Note: there are some cool tips towards the bottom on how to pay less tax – but I do suggest you read the whole post…
So, do you want to know how to legally reduce your tax bill to zero? Simple, quit your job. The current Australian tax free threshold is $18,200 – so as long as you earrn below that level, you’re not goinng to pay any tax. Doesn’t sound too appealing? Don’t worry, there are other ways. If you apply this algorithm, it will help, where;
i(pa)-ex(pa)=ti and then if (ti<18,200)*mtr = $0 tax
Rather than reading that formula, this is what it means – if your total allowable deductions offset your income sufficiently so that your taxable income falls below $18,200, then you’ll pay no tax. So, all you need to do is find sufficient ways to legally lose money (buy bad stocks, get an investment property where the costs are significantly higher than the income, run a business into the ground – that kind of thing) and you’ll be able to write off just about any level of income.
Obviously, I haven’t been too serious up until now, but the point I’m making is that while you can reduce your tax to zero, it’s a false economy for most. If you have sufficient money, good advice and very complex structures, it’s possible to do some amazing things with your income and the tax you pay. But for normal people, the idea of drastically reducing your tax, while sexy, just isn’t worth it. Tax efficiency? Yes, all for it. Money efficiency? Yes, all for that as well. Tax is just an expense that you need to pay. So the logic of saying to someone of wanting to focus on paying less tax is like saying to someone who has a home loan that the fastest way to pay off their debt is to sell the house. It gets the job done, but not with the outcome that you want.
When most people say they want to pay less tax, usually what I hear is that they want more money – and that is ok. Reducing tax should just be a by product of building a good investment structure, never the focus. Funnily, however, believe it or not if some people were given the choice to save $5,000 off their mortgage over the next 12 months or get an extra $4,000 back in tax, they would take the tax.
Go figure eh?
Focus on making more money. I often say to people that the best thing I can do for them is produce a million dollar tax bill. What’s so good about paying $1m in tax? Simple, you’ve earned at least $2m in income, or $4m in capital gains. If you were paying $1m in tax every year, things aren’t too bad for you. This logic doesn’t sit well with some, however if you take a breath and think about it, it makes sense. The top 10% of the working population pays about 50% of the income tax. You want to be in that top 10%, because that 10% also owns about 45% of the country’s wealth.
There are, however, quite a few things you can do to reduce your tax. Here are my top 5 ways to reduce tax:
- If you own your own business, employ your partner to do some administration work. Most people who run their own businesses and have a spouse or partner will almost always have them invovled in one way with the business. If they’re not working, they can earn $18,200 tax free – so get them doing $18,200 worth of work and save the tax that you would have otherwise paid
- Use trusts. A discretionary trust allows you to distribute the income earned to anyone that qualifies as a beneficiary of that trust. This is useful if you have mature non-working children or a non-working spouse. Be careful, however, how you get the money into the trust. You can’t just transfer it otherwise you may be liable for capital gains or stamp duty.
- Use superannuation. Boring! But very very powerful. You can put a lot of money into super, and some of it can go in pre tax. Especially if you’re getting closer to retirement, you can put in $180,000 per year each or do three years worth in one hit. No tax going in and a maximum of 15% tax on any profit until you retire – where tax drops to 0%. Nice!
- Salary package. Not as good as it used to be, but you can still get a car pre tax along with all your maintenence costs and fuel. You can get a new mobile phone as a salary sacrifice as well as a new computer. The company gets the GST back on the purchase, and you save the tax – win/win (but a loss for the ATO). Make sure it’s for work use however.
- Get your timing right. If you have a period of your life coming up where you’re either retiring or taking a year off (such as working overseas), you can pull forward expenses into this financial year. If you’re not working next financial year, any tax deductions will be lost since there won’t be any tax to claim back, so double up this year and pocket the money!
This is just the tip of the iceberg, but just remember – the main focus should be on creating wealth, not just paying less to the tax office.
Comments by Brenton