that we’re not talking about evading tax. As the late, great Kerry Packer said, “I pay whatever tax I am required to pay under the law, not a penny more, not a penny less.”
Instead, in this news post we’ll look at wealth creation through finding legal and logical ways to help you retain more of your hard-earned dollars instead of handing them over to the tax man.
Think about whether these five tips could help you minimise the amount of tax you pay.
1) Salary sacrifice into your superannuation
Many people think that this is only available to government employees, or those on mega salaries, yet in fact the strategy of salary sacrificing in to your super is available to all Australian workers.
When you make a before-tax contribution into your super fund, it means that instead of paying the marginal tax rate on your income (usually an average of around 32%), you’re paying only the superannuation contributions tax of 15%. Then once you retire, your money (and whatever earnings it’s received) are returned to you tax-free.
There are some limitations. Note that you can only deposit a maximum of $25,000 into your super each year – a figure that includes the compulsory contributions made by your employer on your behalf.
And of course, money that you sacrifice into super can’t be accessed until retirement (which is currently set at 60 years old). Nevertheless, you can see how this strategy gives you both an immediate tax saving on your cash flow, and over the long term as well.
2) Think about taking out a novated lease for a car
Another way to reduce your tax payable is by setting up a novated lease on a car – even if that vehicle is solely for personal use.
With a novated lease, you pay for part of the vehicle’s costs (including finance costs, rego, and other operating costs) after tax as normal, and part of the costs before tax – resulting in tax savings for you.
There are some restrictions with a novated lease – for example, the car can’t be older than 7 to 10 years at the end of the lease, depending on the vehicle. You will have to deal with a balloon payment at the end of the lease, depending on the lease term.
If you’re taking out a novated lease, make sure that you’re in steady employment, as the lease payout could be worth more than the vehicle in the first couple of years. And note also that a novated lease must be done in conjunction with your employer – which means they have to be willing to take part in the scheme.
3) Make sure you claim all legitimate work expenses
Are you claiming back all eligible expenses you incur for work purposes? You may be able to claim a deduction for expenses such as clothing and dry cleaning, travel expenses, home office expenses, phone and internet costs, and more.
It’s important to be realistic about your tax minimisation potential. There is no point spending a dollar to save 50 cents in tax! Yet if you have incurred legitimate expenses, it’s important to keep track of them and to claim them back at tax time.
Note that of course, you must have evidence or proof of the expense you wish to claim from the tax office, as heavy penalties can apply for inaccurate claims.
To check which expenses you can claim back, speak to your accountant or download the fact sheet from the ATO website.
4) Consider protecting your income
It can be a good idea to think about taking out Income Protection insurance, for two reasons.
Firstly of course, this insurance protects your future income in the event that you become seriously sick or are injured, and cannot work. Depending on your policy, your insurance may provide up to 75% of your usual monthly income to provide an affordable level of financial protection and to provide enough financial support for you to return to work.
Secondly, in terms of minimising your tax, this insurance is predominantly a tax deductible expense because it’s considered a way for you to protect your income earning ability.
Be sure to double check whether your policy includes any ‘extra benefits’, as these may not be tax deductible.
5) Think about borrowing for investment
You’re no doubt familiar with the process of borrowing to invest in a home to live in, or perhaps to set up a business. But there’s another category of investment borrowing that can help you minimise your tax payable.
When you borrow for investment purposes (a process known as gearing), the interest you pay is 100% tax deductible (according to current legislation at the time of writing). Gearing to invest helps you to maximise your investment potential by investing in shares or managed funds.
To get the most out of gearing, it’s important to invest in assets that will provide you with both income and growth over the medium to long term. Think about whether you’d prefer to invest gradually over a period of time with a regular savings plan, or use a significant amount up front (for example to purchase an investment property).
Borrowing to invest isn’t a strategy that’s suitable for everyone, and will depend on your individual circumstances. You should make sure you have appropriate cash reserves and buffers for security, along with strong enough cash flow to manage the interest costs of your investment loan.
Talk to Henderson Matusch for help with minimising tax
For advice and assistance with finding the logical and legal strategies you need to keep more of your hard-earned income in your pocket, talk the friendly team of financial advisers at Henderson Matusch. For a complimentary no-obligation chat, call us on 07 3229 3688 or use the simple contact form here.