Are you tired of handing over a significant chunk of your hard-earned money to tax payments every year? You’re not alone. Many Australians find themselves confused with complex tax regulations and wondering if there’s a way to minimise their tax burden legally and ethically.
Taxes are an unavoidable part of life, but with the right knowledge and guidance, you can optimise your financial situation and keep more of your hard-earned money.
This blog post will discuss the art of tax planning, present you with seven ethical and effective tax minimisation methods, and explain the benefits of working with tax accountants.
What is tax planning?
Tax planning is a strategic process that involves arranging your financial affairs in a way that legally reduces your tax liability. It requires careful consideration of your income, expenses, deductions, and investments to maximise tax benefits while staying compliant with the tax laws.
A tax plan is known as tax-efficient when it can help you reduce the amount you need to pay in taxes. Tax accountants are vital to creating a tax plan that helps people save on yearly taxations fees.
The scope of a tax plan includes the timing of income and purchases, the size of income. Additionally, factors such as various investment options and retirement plans also contribute to the successful result of tax planning.
7 Ethical Ways to Reduce Your Taxes in Australia
Make sure to claim your deductions
Keep track of all your work-related expenses and claim legitimate deductions. This includes expenses like work-related travel, uniforms, equipment, and professional development courses. Be prepared with the necessary documentation to support your claims.
Furthermore, you may also be eligible to claim deductions for items used for both business and personal purposes, such as laptops, mobile phones, and motor vehicles. For instance, if an item like your mobile phone is used 50% for business purposes and 50% for personal use, you can only claim a deduction for half of its costs.
Remember, any expenses directly related to earning income can be claimed as deductions, even if the item in question is not exclusively used for work. In such cases, you can still claim a percentage of the expense as a tax deduction.
Charitable donations
Donations that are more than $2 are automatically tax-deductible. Furthermore, donations are not limited to cash only. It may also be through property, clothing and household necessities.
Donating to registered charities not only helps causes you care about but also allows you to claim a deduction on your tax return. Make sure to keep receipts or acknowledgements from the charities as evidence for your donations.
Salary sacrificing
Otherwise known as ‘salary packaging’, this happens when a taxpayer channels a portion of their un-taxed income toward some benefits. In Australia, some of the popular benefits for salary sacrifice are superannuation, mortgage, insurance, and car payments.
Another term for these benefits is fringe benefits, and it is important to remember that there are limitations to what kind of benefits can be included when ‘salary packaging’.
By diverting a portion of your pre-tax income to your super, you can reduce your taxable income and build retirement savings simultaneously.
Pay for private health insurance
Depending on your income level, having private health insurance can save you money on the Medicare Levy Surcharge and provide a tax offset on your premiums.
Individuals lacking private health insurance are subject to an elevated Medicare levy surcharge. While the majority of taxpayers incur a compulsory 2% Medicare levy, those who do not possess private health insurance and earn over $90,000 (for singles) or $180,000 (for families) will face an additional 1% surcharge.
Abide by ATO Deadlines
Utilising the services of tax accountants allows for the lodgement of tax returns as late as May of the subsequent financial year, provided there are no disputes with the Tax Office. Conversely, all other individuals must ensure their returns are lodged by October 31 to comply with ATO deadlines and avoid potential conflicts and penalties.
The online Tax Office platform is typically employed for those with uncomplicated financial situations who choose to self-lodge their taxes. This process involves the population of the account with the previous year’s return and relevant data received from various sources, such as banks, workplaces, and government agencies.
It’s important to note that the Tax Office accumulates this information until the beginning of August, prompting individuals to wait until after this period to lodge their taxes online.
Prepay some income-related expenses
Paying your income-related expenses in advance, you need to follow two rules, the fees must not exceed $1,000 and meet the 12-month policy.
If you have deductible expenses due shortly after the end of the financial year, such as interest on an investment loan, consider prepaying them before June 30th to claim the deduction in the current year.
Exclude Non-taxable Income
Be aware of non-taxable income sources, such as some government benefits or certain reimbursements from your employer. These amounts should not be included in your taxable income, saving you from unnecessary taxes.
The ATO takes into consideration certain income that is considered exempt or non-taxable, which means you do not need to include it in your tax return. However, it’s important to note that some exempt income might be considered when calculating tax losses from previous income years. You have the option to deduct certain income and adjust the taxable income of any dependents you may have.
Tax accountants can help you with these tax minimisation strategies because they possess a keen eye for financial details and can tell you what claims you’re qualified for, what kinds of tax benefits can be included in your salary package and what types of income you should not include.
Oftentimes, we are already preoccupied with work and personal circumstances that we overlook several details when filing taxes. Most often, these are the small things that play a role in minimizing tax fees.
Therefore, tax accountants are indispensable when you want to make financially-wise and ethical decisions.
