High-income earners can take advantage of the various tax deductions or offsets that the Australian Taxation Office (ATO) permits.
Tax deduction versus tax offset
The ATO considers some expenses as valid ways to reduce tax payable, however, how and when the reduction is applied on the assessable income depends on the type of expense.
Tax deductions refer to expenses incurred in relation to work, charity, self-education and filing taxes. The pertinent amounts are deducted to a person’s assessable income before any taxes are applied, thereby reducing the amount of tax they have to pay.
If the amount of deductible tax exceeds the payable portion, an individual may be eligible for a tax refund.
Tax offsets, on the other hand, directly decreases a person’s tax payable because it is applied after taxes have been computed.
Offsets or rebates can bring an individual’s tax payable down to nil but do not necessarily result in a refund.
Tax reduction strategies
Here are some of the most accessible tax reduction strategies that ATO allows:
- Work-related expenses
- Superannuation contributions
ATO allows individuals to reduce their tax on salary by claiming deductions on work-related expenses that were not reimbursed by the employer. These include vehicle and travel expenses for work-related duties, laundry and dry cleaning expenses for specialised work-related clothing, overtime meals, tools and equipment for work use.
Employees may also claim deductions for self-education costs (i.e., books, seminars and educational courses) and other expenses that are related to their work but were not reimbursed by their employer.
Any monetary or property contributions or donations may be deducted as long as it was given to accredited deductible gift recipients (DGRs) and was given completely voluntarily.
ATO prohibits claiming deductions if the donation provides a personal benefit to the donor in exchange for their ‘gift’.
A tax deduction may also be claimed for voluntary contributions to an individual’s super fund simply by filling out a form. However, claiming this tax deduction will automatically subject the amount to the 15 per cent tax within the fund. Furthermore, it disqualifies the employee from receiving a government co-contribution even if they are eligible.
- Private health insurance premium
- Voluntary super contributions
- Low-income tax offset (LITO)
- Seniors and pensioners tax offset (SAPTO)
- Zone tax offset
- Government benefits tax offset
Private health insurance premium
The government has strongly encouraged higher income earners to reduce dependency on Medicare, which is why it allows those who pay for private health insurance to claim a tax offset on their premium payments.
Insurance offsets may result in the reduction of premium payments or a refund, but the amount individuals can claim would depend on the type of income (single or family) and the age of the oldest person covered by the policy.
Voluntary super contributions
Those who receive an Australian super income stream may also be eligible for a 15 per cent or 10 per cent offset against the taxed or untaxed component, respectively.
Likewise, voluntary super contributions on behalf of a low-income earner spouse may entitle the contributing partner to a tax offset up to $540 annually. However, the offset is still subject to certain conditions, such as a total assessable income cap and super contributions and transfer balance cap.
Low-income tax offset (LITO)
Low-income earners who earn less than $66,667 annually are eligible for the low-income tax offset amounting to $445.
Seniors and pensioners tax offset (SAPTO)
Seniors in their Age pension age may also bring down their tax liability to nil if they are eligible for SAPTO.
Single pensioners may be eligible for a $2,230 tax offset if they earn up to a maximum of $32,279. For coupled pensioners with a combined income of up to $57,948, the eligible tax offset amounts to $1,602. The tax offset is reduced by 12.5 cents for every $1 that exceeds the threshold.
Zone tax offset
This offset applies to individuals whose usual place of residence is located in an isolated or remote area of Australia, provided that they lived there for at least 183 days of the income year.
Government benefits tax offset
An individual has no tax payable if their sole income are benefits and allowances they receive from the government. However, if they generate any assessable income, the ATO will compute how much tax offset they are eligible for and apply it to the income they declare.
Seek professional advice
It’s important to prepare all the necessary documents when filing taxes and claiming offsets and deductions. It may be a complicated process for some, but employing the services of a registered tax agent can help them lodge their tax return and avail the correct claims according to their personal circumstance.
This information has been sourced from the Australian Taxation Office and ASIC's Moneysmart.