It comes around every year. When our attention turns to the fiscal fiend and the amount of tax he has slugged us.
Naturally, as good citizens, we don’t mind paying the right amount of tax but we are damned if we are going to pay a penny more than we have to.
The problem is that tax is so complicated many of us have given up trying to understand what we can and can’t do. So here are the 10 commandments of tax. They are simple, legitimate and guaranteed to cut your tax bill.
1. Split your income
It’s easy. Put all the bank accounts and other income producing investments in the name of the spouse on the lower income tax bracket. Interest on savings accounts, fixed interest and government bonds are taxed at the same marginal rate as the investor.
With joint accounts the Tax Office splits the interest earned and applies the tax rate of each individual partner to their share. The partner on the highest tax bracket pays the most tax on their interest. So do something about it.
More money advice for couples: Kochie’s tips for managing money together
Income splitting is very attractive in a family where there is one primary income earner because the other spouse can earn up to $18,200 tax free. But remember, after they are transferred, the accounts are legally owned by the spouse named. So make sure the relationship is sound.
2. Have your tax adjusted
If you think you are paying too much tax, apply to have it adjusted. With interest rates so low compared with a few years ago many people, particularly retirees, have seen their interest income cut sharply. The problem is the Tax Office assumes you will earn the same amount of income from savings and investments as last year. And it will calculate tax based on that assumption.
Plus a lot of contractors and self-employed may have seen income fall substantially during COVID-19 lockdowns.
But you can approach the Tax Office for a variation of tax. The applications are available through your accountant, bookkeeper and online. But make sure your calculations are right. The Taxman imposes stiff penalties on those who understate their income.
Another of my 10 commandments of tax is to claim the cost of education where you can. As a rule of thumb, you can claim a tax deduction for the costs of self-education, provided it’s related to your income earning activities.
Generally self education is associated with courses run by schools, colleges and universities which end up in you gaining an award like a degree or a diploma. But you don’t necessarily have to come out with a bit of paper to claim a deduction. You’ve just got to be able to prove the skills or knowledge you gained are sufficiently related to your job. The idea being the completion of the course will help you get a pay rise or promotion.
So that means you can’t claim for courses you do in order to help you get a new job in a new field. You also can’t claim for a really general course. For example, say you’re an accountant, don’t try telling the Taxman you’re claiming a meditation course because it’ll help you relax and perform better at work!
4. Keep accurate records
The reason you receive your tax refund so quickly is because the Tax Office takes your word for it. Hard as it may seem, the Tax Office accepts your calculations at face value and pays the refund. But they will be back to check. It may not be for a couple of years, but when they target you for an audit you better have all the records and receipts to substantiate the claims. If you don’t, the penalties will be harsh.
The shoe box of receipts is simply not good enough anymore.
This might help: Everything you need to know about the ATO’s shortcut method
5. Pay off debts
Surprisingly, this is one of today’s best tax tips. It is silly to invest spare cash – and pay tax on the returns – when at the same time you are paying interest on loans.
Think about it. If you have a credit card or personal loan, you are paying out interest on the balance at 10-18 per cent. Invest any spare cash and the best you could do is 0.5-2 per cent and then tax is taken out.
By using that spare cash to pay off debts, you are saving yourself from paying out more than 10 per cent in interest. Paying off the mortgage should be a major priority because a home is also capital gains tax-free.
6. Delay income until next financial year
For most people, this is probably the most overlooked of my 10 commandments of tax. Every dollar of income we earn, whether it be from wages or investments, is taxed at our marginal rate.
If you expect to earn less income next financial year, and therefore be on a lower tax bracket, delay receiving the interest on savings until then.
Plenty more tips here: Tips and tricks to maximise your tax return
7. Offset capital gains with losses
Profits on selling shares, property or unit trusts purchased after 1985, will be charged capital gains tax. CGT is based on half of your marginal tax rate. But any losses made on these types of investments can be offset against profits.
So if you have made a big profit on one investment, sell some of your disasters. The losses made on the “dogs” will be offset against the profits on the winners and the capital gains tax bill is cut.
8. Dividend imputation
This is a big winner particularly for investors who depend on income from their investments to live on. A lot of our big companies listed on the stockmarket pay dividends to their shareholders. A dividend is basically a slice of the profits that is paid out twice a year.
Because many of these companies pay tax at the full corporate rate, the dividends are paid to shareholders along with a 30 per cent tax credit. So if your personal tax rate is 30 cents in the dollar or less, the dividend income from these shares is tax free. Check with a financial adviser for recommendations.
9. Forget negative gearing
Australians still seem to have a passion for negative gearing as the answer to all their tax problems. Unfortunately, they have got it wrong.
More on this: 3 tax mistakes investment property owners make
Negative gearing is where you borrow to invest and if the loan repayments are more than the amount of income generated from the investment the difference can be claimed as a tax deduction.
Negative gearing works at a time of high income tax rates, high inflation and high interest rates. But today we have lower tax rates and inflation and interest rates are at record lows. Negative gearing simply does not stack up in this economic environment.
That is not to say, don’t borrow to invest, but do it because of the investment potential, not just for tax reasons. And if you’re going to do it, make sure you’re in the top tax bracket.
10. Claim work-related expenses
Let’s round out the 10 commandments of tax with one that everyone can benefit from somewhere along the way. Many jobs demand spending money on unusual items which are a necessity to earning an income. The cost of these items can be claimed against tax and are called work-related expenses. There’s a list of some general deductions that could maximise your tax return here.
But be careful because the tax office studies these closely. You must keep receipts and the expenses must directly relate to earning an income.
For example, funeral directors can claim the cost of their black suits and professional dancers the cost of leg waxing. Hard to believe, but true. The Tax Office website has a list of occupations and the allowable work related deductions. Check it out.