Paying tax is right up there as one of the least enjoyable things in life. With some smart strategies, you can reduce your tax bill and have more money in your pocket.
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If you earn money – whether that’s through a job, an investment or any other type of income - you need to pay tax. But are you paying more than you need to? You’ve worked hard for your money, so it’s a good idea to make sure you’re doing all you can to reduce your tax bill – and stress levels – at tax time.
The amount of tax you pay depends on how much you earn, and any deductions you can claim. Making sure you’re claiming as many tax deductions as you legitimately can, is one of the easiest ways to reduce your tax bill.
You can claim a wide range of expenses, including work-related expenses, working from home expenses, union fees, charitable donations and the cost of managing your tax affairs – paying an accountant to do your tax return, for example. You can get a full list of tax deductions on the ATO website.
Depending on the type of work you do, work-related expenses are one way you may be able to save plenty on tax. You may be able to claim:
It doesn’t stop there. If you work from home, you’re entitled to claim working from home expenses too, and any tools or equipment you use to do your job including:
You have a few options when it comes to calculating your deductible work-related expenses. We break it down for you below:
The shortcut method was introduced by the ATO to simplify tax returns using an hourly rate. It’s designed to make it easier for those working from home during COVID-19 to claim working from home tax deductions. You only qualify to use this method if you worked from home and incurred extra tax deductible expenses as a result – occasionally checking emails or taking phone calls doesn’t count.
The shortcut method is pretty simple: For every hour you work from home, you can claim an $0.8 (80 cents) tax deduction. The hourly rate deduction covers everything from your phone and internet expenses, your utility costs right through to the decline in value of your work equipment and furniture. With this method, you can't ‘add on’ any other work expenses you incurred. For example, even if you bought some new equipment you won’t be able to claim it.
To use this method, you’ll need to keep a record of the hours you worked from home - a timesheet, diary or roster for example. Because it’s an hourly rate calculation, you won’t need to calculate the costs of specific items or keep receipts.
For more about the shortcut method you can visit the ATO website which also has a handy calculator to help you work out your expenses using the short cut method.
It’s important to know that this method is only temporary, and only applies between 1 March to 30 June 2020 in the 2019–20 income year, and for the 2020–21 and 2021–22 income years. Beyond 30 June 2022, you’ll need to use either the ‘fixed rate’ method or ‘actual cost’ method.
The fixed rate method also allows you to calculate your claim based on the total of hours you work, but uses a rate of $0.52 (52 cents) per hour to calculate your tax deduction.
This method does not include work-related costs such as: phone or internet expenses, computer consumables and stationery or the decline in value of your work equipment, so you can claim these items as extras. Bear in mind, you’ll need to keep receipts for these costs.
To qualify for this method, you also need to have a dedicated work area in your home.
With the actual cost method, you calculate your working from home tax deductions based on the actual costs you’ve paid for. Under this method, you’ll need to keep a record of the hours you’ve worked as well as a complete breakdown of your expenses and your receipts. If you work in a shared area (for example your kitchen), this method takes into account the work-related portion of expenses, such as cleaning, heating and lighting.
Depending on how much you earn each year, you could be paying tax at a rate of up to 47% on your income. But when you earn money from your super savings, the tax you pay is only 15%, no matter how much you earn.
The government creates these tax incentives to get you saving for retirement. But there is a way to save on tax – by making extra contributions into your super through a salary sacrificing arrangement with your employer. A tax rate of 15% applies to these contributions (known as concessional contributions) that are made from your pre-tax salary, which could potentially reduce the amount of tax you have to pay.
You can also make extra contributions to your super from your after-tax pay (known as non-concessional contributions) and how much tax you can save from it will depend on your marginal tax rate. Here’s an example showing the difference if you made a $10,000 contribution into your super from your after-tax pay compared with a salary sacrifice arrangement. This is assuming that your marginal tax rate is 39%, including medical levy.
| From you after-tax salary | Salary sacrificed into super |
|---|---|---|
| Contribution | $10,000 | $10,000 |
| Tax rate | 39% | 15% |
| Tax payable | $3,900 | $1,500 |
| Net benefit | $6,100 | $8,500 |
If you want to get started with salary sacrificing, you should talk to a financial adviser. If it is right for you, you’ll need to ask your employer to make a regular direct payment from your pre-tax salary into your super fund. Find out more about salary sacrificing, visit the ATO website or speak with your financial adviser.
Remember there are annual limits on how much you can contribute to superannuation and there are different contributions tax rates for high income earners.
One of the best ways you can get ready for tax time – and make sure you’re ready to claim deductible expenses – is getting organised early. Here are a few tips to help you prepare:
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