In Australia we do pay a lot of personal income tax, I’m sure at some point everyone has looked at how much tax they pay and let out an uninspired sigh.
As we near the end of financial year (30th June) we all get a little excited about the prospect of a nice tax refund, however there is always the unwelcomed possibility of one day getting that dreaded tax bill (yeah that’s right, you having to pay the Tax Office instead of the other way around).
Regardless of your own tax position, its super important that you educate yourself about our tax system to help you make smart decisions. This will result in your keeping more of your hard earned money which will allow you to save, invest or even just spend more 😊
Australian Tax System
In Australia we have a ‘marginal tax rate’ system, which in English simply means that we get taxed higher as our rate of income increases.
The following examples demonstrate this (figures exclude 2% Medicare levy):
- $50,000 taxable income = tax payable of $6,042 or approximately 12.08% of your income
- $90,000 taxable income = tax payable of $19,717 or approximately 21.91% of your income
- $200,000 taxable income = tax payable of $60,667 or approximately 30.33% of your income
In Australia, the more you earn, the more tax you pay as a percentage of your income!!! (obviously the above examples do not factor in any tax deduction strategies which you can legally use, smartly)
The opposing system would be a ‘flat tax rate’ whereby there is a blanket rate applied to all individuals, which is the case in some countries.
Using the flat rate 20% tax with the same previous examples, you can see how the higher income earner actually pays less tax:
- $50,000 taxable income = tax payable of $10,000 or approximately 20% of your income
- $90,000 taxable income = tax payable of $18,000 or approximately 20% of your income
- $200,000 taxable income = tax payable of $40,000 or approximately 20% of your income
Interesting when you compare the two, but nonetheless let’s get to some ways that you can actively manage & legally reduce your tax, assuming you’re an Australian resident for tax.
Understand your eligible deductions
If you’re an employee or earning a salary/wage, you should read up and understand what you can claim based on your line of employment – check out the ATO website!
Knowing exactly what deductions you’re eligible to claim, means that as you incur this expense you can actively record this and ensure that it’s included in your tax return for the relevant financial year.
It’s soooooo easy to forget to claim something if you have a fairly loose filing system!
Tax effective investing
Before you start investing, it’s ideal to understand the tax impacts of your chosen strategy and how you can invest in a tax-efficient manner both now and into the future as your portfolio grows.
If you ignore this, it can be restrictive and expensive to restructure your investments after you’ve began the journey. So many fall into the trap of not structuring their investments tax effectively and end up having tax negating their overall investment returns
If you get this right at the start, you’ll get to keep more of your investment returns in the future.
Consider topping up your Super
On an individual basis, you can make $27,500 of Concessional contributions per year into Superannuation. Any Employer Super Guarantee (SG) payments that are made on your behalf, also count towards this annual cap.
However, for majority of Australians there will be a gap (difference) between what their Employer pays into Super and the $27,500 cap.
Under current legislation, an individual is allowed to contribute funds up to this difference, into their Super fund and claim a personal tax deduction for the amount they’ve personally contributed – subject to lodging a ‘Notice of intent to claim a tax deduction’ form with the Super Fund and receiving acknowledgment of this.
This strategy is not suitable for everyone reading this and is one that you should seek advice on, or simply contact your Super Fund for assistance with.
Why? Because Superannuation has restricted access and you don’t totally dodge tax – the funds you contribute & claim a personal deduction for, get taxed at 15% in the Super environment.
Invest in a good Accountant or Adviser
This is not a sales pitch, but if you do not have a good professional in your corner – you’re doing yourself a disservice.
A good Accountant can help you with your tax strategy and managing your obligations on an annual basis. By using a professional, you will be well positioned to maximise your deductions, make smarter decisions and keep more of your hard earned money.
Yes you pay a fee for this, but 1) this is so worth it in the long-run if they help you get all of the above right from the start, and 2) their fee is tax deductible to you.
Jayden Allison CFP®
MFinPlan, BCom (Eco&Fin), Dip. FS (FP)
Employee Representative of Phillipsons Financial Planning
ABN: 87 103 720 181
AFSL No. 332836
General Advice disclaimer
The general/factual information provided was done so without taking into account your personal objectives, financial situation or needs; you should consider the appropriateness of the general/factual information, in light of your own objectives, financial situation or needs, before following or relying on the general/factual information; if the general/factual information relates to the acquisition or possible acquisition of a particular financial product, then you should obtain a copy of, and consider, the Product Disclosure Statement (PDS) for that product before making any decision.