This article covers some tax planning strategies that can help high-income earners reduce the tax they pay in a given financial year.
Nothing is sure in life except death and taxes – or so they say. But the amount of tax you pay isn’t set in stone, and there are a variety of tax mitigating strategies that high-income earners in Australia can and should take advantage of.
Before acting on any advice given in this article, be sure to talk to a qualified accountant or tax specialist.
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What is tax planning?
Tax planning is the process of organising one’s financial affairs in order to minimise tax liability. This may involve taking advantage of tax laws and regulations, as well as making strategic decisions about allocating assets and income. Tax planning can be complex, and working with a qualified tax professional is important for high-income earners to ensure maximised tax-saving opportunities.
Tax minimisation strategies
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.
We can help high-income earners reduce their taxes
Here at Aspiri, we’re passionate about helping high-income earners reduce their taxes and manage their financial affairs so they are free to live the lives they desire. We will work with you and your tax advisor to minimise tax, so you can concentrate on enjoying life.
We can help you with:
Our mission is to take a holistic approach to wealth creation and protection, and we consider your whole situation when determining the best financial strategy for you. We look at where you currently are, what you’re trying to achieve short and long-term, and allow you to focus on the things that are important in your life, so contact us today.
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This material is issued by Aspiri and is general in nature, and does not constitute advice. This information does not take into account your personal objectives, circumstances, financial situation or needs. We strongly recommend you seek independent professional advice, including but not limited to speaking to a licensed financial planner and/or tax advisor, before opening an account with us and/or acquiring our services/products.
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