High-income earners in Australia are one of the highest taxed in the Western World. Those earning over $180,000 are subject to a 45% marginal tax rate, plus the Medicare Levy. Fortunately, several strategies can help high-income earners legally reduce their tax liability. Melbourne business accountants such as Nobel Thomas can help. Here are some important strategies to consider:
1. Maximize Superannuation Contributions
Superannuation contributions can reduce tax bills effectively. High-income earners can contribute up to $30,000 annually, including amounts paid in by the employer and own personal contributions. These superannuation contributions are taxed at 15%, significantly lower than the 45% plus medicare levy, resulting in immediate tax savings and increasing retirement savings over time. This concept can be best explained by visiting your Melbourne accountant.
Note that unused contributions from previous years can also be carried forward for up to five years if your total super balance is under $500,000.
2. Negative Gearing on Investment Properties
Investment property owners can use negative gearing to offset negative gearing losses against their other income. Negative gearing is the concept of expenses for the property (including bank interest, repairs and maintenance, council rates etc) being greater than the rental income received for the property. This strategy is effective as it generally also leads to capital growth if the properties are held for the long term.
3. Family Trusts
Family trusts, or discretionary trusts, when used correctly, allow high-income earners to distribute income from investments and other income among family members in lower tax brackets. This strategy can be complex and it is highly recommended to seek the assistance of a Melbourne business accountant. Note that there are boxes to tick to keep the ATO happy when using family trusts – Nobel Thomas can help in this regard.
4. Investment in Tax-Effective Products
Investing in tax-effective products, such as Australian shares with franked dividends, can provide tax advantages especially for high income earners. Franked dividends offer the taxpayer a tax credit for the tax that the company has already paid. This has the effect of lowering the tax for the taxpayer. Furthermore, holding assets for over 12 months allows for a 50% discount on capital gains tax (CGT) when the asset is sold, making it a favourable option for those investing for the long term. Both strategies reduce the overall tax liability and increase after-tax returns.
5. Maximize Work-Related Deductions
High-income earners can lower their tax bill by legally maximising work-related deductions, including motor vehicle, travel costs, and self-education expenses related to employment. It is important to note that keeping detailed records is essential to substantiate these deductions. Please seek guidance from your Melbourne accountant to help avoid an ATO audit. Prepaying deductible expenses, such as income protection insurance and interest, may also provide a tax benefit in the current financial year.
6. Charitable Donations
Donating to worthwhile charities not only supports important causes but also reduces the tax liability of high-income earners. The donations for registered charities are tax-deductible and are over $2. Structuring charitable donations, especially in high-income years, can reduce the tax liability of an individual while also aligning with personal philanthropic goals.
Tax planning is vital for high-income earners aiming to reduce their tax liability legally. By contributing to superannuation, utilizing investment strategies, using trusts, maximizing deductions, and donating to charities, high-income earners can lower their tax bill and increase their wealth. Consulting with a Melbourne business accountant, such as Nobel Thomas, ensures that each strategy is applied correctly and keeps the ATO happy!
