30 Ways to Reduce your Tax Bill
It is never too early to focus on your tax planning in order to minimise tax, reduce risk and be prepared financially.
Effective tax planning is something that should be considered year round and making it a priority can result in you paying less tax liability. Preparing and updating a forecast of income and outgoings can also help you and your business identify times when money may be short and plan accordingly.
Keep reading for:
- Strategies to minimise your personal tax bill
- Reduce costs by claiming these deductions
- Depreciation, negative gearing and more!
- Reduce your tax liability in retirement
- Careful planning can produce tax effective outcomes
1. Claim deductible expenses
Individuals are entitled to claim deductions for expenses directly related to earning taxable income. To claim a work- related deduction, individuals must have a record proving a purchase was made and must have spent the money themselves and received no reimbursement.
2. Donate to charity
Those who donate money as a gift may be able to receive a tax deduction. Individuals can claim tax deductions for donations given to organisations that have the status of deductible gift recipients (DGR). The gift must be money or property, and must truly be a gift i.e. a voluntary transfer where the giver receives no material benefit or advantage.
3. Create a mortgage offset account
A mortgage offset account allows individuals with a home loan to offset their non-deductible interest on the loan with the interest on the normal taxable earnings of money in a deposit.
It is an arrangement where individuals create a savings account with their lender. Instead of paying interest on the full home loan, individuals are charged interest on the loan minus the amount in the savings account.
4. Delay receiving income
Where possible, defer receiving income until after June 30 to avoid paying tax in the current financial year. This will help minimise your taxable income in this financial year.
5. Hold investments in a discretionary family trust
A discretionary family trust can be beneficial for high income earners who are seeking to redistribute some of their income to family members on lower tax brackets.
A properly drafted discretionary trust allows trustees to make distributions to the most appropriate members regarding their tax status i.e. distribute more income to beneficiaries on lower tax brackets or those with no other income to utilise the $18,200 tax-free threshold.
Any capital gains that are made can be distributed to beneficiaries with capital losses available or who can use of the 50 per cent discount. Franked dividends may also be paid to beneficiaries who can use the imputation credits to reduce tax on other income.
Trusts can also use the 50 per cent discount on CGT on the sale of an asset if it was held for more than 12 months.
6. Pre-pay expenses
Prepaying up to 12 months of tax- deductible expenses may help bring the tax deduction forward to the current financial year. An example of doing this would be to prepay interest on an investment loan.
7. Invest in an investment bond
Investment bonds (also known as insurance bonds) are ‘tax paid’ investments that can be used as a wealth- building strategy. They are a type of a life insurance policy with the features of a managed fund sold through life insurance companies and building societies.
Earnings, such as income and capital gains, made from a bond are excluded from the individual’s personal income since the bond provider pays tax at 30 per cent internally, leaving nothing to declare on a tax return. After ten years no further tax is payable.
Investors can top up the amount in the fund as long as their subsequent investment does not exceed 125 per cent of the initial investment. Doing so triggers the 125 per cent rule which sets back the 10-year benefit to year one for the newly invested amount.
8. Review your income package
Consider salary sacrificing to reduce your taxable income. Salary sacrificing involves entering into an agreement with your employer to pay for some items or services straight from your pre-tax salary.
Individuals can salary sacrifice many things such as electronic devices, motor vehicles, childcare, private health insurance, super and so on.
Most employers will offer salary sacrifice to super but it is best to talk to you employer to see what other benefits they offer.
Salary sacrificing is available for anyone who earns more than the $18,200 tax-free threshold, however it is most suitable for individuals on mid to high incomes.
9. Make spousal contributions
Higher earning spouses can reduce their tax by contributing some of their super to their spouse’s super account.
Spouses can claim a tax offset of up to 18 per cent on super contributions of up to $3,000 that are made on behalf of their non-working or low-income earning partner.
From 1 July 2017, the spouse’s income threshold will be increased to $40,000.
10. Claim for training courses
Employers can claim a tax deduction for education expenses that have a satisfactory connection to an employee’s current employment, maintain or improve the skills or knowledge required for the employee’s current role, or result in an increase in the employee’s income.
