The tax system in Australia is set up to incentivise people to take certain actions that benefit the “common good”. It is therefore possible to take advantage of this situation to legally reduce your taxes. Here are a couple of ways you may be able to do this:
Set Up a Salary Sacrificing Scheme to Boost Your Super
A salary sacrificing scheme is an arrangement that you negotiate with your employer. In a typical salary sacrifice arrangement, you would agree to forgo a portion of your before-tax salary; and, in return, your employer would make equivalent-value contributions to your super on your behalf.
This can potentially result in tax savings because the portion of your salary that you sacrifice is directly added to your super and is usually taxed at a maximum rate of 15 per cent contributions tax. Otherwise, it would be taxed at your usual marginal tax rate, which presumably, for most Australians, would be higher.
Your future, retired self will probably thank you for making this arrangement; however, there are some additional considerations to be aware of, so it is advisable to speak with both your employer and your tax preparer to get educated about all the specific details that could affect the outcome in your unique situation.
Enrol in a Private Health Fund
Australians enjoy a tax-subsidised Medicare system that ensures citizens’ most basic healthcare needs are met – yet there’s also a thriving private healthcare system in place. Historically, sizable numbers of people have chosen to participate in the private healthcare system, in part because of government incentives to do so. Use of the private system helps to ease the burden on the public system, which creates a win-win situation for everyone.
For some but not all Australians, paying for private health insurance can result in tax savings, because you’ll be able to avoid incurring a Medicare Levy Surcharge (MLS). You’re likely to enjoy an overall total savings if your household has high income. Note that your household income for the purpose of calculating the MLS is different than your taxable income.
The current threshold for single Australians is $90,000 and for families is $180,000. If your earnings are above this amount, the government will apply a Medicare Levy Surcharge of 1 per cent or more to your tax bill unless you maintain a suitable level of private patient hospital cover.
There are suitable private health insurance policies that cost less than the MLS would be, and that’s where the savings comes in.
So how much of a total savings, exactly, could you enjoy if you pay for private health insurance? There are many variables to consider, and each family’s answer to this will be different; to answer this question, it’s helpful to first seek an answer to the question of how much does family health insurance cost? An estimated average insurance cost for the average two-parent family is about $97 per month, which adds up to $1,167 a year.
In contrast, at the lowest level of 1 per cent on an income of $180,000 the MLS would cost a family at least $1,800. In this hypothetical example, the difference is $633, which is substantial on its own; and, of course, you’d also enjoy the considerable benefits of having private health insurance.
Obviously, your own financial situation will be different than the one presented above, so you will have to do your own due diligence to determine whether private health insurance would make financial sense for your family given your actual income levels and the actual costs your family would incur to pay for private health cover.
For low income households, the government also provides an incentive to maintain private health cover; however, that doesn’t come in the form of a tax; instead, it is a private health insurance rebate to help defray the costs of premiums.
There are many other possible ways to save on taxes beyond just these. However, these are a couple of the easiest and most straightforward ways to reduce your family’s tax burden in Australia.
Important Disclaimer: We’re not tax professionals. The information presented in this article should be construed as general in nature, because it does not take account of your family’s unique circumstances. When preparing your taxes or making any other arrangements that will affect your financial future, it is advisable to obtain your own independent financial advice from a qualified professional.