Beat the ATO: Legal and effective tricks to cut your tax bill

Ben Nash (Getty/Ben Nash)

Tax planning can help you build the money you already have. I’ll now unpack the most effective, and legal, tax-reduction strategies you can use to cut your tax bill and hold onto more of your hard-earned money.

Tax is one of the most important accelerators of your money.

Not only is it important to make sure you’re not paying more than your fair share, but being smart with your tax will give you more money you can invest to get ahead faster.

Know that you can’t (and shouldn’t) try to do this on your own. As I’ve suggested, a good professional will be a profit driver, not an expense.

Keep good records

To be good at tax, you need to be organised with your admin. It's probably the single most important thing you can do when it comes to saving tax.

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Many people miss out on deductions because they don’t keep good records throughout the year and have to scramble to find what they can at tax time.

You have two objectives when it comes to keeping your tax records.

First, keep everything organised in one place so it’s easy to put in your tax claim.

Second, keep a longer-term record of your deductions and returns in case you're audited in the future.

Maximise your deductions

Whether it's work-related equipment, travel costs, home-office expenses or any of the weird and wonderful things in between, you need to understand what’s deductible if you’re to take full advantage of the rules.

A word of warning. Because you only get part of any tax-deductible cost refunded, spending money on something you don’t need just to get a deduction doesn’t make financial sense.

Prepay expenses before EOFY

If it’s getting towards the end of the financial year and you have tax-deductible expenses planned for the near future, you can benefit from bringing them forward into the current financial year.

For example, you may be planning to buy a heap of new office equipment in July.

If you do this spending in June instead, you’ll be able to claim the tax deductions and get the tax benefit a full year earlier. Because the money is in your bank account, you can put it to work for you.

Negative gearing

Negative gearing refers to an investment’s negative overall cash flow.

For example, if borrowing + ongoing costs are more than the rental income from an investment property, the overall cashflow is negative. You will need to fund the shortfall from your other income.

The reason you’d choose an investment with a negative cash flow is because your total return includes the long-term growth in the property’s value, which typically will be much higher than the shorter-term out-of-pocket costs.

Debt recycling

With a debt recycling strategy, you make extra payments on your non-tax-deductible home-loan debt, and at the same time draw the same amount from debt.

This money is then used to invest, typically into share-type investments like funds or ETFs.

Because the purpose of this new borrowing is investment, the interest on this portion of the debt is tax-deductible.

When you follow a debt recycling strategy over time, your non-deductible home-loan debt is converted or recycled into tax-deductible investment debt.

Share investing and franking credits

In Australia, share dividends are often paid from after-tax profits. The company earns a profit, pays tax on that profit and pays out dividends from this money after company tax has been paid.

Because this company’s profit income has already been taxed, the ATO don’t tax it again. A tax credit is attached to your dividend that reflects the company tax paid.

This tax credit is referred to as a franking credit, and when dividends are paid with franking credits attached, they’re referred to as franked dividends.

These tax credits will seriously move the dial in terms of how much you need to have in investments to deliver your ideal level of after-tax income.

Superannuation contributions

There are two big tax benefits of contributing money to your superannuation fund.

First, any deductible contributions to your super fund are taxed at a rate of 15 per cent, rather than at personal marginal tax rates.

Once money is inside your super fund, the maximum rate of tax you pay on its investment earnings is also 15 per cent, again much lower than the personal marginal tax rates that would apply if the money was invested in your personal name.

So you benefit from tax savings when the money goes into your super fund, and then every year into the future that the money remains invested.

Even small contributions can make a huge difference over time.

Pay for good advice

Under Australian tax rules, you can claim a tax deduction for the cost of ongoing advice that helps you save tax and generate ongoing investment income.

This means you can get the best professional advice and support to help you navigate your tax and investment planning, and effectively get a discount of up to 47 per cent.

As things change, the suitability of a strategy or tactic can change. Unless you are aware of this and map the variables into your plan, it can be difficult to make the decisions that are best for you.

Good advice will make you more money than it will cost you, and it’s tax-deductible.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth.

Ben’s new book, Virgin Millionaire; the step-by-step guide to your first million and beyond is out now.

If you want to review your existing mortgage and see how much money you can save, you can use our free mortgage comparison tool here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.