11. Review your business structure
There are four commonly used business structures in Australia; sole trader, partnership, company and trust. Business owners need to understand the responsibilities of each structure, since each structure affects the tax they’re liable to pay, asset protection and ongoing costs. Reviewing your current business structure will establish whether it is still appropriate for your business’s current situation.
12. Write off bad debts
Businesses can write off bad debts to claim a tax deduction and receive a GST credit on their next BAS (if they are registered for GST on an accruals basis) provided that:
- The business has tried to recover the debt and has exhausted all efforts for it to be recovered with no reasonable expectation of payment.
- The bad debt is formally written off in the accounting records prior to the end of the financial year.
- The debt owed is included in your assessable income in the current financial year or earlier financial year.
13. Claim deductions for depreciating assets
Small businesses can claim an immediate write off of up to $20,000 for eligible assets they start to use, or have installed ready to use, and paid for, from 12 May 2015 until 30 June 2018.
The $20,000 limit can be applied to as many items as they wish. Assets that cost $20,000 or more are added to the entity’s small business pool and depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter.
14. Apply the 15 year exemption
Small business owners aged 55 or older who retire or become permanently incapacitated, and have owned a business asset for at least 15 years, are exempt from paying CGT when they dispose of the asset.
15. Use the 50% active asset reduction
Small business owners can reduce the capital gain on an active asset by 50%. An active asset is a tangible or intangible asset that is used or held ready for use in the course of carrying on a business.
16. Consider applying the small business rollover
Small business owners who make a capital gain from selling an asset can defer the CGT on the capital gain, as long as a replacement asset is acquired within two years.
17. Claim for property depreciation
The majority of properties that generate income qualify for some level of depreciation. Property investors can claim Division 43 capital works deduction and Division 40 plant and equipment depreciation. The capital works deduction applies to items that are fixed to a property’s structure and includes renovations. The plant and equipment deduction relates to what you can claim for eligible items within the property, such as curtains or blinds.
18. Use a quantity surveyor
Quantity surveyors can help prepare a depreciation schedule to help maximise an investor’s claim for depreciation. The cost of preparing this report is also tax deductible.
19. Negatively gear your property
Negative gearing involves generating tax losses which arise from tax-deductible costs that are higher than investment income. Where a property owner’s deductible expenses are higher than the property’s annual rental income, the net rental loss can be applied to reduce the property owner’s taxable income.
20. Claim for advertising costs
Property investors can claim for the cost of finding tenants and persuading them to stay in their property. Direct (where the property investor advertised independently) and indirect (when an agent advertised on the investor’s behalf) advertising costs can be claimed.
21. Claim for miscellaneous costs
Investors can also claim for costs related to maintaining a safe, clean and pleasant environment. Examples include cleaning costs, gardening expenses, pest control costs and security patrol fees.
Retirement & Estate Planning
22. Make super contributions
Concessional (before-tax) super contributions are taxed at 15 per cent when they enter a super fund, as opposed to being taxed at the marginal rate (which can be as high as 49 per cent).
The types of concessional contributions individuals can make include salary sacrificing and personal deductible contributions. Salary sacrificing involves entering into an agreement with your employer to have some of your pre-tax salary paid directly to your super fund. There is no income tax on amounts that are salary sacrificed.
If you are self-employed, substantially self- employed or an unsupported person, you can make contributions to your super and claim a full tax deduction.
23. Franking Credits
Franking credits are a kind of tax credit that allows Australian companies to pass on the tax paid at company level to shareholders.
Franking credits can reduce the income tax paid on dividends or potentially be received as a tax refund.
Where a company distributes fully franked dividends (and those dividends are included in the taxable income of the taxpayer) the taxpayer can claim a credit against their taxable income for the tax that has already been paid by the company from which the dividend was paid.
24. The retirement exemption
Small business owners who own assets with signi cant capital gains outside of their super account should time the sale of the assets to reduce the amount of CGT.
There is a lifetime limit of $500,000 CGT exemption on the sale of an active business asset. For those who are under 55, the proceeds from the sale of the asset must be paid into a superannuation fund or retirement savings account.
