How do high-income earners reduce taxes in Australia?

Salary sacrificing or personal deductible contributions to superannuation

Sacrificing some of your pre-tax salary into your superannuation is a great way to reduce the amount of tax payable. This is due to super contributions being taxed at a concessional rate of 15%. For high-income earners, this would lead to a significant tax reduction. However, while there are no limits to the amount of salary you can sacrifice unless specified in your terms of employment, if you exceed the concessional contribution cap ($27,500 as of 2022), any further contribution in excess of the contributions cap will be taxed at your normal marginal rate or an additional excess contributions tax. On top of this, if you earn over $250,000 (including super contributions), you will attract the Division 293 Tax, which is an additional 15% tax on your contribution. 

If you own a self-managed superannuation fund, you may be able to take advantage of additional superannuation contributions strategies that aren’t available to retail or industry superannuation funds. 

Catch-up super contribution strategies

From the 2019 financial year, if you don’t maximise your super contributions each year, you may be eligible to utilise the unused contributions caps in subsequent years, known as ‘catch-up contributions’. 

For example, if, according to the Australian Taxation Office (ATO), your catch-up super contribution balance is $30,000 on 30 June, then, in that case, you may be able to contribute the current year’s contributions cap of $27,500 (less employer contributions) plus the $30,000. This leads to a total of $57,500 contributed to your super, and you can claim this amount as a tax deduction).

To be eligible for this, your superannuation balance must be below $500,000 as of 30 June in the prior financial year. Additionally, you must have unused contributions from the previous 5 financial years, starting from the 2018/19 financial year and be eligible to make these contributions to super from an age perspective. Any unused contributions are only carried forward on a 5-year rolling basis. 

Reduce your capital gains tax (CGT) liability

Capital gains tax (CGT) is a type of tax paid on profits earned from selling assets, such as investment properties, shares, cryptocurrency, business vehicles, etc. The easiest way to reduce CGT for high-income earners is by holding onto an asset for at least 12 months, which reduces the assessable capital gain by 50% and reduces the overall tax payable.  

Also, looking at other structures an asset is held in may help minimise tax. 

Owning the same asset inside super, depending on what stage you are at, may reduce your tax bill from your marginal tax rate (which could be as high as 47%) to a maximum of 15%, or as low as 0% if that asset is held inside the superannuation environment. 

Another strategy is to hold assets through a trust. Depending on the structure of that trust and particularly in the case of a discretionary trust, it may be able to distribute your capital gain to someone at a lower marginal tax rate than if you held that asset personally. 

For example, if a beneficiary is on the 21% marginal tax rate compared to someone on the 47% marginal tax rate, distributing the capital gain to someone on the lower tax rate will help reduce the overall capital gains tax liability. 

Finally, there are various other CGT minimisation strategies, such as the timing of the sale, super contribution strategies and utilising any capital losses you may have.  

Avoid the Medicare Levy Surcharge with private health insurance

Any single person making over $90,000 or couple earning over $180,000 must pay the Medicare Levy Surcharge. This is charged at an additional 1-1.5% of the individual’s or couple’s taxable income/s. An easy way to avoid paying this for high-income earners is by acquiring private health insurance hospital cover, making it an easy way to reduce tax. 

Set up a discretionary trust

Discretionary trusts are a great way to reduce the tax you have to pay as a high-income earner and can be especially valuable when buying assets. They work by essentially redistributing your income and capital gains to beneficiaries on lower income tax brackets, reducing your tax liability. 

Timing is vital

If you can plan part of your income to arrive after June 30 (the cutoff for the income tax year), this will reduce your taxable income for that year. While doing this only delays the tax you have to pay, it can be useful in years when your income is exceptionally high or where you think it might be lower in the following year.