It’s frequently said that only two things in life are certain – death and taxes -, but what you don’t hear so often is that there are ways to reduce the amount of tax you pay. To help reduce your tax bill, our expert team has looked at some of the effective (and not so useful) ways you can reduce your end of year tax bill.
Consideration #1: Effective investments
One of the most common investments to reduce tax obligations is a negatively geared rental property. However, not everyone is able (or willing) to buy an investment property. If you’re one of these people or simply don’t want to put all your eggs in one basket there are other options:
- Property Funds: Often a distribution from a property fund will include a ‘tax-deferred’ portion to the distribution. Tax-deferred income reduces your original cost base of the investment, effectively moving the time of taxation from now to when you dispose of the investment. On top of this, if you hold the investment for more than 12 months, you will receive a Capital Gains Tax discount of 50% on disposal
- Growth focused investments: When focusing on growth instead of revenue generating investments, you will not have to pay tax until you dispose of the investment. Again, if you hold the investment for more than 12-months the gain on investment is discounted by 50%
Consideration #2: Effective deductions and salary packaging
Bear in mind that a tax deduction is not an effective way to reduce your tax bill if you were not planning on making the purchase anyway. Why spend $1 to save 30¢! For example, opting for a brand new car by way of salary sacrifice doesn’t make sense if you already have a perfectly good car that you had no intention of trading in.
Nonetheless, deductions for necessary purchases are an effective way to reduce your tax. This includes:
- Electronic devices: Work-related portable devices are exempt from Fringe Benefits Tax, if at the time of purchase through salary sacrifice, they are ‘predominantly’ for business usage. If a device is 51% business usage and 49% private, you can obtain an instant deduction without the need to substantiate a 100% business usage claim, saving you the need to depreciate the asset over multiple years. You may also be entitled to receive the GST back if you or your employer are registered for GST
- Otherwise deductible expenses: Another FBT exemption available is the ‘otherwise deductible’ exemption. This allows an immediate deduction again with the possible entitlement of receiving the GST back. An example of this could be self-education expenses
- Home office expenses: if you are an employee who works from home with a dedicated work area, you are entitled to claim a deduction for office running expenses on top of the home office equipment used. To calculate this deduction, you should maintain a logbook of hours worked and claim a fixed rate of 45 cents per hour. Alternatively, actual costs incurred can be deducted with a percentage split between personal and work use, calculated based on floor area of dedicated work space used. When using actual costs, you need to be careful not to claim costs for occupancy as it would result in losing a percentage of the main residence exemption for Capital Gains Tax purposes.
Consideration #3: Effective investment income structuring
Profits made from investing are added to your taxable income – that is, in addition to your salary. As such, investing in your personal name might not be the best way to structure your affairs. Depending on your individual circumstances, an investment company, family trust or Self-Managed Superannuation Fund could be a more appropriate vehicle to invest through. It’s important to get this structure right early on as it may save you significant amounts of tax, as opposed to restructuring down the line.
How will you plan to reduce your tax bill?
The considerations discussed above provide an insight into the importance of planning when it comes to reducing your tax bill. Effective investments, taxable deductions, and income structuring are critical to get right to ensure that you’re minimising your tax obligations.
A D Danieli Chartered Accountants can help you take the next step, which is effectively structuring your tax obligations. Contact us to set up an appointment.