Easy ways to reduce tax

Paul Clitheroe

Smart money management involves both sides of the ledger – maximising the money coming in, as well as reducing money going out. This includes looking at legitimate ways to reduce the money we pay in taxes and to apply for entitlements we may be eligible for.

First up, let’s take a look at a few simple ways to reduce those taxes. There are some basic steps that are easy to overlook, like holding onto any receipts and invoices for work-related expenses. Hang onto these and hand them over to your accountant at tax time. You may not be able to claim every item on tax but, without a tax receipt, your work claims could be considerably reduced – and that means paying more tax than necessary.

It’s also sensible to hold onto receipts that could boost your entitlements to any tax offsets (or rebates). For example, if you’ve paid more than $1500 worth of medical bills during the year, you can claim 20 per cent of expenses over this amount – only if you have the receipts to back up your claim.

For couples with cash tucked away in an online saver, term deposit or cash management account, basic measures like holding the investment in the name of the lowest income-earner – a stay-at-home spouse perhaps – can help to reduce the tax you’ll pay on interest earnings.

If you’re tempted to hold savings in the name of children, be aware there are two pitfalls to avoid. The first is that children are charged high tax rates on investment income; secondly, as far as the tax man is concerned, if parents have control over the money, any interest should be declared in mum and dad’s name. So open a kid’s saving account, as a means of teaching the kids to save, but avoid the tax problems that can arise by holding large wads of cash in the kids’ names.

One charge to be increasingly aware of is the Medicare Levy Surcharge (MLS). It only applies to people without health insurance and it’s calculated as an additional one per cent, on top of the normal 1.5 per cent Medicare levy. If you’re single and earning more than $50,000 annually, or if your family income exceeds $100,000 a year, chances are you could get slugged with the MLS.

Tax Office figures show some 200,000 people pay the MLS each year, with the average levy around $600. This is more than the premiums on budget health insurance policies, yet paying the MLS doesn’t entitle you to anything more than the Medicare basics. Websites like iSelect can help you shop around for health cover.

For those earning up to $58,980 a year, it’s definitely worth tipping a bit extra into super before June 30, as you could be entitled to a government co-contribution. If your annual income is below $28,980, making an after-tax contribution of $1000 could see the government tip an extra $1500 into your retirement nest egg – that’s a risk-free return of 150 per cent, which is pretty hard to argue with.

Similarly, if you’re starting to use salary sacrifice either to boost your super, or if your employer is including things like a laptop computer in your salary package, your taxable income will reduce.

If you have children, you may be eligible for Family Tax Benefits. A family with two young kids can earn up to $107,797 a year before Family Tax Benefit cuts out. This threshold is altered in line with inflation several times each year so, if you’re not eligible at present, re-check the limits down the track. Log onto www.familyassist.gov.au  for updated figures.

Paul Clitheroe is a founding director of the financial planning firm, ipac, chairman of the Federal Government’s Financial Literacy Foundation and chief commentator for Money Magazine.

PAUL’S RULES
1. Trim the tax man’s take by asking for- and holding onto – any receipts for work-related expenses.

2. Hold cash-based investments in the name of the lower income-earning spouse to reduce the tax paid on interest income.

3. If you’re a single and earn over $50,000 annually, or part of a family with yearly income topping $100,000, taking out basic health insurance could see you avoid the 1% Medicare Levy Surcharge, which is charged on top of the normal 1.5% Medicare levy.

4. If you earn below $58,980 annually, making an after-tax super contribution could see you entitled to a government co-contribution of as much as $1,500.

5. If you have started using salary sacrifice to make super contributions it’s worth taking a look to see if you are eligible for any Family Tax Benefit payments.

The Sunday Telegraph