Tax planning strategies for high income earners

When you remain compliant and consistent in your tax planning strategies, you can save thousands of dollars every year and direct your finances towards things that matter to you, such as the growth of your business.

The ATO describes the process of ‘Tax Planning’ as an Australian taxpayer’s right to arrange their financial affairs in order to keep their tax to a minimum. However, when organising their affairs, individuals must do so legitimately, and within legal grounds. Unlawful methods of Tax Planning schemes are referred to as Tax Avoidance and Tax Evasion – both of which carry heavy penalties, including fines and imprisonment.

Below we outline the top 10 tax planning strategies for high income earners and highlight how you can make the most of your tax planning strategy.

Tax Planning Strategy 1: Making additional personal contributions to your SMSF or Superannuation Fund

Making contributions to your super fund not only gives you the opportunity to grow your retirement nest egg, but it can also reduce the amount of your tax bill. Each year, under the concessional contributions cap, individuals are entitled to personally contribute up to $27,500 into their super fund of choice – including the payments made on behalf of their employer/s.

However, going over the deductible superannuation contributions by exceeding the $27,500 cap will leave the taxpayer to pay an effective tax rate of 49% in tax.

From 1 July 2024, the concessional contributions cap will increase from $27,500 to $30,000

Tax Planning Strategy 2: Avoiding the Medicare Levy Surcharge with Private Health Insurance

Australians earning over $27k pay the Medicare Levy (calculated at 2% of an individual’s taxable income). High income earners (singles earning $90k+ and couples with a joint income of $180k+) without Private Health Insurance/Hospital Cover must also pay the Medicare Levy Surcharge. The Medicare Levy Surcharge is charged at an additional 1-1.5% of an individual’s taxable income and encourages individuals who don’t have Private Health Insurance to consider taking it out and making use of the Private Health system.

Tax Planning Strategy 3: Negative gearing a property investment

The Treasury describes negative gearing as ”a commonly used term used to describe a situation where expenses associated with an asset (including interest expenses) are greater than the income earned from the asset. Negative gearing can apply to any type of investment, not just housing.”

Taxpayers who are negatively geared have the ability to deduct their losses against other income, including their salary and wages. Many high income earners may also have a negatively geared investment property – this means that the tax deductions received from renting out the property outweigh the rent that is received from the property.

Tax Planning Strategy 4: Make regular donations to charity

After seeing the devastating impacts the COVID-19 pandemic had on the community, giving back is now as important as ever. Individuals who are passionate about giving back to their community or particular causes should consider making a tax deductible donation to an Australian Deductible Gift Recipient (DGR).

Tax Planning Strategy 5: Get reimbursed for continuing with your educational journey

Education that will better a taxpayer's skills in their current role of employment are eligible to be claimed back on tax. The following educational tools can be claimed:

• Further study

• Professional development

• Training

• Self-education

• The use of an executive coacha

Tax Planning Strategy 6: Making the most of your home-office

Since the pandemic hit, working from home (WFH) and hybrid work has become the norm for many of us. During COVID, the ATO blessed us with an increase in the home office deduction from 52c to 80c per hour on WFH expenses. But all good things must come to an end and we’re now set at 67c and a revised (not so easy) method.

A SNAPSHOT OF THE REVISED FIXED RATE METHOD

• The increased revised fixed-rate method includes internet, mobile, home phone, stationary and computer consumables, plus energy expenses related to WFH.

• You won't be able to claim additional separate deductions for anything covered under the fixed-rate method.

• You can still calculate separate deductions for depreciation of assets used when WFH, like computers, stand-up desks or your fancy ergonomic chair

Tax Planning Strategy 7: Invest in Income Protection Insurance

Income Protection Insurance protects you, your family, and your finances in times of uncertainty. Essentially, it is an effective way to protect your current income if you are left unable to work as a result of illness or injury.

Income Protection Insurance pays up to 75% of an individual’s gross annual income (including your superannuation repayments) in monthly instalments in order to cover the cost of your day-to-day expenses until you’re ready to return to work.

Tax Planning Strategy 8: Get ready to lodge your tax return!

Keeping up to date with all of your records means you can lodge your tax return as soon as possible after the end of the financial year (30 June). Lodging your tax return early means you avoid paying any late penalties and fees, and you'll get money back in your pocket sooner.

Tax Planning Strategy 9: Stay on top of your records and documents

In the event of an ATO review or audit, taxpayers will be asked to provide relevant and applicable documentation to substantiate whatever claims they may have made over the course of the financial year.

It's crucial for every taxpayer who has made a claim that they have access to:

• Credit card statements

• Bank statements

• Sales receipts

• Expense invoices

• Tax invoices

• Employee records (only applicable for employers/business owners)

Tax Planning Strategy 10: Get expert advice

Seeking professional advice is crucial in order to ensure that you are implementing strategies that will benefit you in the long run. An expert will be able to present all the tax offsets available to you, while highlighting which options you can claim based on both your individual and business circumstances.

For resources to help you with tax planning, we’ve collated the top tips on Tax Planning for small businesses. To ensure legal compliance, it’s important to seek advice from an expert before embarking on your own Tax Planning journey.

Get in touch with our our Books360 team to discuss your tax planning strategy today.