The 50 per cent CGT discount also applies if the asset was owned for more than 12 months.
25. The bring forward rule
The bring forward rule allows eligible Australians to make up to 3 years’ worth of non-concessional contributions in any single financial year, representing their annual non-concessional contributions cap over a successive 3-year period.
The bring forward rule is automatically triggered when after-tax contributions exceed the cap for the financial year in which it is made. Since 1 July 2017 that cap is $100,000. Once triggered, the normal non-concessional cap no longer applies for the next two years and total contributions over the three years are not permitted to exceed $300,000.
26. Make a Binding Death Benefit Nomination
Superannuation does not form part of your Will. Upon death, where there is no nomination, the trustee of your super fund will determine which of your beneficiaries is paid your super benefits.
A Binding Death Benefit Nomination (BDBN) is a written nomination made to your super fund which allows you to appoint dependants as beneficiaries.
Generally, a BDBN expires after three years so it is important to regularly revise it.
27. Plan to avoid the ‘death tax’
Super death benefits are tax-free for a deceased member’s dependants. However, many members are not survived by dependants, and are often survived by adult independent children who do not receive super bene ts tax-free, for the taxable component of the lump-sum super death payment is usually subject to 15 per cent tax, on top of Medicare and other levies.
To minimise the chance of surviving adult children paying the ‘death-tax’, members should consider using a recontribution strategy, keeping a separate pension or even drawing down on their super before their death.
28. Administering a deceased estate
There are specific tax obligations that need to be met as the executor of a deceased estate, including:
- Notifying ATO you’ve been appointed as executor
- Lodging final return and any trust tax returns
- Provide beneficiaries with information needed to include distributions in their own returns
- Paying tax on income of deceased estate
29. Use a testamentary trust
Testamentary trusts allow for a tax effective distribution of income after death. Testamentary trusts are created within and by a person’s Will, but do not take effect until after their death.
Any taxable income generated by a testamentary trust is either held by the trust or allocated to the beneficiaries in a tax-effective manner.
Beneficiaries pay tax at their individual marginal rates on the income they receive from the trust. However, beneficiaries under the age of 18 are taxed at normal adult rates instead of the penalty tax rate applied to minors. This is where the potential for tax savings can be substantial.
30. Prepare for your funeral
Prepaying funeral expenses or investing in a funeral bond can result in significant tax savings in the future.
Bonds of up to $12,000 are classified as ‘exempt assets’ for the age pension under the Centrelink and Department of Veterans’ Affairs means test.
To receive tax advantages for funeral bonds, the total amount invested must be for “reasonable” funeral expenses.
Prepaying for funerals allow individuals to be very specific about what they want while also being able to pay at today’s prices.
A Lifetime of Tax
- Claim for deductible expenses to reduce your taxable income
- Donate ‘true’ gifts to charities with DGR statuses
- Delay receiving income to avoid paying tax in the current financial year
- Prepay tax-deductible expenses to bring your tax deduction forward
- Consider salary sacrificing to reduce your taxable income.
- Hold investments in a discretionary family trust for tax-effective income distribution
- Make spousal contributions to reduce your tax liability
- Invest in an investment bond to minimise your taxable income
- Negatively gear your investment property to reduce your taxable income
- Use a quantity surveyor to help maximise your claim for depreciation
- Claim for employee training courses that directly relate to staff employment
- Review your business structure regularly
- Write off bad debts to claim a deduction and receive a GST credit
- Claim immediate write-offs for eligible depreciating assets from 12 May 2015 - 30 June 2018.
- Use one of the CGT concessions available to reduce your business’s CGT
- Use the retirement exemption to reduce the amount of CGT
- Reduce the income tax paid on dividends through franking credits
- Make concessional (before-tax) contributions to prepare for your retirement.
- Make a Binding Death Benefit Nomination to nominate your super to intended beneficiaries.
- Utilise the bring forward rule to contribute more to your super.
- Plan to avoid the death tax by nominating your beneficiaries
- Use a testamentary trust to distribute income in the most tax- effective manner for your family
- Prepay funeral expenses or invest in a funeral bond to receive a number tax advantages for the future
- Understand your tax obligations as an executor.