As a high-income earner in Australia, a significant portion of your income goes towards taxes. This article outlines five effective strategies to help you reduce your tax burden while simultaneously supporting your efforts in building wealth.

(Note that before implementing any tax minimisation tactics, it’s crucial to consult with a qualified tax accountant and financial advisor. Remember, tax avoidance and evasion are illegal and can result in severe penalties, including fines and imprisonment.)

 

1. Maximise Superannuation Contributions

Superannuation is one of the most tax-effective strategies available. The tax on contributions and earnings in the fund is only 15%. In addition, if you are over 60, you can take advantage of the superannuation pension phase, which means that earnings in the account are tax-free. This makes superannuation an ideal way to save for retirement and because it is a long-term investment, it is also a great way to build up your wealth over time. 

However, because of these tax benefits, there are some restrictions, you can’t just dump all your savings into superannuation.

 

Concessional Contributions

Any contributions of up to $27,500 are taxed up to 15% for individuals. This increases to 30% for those earning $250,000 or above. This applies whilst you are in the accumulation phase (pre-retirement).

Investment income within super is taxed at a flat rate of 15% and capital gains at 10%.

When you enter the pension phase (when you are retired and over the age of 60), your super fund’s investment income and capital gain tax rate fall to zero if your total super balance is less than $1.7 million.

 

Non-Concessional Contributions

Most people are unaware that they can make a $110,000 cash contribution into super each financial year, this is called a non-concessional contribution. As tax has already been paid on this income, you are not charged the 15% tax you normally pay when making contributions.

Depending on your circumstances, this strategy could result in a tax saving of up to 32% on investment earnings within the fund instead of having invested that same amount outside the superannuation fund. This can help you retire with more and sooner.

Suppose your super balance is less than $1.7 million. You may be entitled to take advantage of the 3-year bring forward rule, which involves pre-paying three years’ worth of non-concessional contributions of $333,000 allowing for even greater savings and tax earned.

 

2. Utilise Tax Deductions and Offsets

By taking full advantage of tax deductions, such as work-related expenses, investment property expenses, and charitable donations, you can effectively reduce your taxable income and retain more of your hard-earned money.

To increase your deductions, it’s crucial to keep track of your expenses throughout the year, ensuring you have the necessary receipts and documentation. This way, you can substantiate your claims to the Australian Taxation Office (ATO) and claim every legitimate deduction.

Purchasing assets eligible for instant asset write-offs can also increase your allowable deductions. If you’re a small business owner, you can claim immediate deductions for the full cost of eligible depreciating assets used or installed and ready for use before 30 June 2024.

To maximise deductions, remember to satisfy the following three conditions:

  • You must have spent the money and not been reimbursed
  • The expense must be directly related to earning your income
  • You need to keep records to show how you worked out your claim. These can include receipts, bank statements, and credit card statements

 

3. Use Trust Structures

If you are looking for ways to reduce your tax bill, grow your wealth and secure your financial future, consider using a trust. But before you set one up, ensure you understand the implications and seek professional advice.

A discretionary trust might be the way to go if you want to invest in a positive cash-flow investment. A discretionary trust allows the trustee of the trust to distribute taxable income to beneficiaries at their discretion. Allowing you to utilise potentially lower marginal tax rates of beneficiaries and reducing the total overall tax liability.

Example

For example, a family of four, two working parents and two adult kids, one in year 12 and one about to start university. To keep this simple, we create a discretionary trust and purchase high-dividend income-producing shares to the value of $1 million dollars, with a projected net profit of $40,000 per annum in dividend income (approx. 4%). You could purchase any assets in the discretionary trust, including property and a combination thereof, but for this example, it will be only shares.

Each year, the trustee distributes $20,000 to each of the adult children who are not working and who are attending university and/or school; the beneficiaries pay no tax on that income because of the income tax threshold and low-income rebate (especially if they have no other income for that year). In effect, saving $18,800 in tax per annum compared to high-income earners. If the assets are sold before the adult children take up employment, there could be huge savings on the capital gains tax component when disposing of the assets. 

Suppose the assets were sold at a profit of $333,332, and that profit was distributed between the two adult children equally. For those who are still not working, the capital gains would be approximately $19,217 each, for a total amount of $38,434 across the two adult children. 

If the same assets were distributed to a high-income earner, the capital gain tax would be $78,333 approximately. That is a saving of $39,899 in capital gains tax. The above structure over a 5-year period could have saved them over $188,399 in total taxes – everything else being equal. 

 

4. Reducing your Capital Gains Tax (CGT) Liability

One way to do this is to strategically time the sale of an asset to take advantage of tax concessions (e.g., there is a 50% CGT discount on assets held for more than 12 months). If you are selling a property, it is important to note that CGT is payable in the year that you sign a contract, not when the settlement occurs.

 

5. Negative Gearing

Most people are familiar with the concept of negatively gearing an investment. If not, negative gearing is the situation where your tax-deductible expenses associated with an investment property exceed the rental income it generates.

The most common type of expense when owning a rental property is interest on the loan used to purchase the property. Other ongoing costs include repairs and maintenance, council rates, water rates, strata fees (if it’s an apartment), and insurance – to name a few. When you add all these up, it’s quite possible for the total amount of expenses to be greater than the rent you are receiving.

So, in Australia, if you are making a loss on a property the tax system allows you to use that loss to reduce the tax you pay on your other income. For example, let’s say as a high-income individual, you earn $220,000 per annum, and you also own a rental property that is negatively geared at $8,000 per year. Our total annual taxable income is now only $212,000 ($220,000-$8,000). This allows us to pay $3,760 less in tax. 

 

Chat With An Experienced Tax Accountant

At F5 Accountants, we specialise in providing comprehensive and customised tax and accounting services for individuals and businesses. 

If you’re an Australian resident looking to save on tax, get in touch with us today. Experience the difference with F5 Accountants, where financial clarity and lasting success are at our core.

Justin Fahey - F5 Accountants

Justin Fahey

Justin Fahey, a respected tax agent and BAS agent based on the Gold Coast in Australia, excels in cryptocurrency tax, business tax, and personal tax. He was recognised as a finalist for the ‘Rising Star of the Year’ award at the Australian Accounting Awards in 2021. As the director of F5 Accountants, Justin prioritises financial clarity and long-term success for his clients, maintaining a thorough understanding of the latest industry trends and regulations.