Tax is something most of us don’t think too much about until those EOFY sales start popping up. Then suddenly it’s July (or closer to the ATO lodgement date) and we start hunting for those tax deduction receipts that we realise just how much of our income goes in tax.
A smart accountant will help you understand how to reduce your income tax liability, but there’s plenty that most taxpayers can do at any point in the year to help maximise their salary. Please note that the information on this page is general in nature and should not be considered financial advice, especially as it is not specific to your situation.
Minimise tax. maximise savings.
Salary packaging
Salary packaging is an arrangement between you (the employee/taxpayer), your employer and the salary packaging company (for example, Easi). The employer puts some of your pre-tax income toward a benefit before your salary is taxed. Effectively that means you’re not paying tax on top of tax, then trying to claim some of it back after June 30.
Depending on your salary, circumstances and where you work, employees are eligible for different benefits. For example, a healthcare worker living remotely, may be entitled to salary package your rent or mortgage payments through remote area benefits. Similarly, government employees might be eligible for a “Meals and Entertainment Card,” for purchases of certain items/services to a value determined by FBT.
These sorts of benefits are also referred to as “fringe benefits,” and they can save employees thousands of dollars in taxes every year. There are a few limitations, including the amount that can be salary sacrificed (salary packaged). Also, Fringe Benefits Tax, or FBT, can impact the types of benefits your employer offers.
Choosing a car with novated leasing
One popular salary packaging arrangement is a Novated Lease on a new or pre-owned vehicle. Again, this is an arrangement between you, your employer and the salary packaging provider. It’s a pretty straightforward product, which many people are eligible for.
Put simply, a Novated Lease works like this:
You decide on which car best fits your lifestyle needs and salary level.
Easi calculates the cost based on our best price guarantee (ensuring the car price is lower than any other competitor).
We then average out your expected expenses based on your average annual kilometres.
The amount is then divided into a fortnightly payment which is deducted from your gross income.
The best part is, you pay no GST on any of the running costs. Plus, through the Novated Lease method, you have the opportunity to lower your income tax.
Every situation is different, so it’s worth taking a look at how much you can save by using our novated lease calculator.
Keep up with your life admin
This year we expect the ATO to be more diligent than ever. If they ask about a deduction you’ve claimed, be ready to show them receipts or calculations.
If you don’t have the receipt, talk with your accountant about what is required to prove deduction eligibility. That shoebox of paper fragments from across 12 months is always a nightmare, and many Aussies miss deductions they should be eligible for because of their lack of recording keeping.
To help save time and hard-earned money, make sure you keep all your receipts in an accessible, organised, and easy-to-use folders. Backups are also essential, and these days electronic receipts can be extremely helpful especially when keeping track of expenses - especially from the first half of a new financial year.
Understand what you can deduct and why
This year, lots of us will have additional deductions due to working from home. If you spent any money on anything related to earning income, you may want to claim it - but get financial advice on what method to do so. The ATO has made a simplified cents-to-hours-worked claiming model available, but has cautioned against ALSO claiming other costs associated with working from home.
If you’re unsure whether or not you can claim a specific item as a work-related tax deduction, keep the receipt of purchase and ask your tax accountant when you file your application.
Choose a reputable tax accountant
Choosing to engage a professional tax accountant can save you a lot of time and hassle when it comes to lodging your taxes. Hiring a tax accountant helps many Australians get a larger tax refund while reducing their chances of running afoul of the ATO. The costs of managing your tax affairs may also be a deduction for the following financial year.
Support a good cause can do more good
Donations to a registered charity greater than two dollars is considered tax-deductible. After donating, remember to file the receipt appropriately and enter that into the “charity donations” section in your tax return. Be aware that donations do not come back via a tax refund. Instead, the amount of the monetary gift is reduced from your total taxable income, meaning your return will only be a percentage of the donation.
A mortgage offset account can help minimise your tax
Those with a home loan might consider a mortgage offset account, which lets you offset your non-deductible interest on the home loan with interest on the standard, taxable earnings of money in a deposit. With this arrangement, taxpayers can create a savings account with their lender. But instead of paying interest on the entire amount of the home loan, taxpayers are charged interest on the loan, minus the money in the savings account.
Consider private health insurance
If you don’t have private hospital insurance, but you’re single and make more than $90,000 annually, or your family household makes more than $180,000 per year, you may be hit with the minimum 1% Medicare Levy Surcharge. Holding private health insurance may make a lot of sense for you!
The Medicare Levy Surcharge is also collected on top of a mandatory 2% Medicare Levy that most taxpayers have to pay anyway.
Some basic, private healthcare plans can cost less than the 2% of Levy Surcharge on your gross income. Depending on your needs and medical history, it might also be worth it for the often shorter wait times you’ll get with private healthcare.
Meet ATO deadlines
If you register with a tax accountant, tax returns can be lodged as late as May of the next financial year as long as you aren’t in dispute with the Tax Office. But for everyone else, all returns must be lodged by October 31.
Meeting all ATO deadlines can help you avoid conflicts and penalties. Self-lodgers with simple finances and circumstances typically submit their taxes online with the Tax Office. The account will be populated with your previous year’s return and any information provided from your bank, workplace, government agencies, etc. The Tax Office collects this information until the beginning of August, so you’ll want to wait until after that to lodge online.
Don’t try to outsmart the tax-man
Paying taxes is a necessary evil, but reporting incorrect numbers and trying breaking the rules will set you up for more trouble down the road. Taxpayers who have tried to make deductions that weren’t true have gotten into hot water with the ATO. The ATO will investigate large, and sometimes small, tax deduction claims that look suspicious.
If you would like to discuss salary packaging and Novated Leasing with Easi, feel free to give us a call on 1300 266 828.
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