When you remain compliant and consistent in your tax planning strategies, you can save thousands of dollars every year and direct your finances towards things that matter to you. Maybe that's the growth of your business, a family holiday, buying a property or renovating your home.
Whatever it may be, our accountants and financial advisors share top tax planning tips and strategies for high-income earners in Australia.
What is Tax Planning?
According to the ATO, the process of tax planning is an Australian taxpayer’s right to arrange their financial affairs in order to keep their tax to a minimum. Sounds simple, right? Not really. When it comes to tax, is anything?
When organising your financial affairs, doing so legitimately and within legal grounds is essential. Unlawful methods of tax planning schemes are what’s known as tax avoidance and tax evasion – both of which carry heavy penalties, and could even land you in jail!
What Makes a High-Income Earner in Australia?
Definitions can vary depending on the context, but generally speaking, someone who earns above $190,000 per year is considered a high-income earner. Australia’s highest income tax bracket kicks in at $190,001. If your taxable income is above that, you’ll pay $51,638 a year in tax, plus 45 cents for each $1 over $190,000.
But when it comes to tax planning, defining a high-income earner isn’t that clear cut. Even if your taxable income is half that amount, you can still benefit from the strategies in this guide.
For example, if you’re able to reduce your taxable income to $97,000 for individuals or $194,000 for families, you’ll likely avoid paying the Medicare Levy Surcharge!
10 Ways High-Income Earners Reduce Taxes in Australia
Our wealth and tax experts have compiled these tips as general advice only. If you have any specific circumstances, we’re here to help you out . Keep that in mind before you fire your accountant as this guide won’t stack up against an ATO audit .
1. Make Additional Superannuation Contributions
Making contributions to your super fund not only gives you the opportunity to grow your retirement nest egg, it can also reduce your tax bill.
Each year, individuals can contribute up to $30,000 in ‘concessional contributions’ into their super fund, including the 11.5% super guarantee payments made by the employer. These contributions are taxed at 15%, significantly less than the 37-45% tax rates of the top 2 tax brackets.
Note! If your income and concessional super contributions total more than $250,000, check if you have to pay Division 293 tax .
2. Avoid the Medicare Levy Surcharge with Private Health Insurance
The Medicare Levy is 2% of an individual’s taxable income and is paid by most Australian taxpayers to fund our public health system.
The Medicare Levy Surcharge (MLS) is an additional tax of up to 1.5% of taxable income, payable by singles earning over $97,000, without an appropriate level of private health insurance. For families, the threshold to avoid MLS is $194,000.
Having private health insurance or reducing your taxable income is the only way to avoid the MLS.
Note! Income for MLS purposes includes your total reportable fringe benefits.
3. Negative Gearing Investments such as Property
Negative gearing can apply to any type of investment, but is commonly associated with property. It occurs where expenses associated with an asset (such as interest, maintenance and management costs) are greater than the income earned.
Those who are negatively geared may be able to deduct losses against salary and other taxable income. While the property might make a short-term loss, the long-term capital gain can result in significant wealth accumulation.
Negative gearing can be a powerful tax minimisation and wealth building strategy for high-income earners, but we recommend seeking expert financial advice before rushing off to an auction. Detailed calculations on deductions, rental return and capital growth need to be considered as part of a holistic financial plan.
4. Make Regular Donations to Charity
From pandemics to natural disasters and lately, geopolitical upheaval, the world can feel like a scary place. But action is the antidote to despair, and taking small steps towards a better future can make a big impact. It can also provide a tax deduction!
Individuals who are passionate about giving back to their community or particular causes can make tax deductible donations to charities. Just make sure it’s registered as 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!
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
- Training
- Self-education
- The use of an executive coach
6. Make the Most of Your Home Office
Since the pandemic, working from home (WFH) and hybrid work is commonplace. During COVID, the ATO blessed us with an increase in the home office deduction from 52c to 80c per hour on WFH expenses. Unfortunately, all good things must come to an end and we’re now set at 67c and a new (and seemingly, not so easy) method.
If you WFH, you should be keeping records of hours spent and costs incurred, if you want to maximise your deductions. Find out more about WFH tax deductions and ask your accountant what method is best for you.
A Snapshot of the Revised Fixed Rate Method
- The increased revised fixed-rate method includes internet, mobile, home phone, stationary and computer consumables, plus energy expenses related to WFH.
- You won't be able to claim additional separate deductions for anything covered under the fixed-rate method.
- You can still calculate separate deductions for depreciation of assets used when WFH, like computers, stand-up desks or your fancy ergonomic chair.
7. Invest in Income Protection Insurance
Income protection insurance protects you, your family and your finances in times of uncertainty. Essentially, it’s an effective way to protect your current income if you are left unable to work as a result of illness or injury. The premiums you pay to protect your income (salary and wages) are tax deductible.
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.
Ask your financial advisor if this type of life insurance is right for you and your family.
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 potentially get money back in your pocket sooner.
That money could be used to reduce debts, parked in an offset account to reduce home loan interest, or be invested in the stock market earning a return straight away. Whatever you do with it, it’s better in your hands than with the ATO!
9. Stay On Top of Your Records and Documents
In the event of an ATO review or audit, taxpayers are asked to provide relevant and applicable documentation to substantiate whatever claims they may have made over the course of the financial year. It’s crucial for every claim you make that you have access to:
- Credit card statements
- Bank statements
- Sales receipts
- Expense invoices
- Tax invoices
- Employee records (only applicable for employers/business owners)
10. Get Expert Accounting and Financial Advice
Seeking professional advice is crucial in order to ensure that you're 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, family and business circumstances.
We find that when helping high-income earners with tax planning,
any fees we charge are quickly recouped through minimising tax payable and setting up long-term wealth strategies. And remember, the cost of managing your tax affairs is also tax deductible.
Ready to Take Your Tax Planning to a New Level?
Our Melbourne accountants and wealth advisors work with high-net worth individuals, families and small business owners to make good things happen. If you’re looking for an advisor that can help with every aspect of your world, get in touch with our experts for a no-obligation discussion.
Disclaimer: This article is intended as general information only and should not be considered as advice on any matter and should not be relied upon as such. The information in this article has been prepared without taking into account any individual objectives, financial situation or needs. You should therefore consider the appropriateness of the information in regards to these factors before acting, or seek advice before making any financial decisions.
