Tax saving strategies to maximise your returns this financial year
Just occasionally, a golden opportunity arrives to reduce your tax bill.
This year marks one such time with the looming arrival of the stage three tax cuts on July 1 offering some wage and salary earners a chance to make some meaningful savings.
In simple terms this can be achieved by maximising deductions under the existing tax rates to bump up the tax return compared to a much lower return if you wait until the following financial year for a lower tax rate to make a claim.
As always, the tax prize goes to the organised and it pays to set aside some time to get the tax strategies all working correctly well before tax time – there is nothing worse than realising you have run out of time to take advantage of an opportunity.
High earners get the best deductions
In general terms, the biggest gains are to be had by those whose tax rate are set to fall – those in the 37% and 45% brackets – who will all see their tax rate fall to 30%.
That means those earning from $45,000 and above and particularly those earning above $180,000, although the strategy of maximising deductions is still a good one for all taxpayers to employ.
There is no need to feel guilty about maximising your tax deductions, after all the Federal Government has been effortlessly scooping up multiple extra billions from taxpayers simply through the process of high inflation pushing up wages and income tax bills.
Don’t forget negative gearing
One of the easiest and best ways of maximising a tax deduction is through negative gearing.
While negative gearing is most commonly – and controversially – linked to property investments, it is a strategy that can be used for most investment classes including dividend paying shares.
By offsetting interest on a loan used to buy an income-producing asset against earned income, the taxpayer is able to potentially push themselves down into a lower tax bracket and also to reduce their overall tax bill while building an investment portfolio outside of super.
This year the strategy of pre-paying interest for the year ahead could be particularly powerful, because the tax credit is likely to be against a higher tax rate than next financial year.
It takes a bit of organisation but this year a bigger than normal negative gearing claim, combined with other tax-deductible costs – will produce a never to be repeated tax refund.
Maximise salary sacrifice to super
Another great strategy is to maximise contributions to super, with salary that is sacrificed into super taxed at the contribution rate of 15% – a big cut on the marginal tax rate for most taxpayers.
The cap on concessional pre-tax contributions a year is $27,500 before penalties apply, which includes compulsory super payments.
Concessional contributions can also be bumped up if there are unused concessional cap amounts from the previous five years in what could be a great opportunity in this particular financial year.
Paying in advance can help
Prepaying eligible expenses is another way to maximise deductions, with many costs including interest, subscriptions, conferences, membership and educational fees, insurance, leases, utilities, travel and telephone able to be prepaid.
The basic rule of thumb is that the prepayment can’t be for more than 13 months and must be for more than $1000.
Time to save the world with an electric car?
I’m normally fairly cautious about the claimed benefits of novated leases for cars.
Many times the tax savings seem to stay in the pockets of the arranging bank or company rather than the taxpayer through hefty interest and other charges but if you do your homework properly, there seems to be a very juicy opportunity at the moment to salary package an electric car.
There are generous government concessions for electric vehicles which when combined with salary packaging can reduce your taxable income and upgrade your car.
Eligible low or zero-emission vehicles are exempt from fringe benefits tax (FBT) as long as they are valued up to the luxury car threshold of $89,332 in 2023-24.
Another benefit is that GST is covered by the finance provider, which allows repayments to be made by the employee from their pre-tax income with approval from the employer under a salary-sacrifice structure.
That means you pay less in after-tax money, as well as reducing taxable income and having some of the vehicle’s expenses such as registration, fuel and insurance bundled into the lease agreement.
Because the lease is novated, the employee can take the car with them if they leave that job and at the end of the lease they can refinance the car, selling it to pay off remaining debt or can start a new lease on another car.
As always, those taking up a novated lease need to go through the details particularly carefully as there are plenty of examples of people who have been very disappointed by the perhaps over-hyped benefits of a novated lease deal.
Holler for a general exemption
Another avenue for boosting your end of year tax deductions is to look at the general deductions available.
These include business travel expenses, the purchase of essential equipment and depreciation of assets and often claims for the business use share of personal items like laptops and mobile phones.
In some cases, usually limited to those running businesses, it is possible to delay invoicing and chasing up revenue from debtors to reduce income a little.
Similarly, many charitable deductions can be claimed as a deduction.
Depending on individual circumstances, it might also be possible to make more use of the capital gains tax discount of 50% for individuals this year rather than waiting, due to the bringing forward of some deductions at the higher tax rate.
As you can see, it can be a complex area worthy of some professional tax or accounting advice but in this financial year in particular, maximising deductions could be a very powerful tool.