In the 2018-19 tax season, the Commonwealth Government's total tax revenue increased 6.6% from 2017-18.* Higher tax revenue for the government isn't a bad thing; it means more money for public services. That said, no one wants to pay more tax than they should. So today we're looking at how you can reduce your income tax by making a few simple and straightforward choices.
Lower tax = lower income?
It's crucial to understand that, often, there is going to be a trade off if you want to reduce your taxes. For example, if you're a full-time employee, you're liable to pay taxes on your salary. By choosing to reduce your take-home salary, you can also reduce your taxes while still enjoying the benefits of a steady job.
However, lowering your income doesn't always have to mean receiving a smaller salary. There are other ways to reduce your taxable income without affecting the pay you receive from work.
If you're in business, you can apply most of these strategies to business taxes as well. Have a look at our guide to business taxes and concessions.
Five legal ways to reduce your taxes each year
Donate to causes you care about
Donating to local causes or organisations is a great way to lower your taxes because you can claim your donation as a deduction on your tax return. This is also an easy and accessible way to save on your taxes if you're self-employed. Be aware, though, impromptu donations to crowdfunded Facebook campaigns may not give you a tax benefit.
Only the organisations classified as deductible gift recipients (DGR) are eligible to receive your tax-deducted donation. Use the Australian Business Registrar's ABN Lookup to identify organisations you can donate to.
Claim the deductions you deserve
Your tax depends on your taxable income. Taxable income is the amount you take home after all applicable deductions. To reduce your tax significantly, it's important to know what you can and can't claim as deductions. We've discussed that donations are tax-deductible, but so are certain work-related expenses like travel and internet facilities, home office setup, self-learning expenses, equipment you've used, and even costs related to your work attire.
Aside from those, you can also claim other, lesser-known deductions like interests paid to government entities, expenses related to managing your tax affairs such as hiring a tax agent, travelling to organise tax documents, postage expenses, and the cost of buying reference materials.
You may also be eligible for additional tax deductions based on industry specific guidelines.
Browse through the ATO's employee guide to work expenses to better understand how you can claim your deductions.
Sacrifice salary for benefits
Under this method, you sacrifice some of the income on which you'd otherwise pay tax. Salary sacrificing is an agreement between you and your employer, and you should make it before you start a job.
When you sacrifice your salary, you forego some of your takeaway income by channelling it through to other benefits that aren't directly monetary. This could include cars, electronic devices, or essential equipment for your job. There are three types of benefits: fringe, exempt, and super.
Fringe benefits incur a Fringe Benefit Tax (FBT) paid by your employer. Benefits under this category include:
Vehicles such as cars and motorcycles
Assets and real estate, including stocks and bonds, physical goods, and land
Monetary expenses such as internet and phone charges, loan repayments, and child care fees
Exempt benefits don't incur the FBT. These are smaller, everyday benefits, including:
Computer and software upgrades
Personal protective equipment, clothing, and tools
Laptop bags and cases
Super benefits include any money that is directed from your salary to your super. Under normal circumstances, your employer makes all your super contributions. However, you can also choose to sacrifice your salary to put it towards your super, which is called 'employee contributed.' You can also funnel it to a different super account such as your spouse's super or a retirement savings account. Learn more about salary sacrificing super on the ATO's website.
Declare income that accumulates rebates
Offsets and rebates apply to individuals under specific circumstances. It's important to know which rebates are relevant to you. You may be eligible if you:
Receive government allowances, pensions, and concessions, including Centrelink payments
Pay for private health insurance or incur severe medical expenses
Are a carer with minimal income
Are from a low or middle income family
Live and work in remote areas
All of the above situations are eligible for offsets that will directly reduce your tax. You need to declare these in your tax return, and they will be applied automatically when your return is processed. Read more about offsets and rebates on the ATO's website.
Maintain essential records
This doesn't directly reduce your tax, but it helps you avoid unnecessary fees and charges. It's important to be familiar with what records you need to keep and for how long.
If you work from home due to and during Covid-19, you need to maintain records of your work hours and any receipts for work-related expenses.
If you run a business, depending on your industry and the nature of operations, you also need to keep records such as invoices for purchases and sales, bills and notices of repairs, rental receipts, bills for travel expenses, and more. Read more about what records you need to keep each year.
All of these records should clearly indicate the following details:
Dates of transaction and payment
Business names of the seller and buyer
Details of the goods and services purchased/sold
Amount of expenses
If you're a small business, you're entitled to further concessions. Have a look at our guide on how to calculate small business taxes.
The ATO's myDeductions app is a great way for you to safe keep your records. You can add your expenses throughout the year and directly upload them to your tax return when it's time to lodge.
While navigating your taxes and trying to reduce your taxable income, it's vital that you stay compliant with ATO regulations. They hold the power to flag and audit your returns at any time. On a positive note, though, they're very helpful and understanding if you're straightforward with your tax returns. In many cases, the ATO also waives or extends payment due dates if you're unable to pay what you owe. That's why it's important to develop a healthy mindset towards your taxes and lodge them diligently.
We hope this post has given you some clarity about saving your tax dollars. If you have any other questions you'd like us to answer, let us know in the comments!
References: *Commonwealth Government's total taxation revenue increase - ABS