Saving tax by offering individual care and service to small businesses is our heart and soul. But what about the individual who works for a larger business as an employee? How can they reduce their tax? Well as an individual, it’s a tougher proposition. You can still claim standard deductions here and there plus we came up with 5 that people sometimes forget about during the tax season. We also have an intriguing sixth option which fell slightly outside the scope but made for an interesting discussion. Interested? Okay then…
But first some ways individuals can reduce their tax burden
There are no “gimmes” here. The following tips require some planning and effort and depending on your individual circumstances the benefits (perceived and standard) will vary from person to person.
- Super contributions – Yes this is a longer term play depending on your age but the immediate benefit is that your additional contributions will not be viewed in the same light as your salary in the eyes of the ATO. It’s a forward thinking way of ensuring you get the most out of your salary either sooner by investing through smsf or later on in life and you’re enjoying the spoils.
- Negatively gear an investment property – doing sufficient research and then dipping a toe in the real estate ocean is another way of reducing taxable income. There are a huge number of resources out there about how to invest and we too have some opinions in this area that we’ll be sharing from time to time.
- Private health insurance – this is an interesting one because there’s a lot of opinion around the value of private health insurance today, given much-publicised hikes in premiums. You certainly will pay less tax as a result of signing up but as always, balance this decision against your individual needs.
- Salary sacrifice your vehicle – some roles require the use of a vehicle and there lays an opportunity to further reduce your taxable income by salary-sacrificing the car or in some cases, opting for the upgraded model if available.
- Donate to a charity – as long as the charity you want to support can offer a tax receipt, your taxable income will feel lighter for your thoughtfulness and generosity.
Ben is quick to point out that spending money to simply save tax is never a good idea because you’re essentially spending a dollar to save 49c. So hang onto that dollar (or dollars) unless you are spending your money on something of value that will benefit you.
Consider the contractor…
If however, you were a contractor or became one instead of being an employee, everything changes. Potentially, you could use your core skills as before but with the added freedom of multiple work environments and assignments. You could structure your business to allow you to take advantage of the tax rates usually afforded to companies and trusts, again depending on your individual circumstances. However, there are some fairly rigid guidelines that need to be kept in mind. As a well-paid, high functioning individual, contracting and loving it, the rules dictate that:
- You need at least two unrelated clients
- No one client can represent more than 80% of total income from contracting. So if our contractor was earning $200k gross, their largest client could not pay them more than $160k (80%)
Again our passion is working with small business owners to help them extract the most benefit for their families and positively impact the world we live in. However, we do like to share our thoughts on improving individual circumstances from time to time as well. Call it our 80/20 rule.