The ATO describes the process of ‘Tax Planning’ as an Australian taxpayer’s right to arrange their financial affairs in order to keep their tax to a minimum. However, when organising their affairs, individuals must ensure to do so legitimately, and within legal grounds. Unlawful methods of Tax Planning schemes are referred to as Tax Avoidance and Tax Evasion – both of which carry heavy penalties, including fines and imprisonment.
Below we outline the top 10 tax planning strategies for high income earners and highlight how you can make the most of your tax planning strategy.
Tax Planning Strategy 1: Making additional personal contributions to your SMSF or Superannuation Fund
Making contributions to your super fund not only gives you the opportunity to grow your retirement nest egg, but it can also reduce the amount of your tax bill. Each year, individuals are entitled to personally contribute up to $25k into their super fund of choice – including the payments made on behalf of their employer/s.
However, going over the deductible superannuation contributions by exceeding the $25k cap will leave the taxpayer to pay an effective tax rate of 49% in tax.
Tax Planning Strategy 2: Avoiding the Medicare Levy Surcharge with Private Health Insurance
Australians earning over $27k pay the Medicare Levy (calculated at 2% of an individual’s taxable income). High income earners (singles earning $90k+ and couples with a joint income of $180k+) without Private Health Insurance/Hospital Cover must also pay the Medicare Levy Surcharge. The Medicare Levy Surcharge is charged at an additional 1-1.5% of an individual’s taxable income and encourages individuals who don’t have Private Health Insurance to consider taking it out and making use of the Private Health system.
Tax Planning Strategy 3: Negative gearing a property investment
The Treasury describes negative gearing as ”a commonly used term used to describe a situation where expenses associated with an asset (including interest expenses) are greater than the income earned from the asset. Negative gearing can apply to any type of investment, not just housing.”
Taxpayers who are negatively geared have the ability to deduct their losses against other income, including their salary and wages. Many high income earners may also have a negatively geared investment property – this means that the tax deductions received from renting out the property outweigh the rent that is received from the property.
Tax Planning Strategy 4: Make regular donations to charity
After seeing the devastating impacts the COVID-19 pandemic had on the community, giving back is now as important as ever. Individuals who are passionate about giving back to their community or particular causes should consider making a tax deductible donation to an Australian Deductible Gift Recipient (DGR).
You might also wish to explore the Be BlueRock Foundation as an accessible way to get involved in philanthropy! It’s important to note that only donations made to a DGR will qualify for a tax deduction.
Tax Planning Strategy 5: Get reimbursed for continuing with your educational journey
Education that will better a taxpayer's skills in their current role of employment are eligible to be claimed back on tax. The following educational tools can be claimed:
- Further study
- Professional development
- The use of an executive coach
Tax Planning Strategy 6: Making the most of your home-office
The COVID-19 pandemic saw many Melbournians move to a working-from-home schedule. However, months after lockdown has ended, many workplaces are accommodating new work-from-home arrangements for their staff.
Employees who work from home (including those who worked from home throughout COVID-19 lockdowns) are eligible to claim deductions for expenses they incur that relate to their line of work.
What expenses can you claim when you work from home?
What expenses can’t you claim when you work from home?
- Items provided by your employer (such as a monitor, laptop, phone, etc.,)
- General household items that employers may provide at work (coffee, tea, milk)
- Your children’s education (including setting them up for online learning, teaching them at home, buying them equipment such as technology, equipment and furniture)
Tax Planning Strategy 7: Invest in Income Protection Insurance
Income Protection Insurance protects you, your family, and your finances in times of uncertainty. Essentially, it is an effective way to protect your current income if you are left unable to work as a result of illness or injury.
Income Protection Insurance pays up to 75% of an individual’s gross annual income (including your superannuation repayments) in monthly instalments in order to cover the cost of your day-to-day expenses until you’re ready to return to work.
To discuss if Income Protection Insurance is the right option for you and your family, get in touch with our Private Wealth team for a free consultation.
Tax Planning Strategy 8: Get ready to lodge your tax return!
Keeping up to date with all of your records means you can lodge your tax return as soon as possible after the end of the financial year (30 June). Lodging your tax return early means you avoid paying any late penalties and fees, and get money back in your pocket sooner.
Tax Planning Strategy 9: Stay on top of your records and documents
In the event of an ATO review or audit, taxpayers will be asked to provide relevant and applicable documentation to substantiate whatever claims they may have made over the course of the financial year.
It is crucial for every taxpayer who has made a claim that they have access to:
- Credit card statements
- Bank statements
- Sales receipts
- Expense invoices
- Tax invoices
- Employee records (only applicable for employers/business owners)
Tax Planning Strategy 10: Get expert advice
Seeking professional advice is crucial in order to ensure that you are implementing strategies that will benefit you in the long run. An expert will be able to present all the tax offsets available to you, while highlighting which options you can claim based on both your individual and business circumstances.
For resources to help you with tax planning, we’ve collated the top tips on Tax Planning for small businesses and how you can maximise wealth and minimise risk through Tax Planning. To ensure legal compliance, it’s important to seek advice from an expert before embarking on your own Tax Planning journey.
Get in touch with our Melbourne-based accountants to discuss your tax planning strategy today.