Reduce your tax using these strategies.
In this article we'll explain how to reduce tax through what you can claim, we'll run you through:
- Deductions you can claim
- The importance of a good tax accountant
- The “tax trap” you need to avoid
- More about specific deductions
1. How to reduce tax - deductions you can claim
According to the Australian Taxation Office (ATO) website, there are 3 things you need to claim a work-related deduction:
- You must have spent the money yourself and were not reimbursed;
- It must be directly related to earning your income; and
- You must have a record to prove it.
The ATO allows you to claim up to $300 for work-related expenses without having kept any receipts – but you must have spent the money and it must be related to your employment.
If the expense was for both work and private purposes, you can only claim a deduction for the work-related portion.
If the cost of any item is over $300, it will have to be depreciated (a portion of the cost claimed each year over its effective life).
2. How to reduce tax - the importance of a good tax accountant
Many accountants seem to be working for the ATO. Instead of trying to maximise what you claim, they’re often too scared of 'upsetting' the ATO to fight and get you the largest legal tax deductions.
Rather than using an accountant who “works for the ATO” – use an accountant who works in your best interest.
3. How to reduce tax - the ‘tax trap’ you need to avoid
Everyone wants to increase their tax refund (or reduce their tax payable), but paying tax might not be as bad as you think.
Tax saving strategies generally involve you spending money on “something” which creates for you a tax deduction. The “something” you spend your money on could be an expense, an asset, or an investment-related payment (like superannuation or prepaid interest on an investment loan).
Don’t fall into the common trap of spending money just to get a tax deduction. You only save tax based on the marginal tax rate proportion on the amount you spend, not the full amount.
For example, if you earn $85,000 a year, your marginal tax rate (including Medicare levy) is 34.5%. This means any extra dollar you earn will be taxed at 34.5%, and any extra dollar you claim as a deduction will save you 34.5%.
So, if you spend $100 on something that you can claim a deduction for, you will get back $34.50 from the ATO. But it will still cost you $65.50.
Only spend money on what you need, not just to create extra tax deductions for yourself.
4. How to reduce tax - learn more about specific deductions
It’s our job as your accountants to make the lodgement of your tax return as easy and simple as possible. We do this every day, so we know all the ins and outs of what to claim to make it easy for you.
To learn more about specific deductions you can claim we have provided some links to the ATO's website - it’s actually pretty good:
– Clothing, laundry and dry-cleaning expenses
– Gifts and donations
– Home office expenses
– Interest, dividend and other investment income deductions
– Self-education expenses
– Tools, equipment and other equipment
– Vehicle and travel expenses – including travel between work and home
– Other deductions