At this time of the year you’re most likely thinking about getting your tax return done for the last financial year. Unfortunately you’re probably going to get less of a refund than you would have if you’d read this 12 months ago. But the good news is that if you get your head around tax now you can (legally) reduce how much tax you pay in the future.
The average full time worker in Australia pays $19,917 in tax to the government each year. That’s a lot of dollars! And the thing is whether we realise it or not (and most times we don’t), tax has a massive impact on every other area of our money . You pay tax on the bank interest earned on your savings, you pay tax when you sell investments or receive investment income, and there’s a tax impact of buying property. So if you want to make smart money choices, you need to be thinking about the tax impact of the decisions you’re making. In this article I’m going to cover some tax basics and then show you how you can get the best tax outcome possible going forward.
In Australia we work on a marginal tax rate system, meaning we are taxed at a higher rate as our income increases. This system can be a little confusing, so it’s worth stepping through a couple of examples.
Australian tax brackets and rates:
| Taxable income | Tax rate
(excluding medicare levy) |
| $0 – $18,200 | 0% |
| $18,201 – $37,000 | 19% |
| $37,001 – $87,000 | 32.50% |
| $87,001 – $180,000 | 37% |
| $180,000+ | 45% |
It’s important to note here that the marginal tax rate only applies on the income within a particular bracket. For example, if your income is $90,000, the tax you would pay is as follows:
For example, if your income is $90,000, the tax you would pay is as follows:
$0 – $18,200 @ 0% = $0
$18,200 – $37,000 @19% = $3,572
$37,000 – $80,000 @ 32.5% = $13,975
$80,000 – $90,000 @ 37% = $3,700
Total tax = $21,247
The important thing to note here and the thing many people find confusing is that when you go into the next income tax bracket the higher rate of tax only applies on the income earned ABOVE that particular tax bracket’s lower limit.
This means there is no point on the tax scale for ordinary taxpayers (excluding things like other benefits and HECS payments etc.) where you end up with less money after tax as a result of making a higher income.
Many people get confused about this and think that when they go into the next tax bracket they will somehow end up with less money in their bank account every month when they get paid. Not true. Every time you get a pay bump that pushes you up a tax bracket, instead of hitting the panic button you should embrace it. You’re going to end up with more money in the bank after tax, so don’t stress.
You only get one tax scale
Another thing many people find confusing is that you only get one tax rate. This means you have the exact same tax rate for your salary, for the interest you earn on your savings account and any investment or property income.
For individual taxpayers, when you do your tax return, the Australian Tax Office (ATO) doesn’t really care about the source of your income (except for some less common exceptions for special types of income such as overseas income and pension income etc.). The ATO simply adds up your income from all sources, takes away any deductions, and the result is your ‘assessable income’. It’s your assessable income that you pay tax on, and the rate of tax you pay is based on the table above.
What you can do to (legally) cut your tax bill
With our high and ever increasing tax bills, it’s more important than ever you are tax smart. This allows you to keep more of your hard earned cash and gives you more money to save, invest, or spend on smashed avo on toast.
The most important thing you can do to get smarter around tax is to educate yourself and build your understanding of the tax rules and how they impact the money choices you’ve already made, or the ones you may be considering. The best time to start planning how you’ll minimise your tax bill (legally) this financial year is today. You need to know what you can claim in advance so you can keep good records and maximise your deductions without running into trouble with the ATO.
When you invest, do it tax effectively. Don’t ignore tax because it can be difficult and expensive to restructure investments after you’ve pushed the ‘go’ button. I’ve seen many people fall into the trap of not structuring their investments correctly and the extra tax they end up paying drags down the return they would have otherwise received on the investment.
You should also understand what you can claim based on your occupation. Most occupations these days have expenses that are deductible, particularly due to our increasing tendency to work more from home. If you don’t know what you can claim, you’re likely missing out on tax deductions.
If you’re an employee, take the time to understand what you can claim based on your job and employment arrangements. If you don’t know where to start, the ATO have lots of very helpful content on their website and even some examples of things you can claim based on different occupations.
The Wrap
We already pay lots of tax in Australia, and you don’t want to pay more than you have to. Take the time to build your knowledge so you can get smarter with your tax planning. If you get your tax strategy right, you’ll keep more of your income to use for your savings, investments, or simply to have more fun.
Understand how tax impacts your investment strategy and how you can invest in a ‘tax smart’ way. Learn what you can claim so you can maximise your deductions and tax refund.
If you don’t have a good Adviser that can help you with your tax strategy or personal tax accountant, find one now. Ask them to help you understand the tax rules and things you can be claiming for the new financial year. This will make sure that at the end of the tax year you’re well positioned to keep as much of your hard earned income as possible!
Tax is the silent killer, but only if you allow it to be. The best time to get smarter with tax is today.