Problematic Taxation Practices to Avoid
In the complex world of money and governance, taxes play a crucial role. They provide the funds needed for various government activities and contribute to the development of society. However, within the proper aim of being financially responsible, certain tax practices have arisen that walk a delicate line between what’s legal and what’s considered ethical.
Here are some methods that many tax accountants disapprove of:
Combining personal and business expenses
When the moment arrives to tally up the earnings and expenses for the year, the last thing you wish to deal with is the tedious task of distinguishing between business and personal transactions. As you approach the time to compile your tax records (or present everything to a tax accountant), having a comprehensive record of solely company-related expenditures will prove immensely beneficial, saving you valuable time and unnecessary complications.
Having a complex financing plan with no business purpose
Engaging in elaborate financing arrangements solely for tax benefits without a genuine business purpose could be considered tax avoidance and might attract penalties.
Tax planning is considered lawful, but tax avoidance is ambiguous. Tax avoidance’ involves employing legitimate yet possibly assertive methods, such as financial instruments and other arrangements, to achieve a tax outcome the government did not intend or anticipate.
It’s important to distinguish ‘tax avoidance’ from ‘tax evasion,’ as the two are distinct. Tax evasion refers to situations where a company unlawfully attempts to lessen its tax obligations by falsely concealing income, inflating expenses, creating fictitious transactions, etc. Evasion is inherently illegal in nature.
Unpaid loans
Consider consolidating all your debts into a single manageable payment to simplify things. This way, it becomes easier to keep track of your obligations. Also, suppose you have debts on mortgages, investment properties, or credit cards. In that case, the interest expenses may be used to lower the income tax you must pay.
For the most effective approach to debt repayment, follow the debt repayment hierarchy. Start by paying off the non-tax-deductible debts first, beginning with the ones with the highest interest rates, and then work your way down from there.
Claim a deduction without ever receiving payment
Only claim deductions for expenses you have genuinely paid for. Attempting to claim deductions without proper payment can lead to serious consequences.
Advantages of working with Tax Accountants
Hiring a tax agent in Australia offers several advantages for handling your tax return efficiently and effectively.
Firstly, tax agents can ensure that your tax return is lodged correctly the first time, offering expert advice at a relatively low cost. They keep you compliant with the latest tax laws, helping you avoid potential audits from the ATO.
Additionally, tax agents can save you valuable time and stress by identifying eligible deductions and providing guidance on necessary documentation. They also assist in understanding complex income calculations, especially with diverse income streams.
Establishing a good relationship with a tax agent can provide long-term benefits, including advice and support for various financial endeavours. Lastly, having a tax agent may grant you a deadline extension for filing your tax return, which can be particularly helpful for first-time filers.
Conclusion
Tax minimisation in Australia can be challenging, but taking control of your financial situation is crucial to minimise taxes legally and ethically. By taking advantage of legitimate deductions and exploring strategic options, you can optimise your financial situation and retain more of your hard-earned money for a secure financial future.
Firstly, claiming legitimate deductions by keeping track of work-related expenses and maintaining proper documentation can help maximise tax benefits. Additionally, making charitable donations supports causes you care about and allows you to claim tax deductions.
Moreover, salary sacrificing or ‘salary packaging’ can be a smart strategy to divert pre-tax income into benefits like superannuation, reducing taxable income while building your retirement savings. For those in specific income brackets, paying for private health insurance can save on the Medicare Levy Surcharge and provide tax offsets on premiums.
Meeting ATO deadlines and working with tax accountants can streamline the tax return process, ensuring compliance with tax laws and identifying eligible deductions. Additionally, prepaying income-related expenses before the end of the financial year can enable you to claim deductions in the current year.
While optimising tax benefits is essential, avoiding problematic taxation practices is crucial. Keeping personal and business expenses separate, refraining from complex financing arrangements solely for tax benefits without genuine business purposes, and adequately managing debts is essential to staying on the right side of tax laws and ethical practices.
Finally, working with tax accountants offers several advantages, including expert advice, compliance support, time-saving benefits, and long-term financial guidance. This paves the way to tax minimisation without getting in conflict with the law.
Sources:
https://oneclicklife.com.au/how-to-pay-less-tax-in-australia/
https://www.myob.com/au/resources/guides/tax/how-to-save-tax-in-australia
https://www.debtnegotiators.com.au/articles/15-easy-ways-to-reduce-your-taxable-income-in-australia/
https://www.bishopcollins.com.au/how-do-i-reduce-taxes-in-australia/
https://www.bishopcollins.com.au/how-to-ethically-reduce-tax-in-australia/
https://www.easifleet.com.au/blog/smart-ways-reduce-taxable-income-save-money/
https://accumulusadvisory.com.au/news/save-now-find-out-how-to-reduce-income-tax-in-australia
