But the thing most people don’t realise is that by being smart and using the rules to your advantage, there are legal ways you can claw back $20,000 or more every year in tax.
And the best part is that you can do it without cutting a single dollar from your spending or lifestyle.
Just to be clear, this isn’t about tax dodges, claiming your work laptop, or a few extra kilometres in your car logbook.
This is about understanding how the tax system actually works - and then using the right tactics to make it work for you.
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The problem: earning more means keeping less
In Australia, we work under what’s called a ‘progressive’ tax system.
This means that the more money you earn, the more tax you pay per dollar.
If you’re on a solid income, getting into the six-figure territory, you’re probably handing over somewhere between $20,000 and $50,000 (or more) each year in tax.
But the kicker is that as you work harder, that number gets bigger, and fast.
Promotions, bonuses, or pay bumps can push you into the higher brackets where nearly half of every new dollar you earn disappears in tax.
The thing that most people miss is that you don’t just have to cop it. With the right strategy, you can reduce your tax burn and grow your money at the same time.
Don’t just earn more (structure smarter)
There’s no single silver bullet here, but there is a system smart people are using to reduce tax while building serious financial momentum.
It’s a combination of three high-impact moves; negative gearing, debt recycling, and tax effective investing.
None of these tactics are secrets, and they’re all fully in line with the ATO’s rules.
But what’s less commonly understood is how they can work together to completely reshape your financial future.
Negative gearing
Negative gearing has copped its fair share of political heat. But when done right, it’s a smart tool - not a get-rich-quick scheme.
Negative gearing works when you borrow money to acquire an investment (like property or even shares) and the expenses of your investment (like interest on a loan) are more than the income your investment generates.
When this happens, you create a tax deductible loss that reduces your taxable income earned today, and your tax bill today.
Over time, the value of your asset or investment grows, and this growth can be used to build your wealth over time.
If you’re thinking about negative gearing, it’s important you choose quality investments that actually grow over time.
And importantly, you need to be smart with your cashflow planning and make sure you don’t overextend. The goal isn’t to lose money, it’s to bring forward tax savings while growing serious wealth over the years ahead.
Many Aussies could avoid handing over tens of thousands of dollars to the tax office if they know the right legal strategies. (Source: Getty)
Debt recycling
If you own a home and you’re paying down your mortgage in the standard way outlined by the banks, you’re sitting on a huge financial opportunity.
Debt recycling is a strategy that gradually converts your non-deductible home loan into tax deductible investment debt.
Through this strategy, you’re using the equity in your home to invest, generally into income producing assets like shares. When you do this, this portion of your mortgage becomes tax deductible.
With this strategy, you’re paying down and reducing your non tax deductible mortgage debt, and ‘replacing’ it with tax deductible debt.
And the opportunity here is huge. Based on Australia’s average mortgage size of $660,000 and an interest rate of 6 per cent, this has the ability to generate $39,600 in tax deductions.
Over time, you’re shrinking the bad debt on your mortgage while growing an investment portfolio that cuts your tax bill and builds passive income at the same time. This strategy is one of my favourites.
Tax effective investing
Most people that invest do it all by owning their investments in their own name - but that’s not always the smartest move, particularly if your income is in the higher tax brackets.
Investing through tax structures like family trusts, investment bonds, companies, and even superannuation can all allow you to cut the tax on your investment income while maintaining full control over your investments.
Depending on your situation, these structures can also allow you to spread income across multiple people, cap tax on investment returns, or defer tax entirely.
For example, investing through an investment bond will cap the total tax paid at 30 per cent, and eliminate tax on capital gains when you hold your investments for ten years or more.
That alone can make a huge difference to your investing bottom line over time.
Worth calling out that tax structures are complex, and probably not the sort of thing you want to DIY.
If you’re thinking about going down this path, you should talk to an expert to get your structure right and make sure it fits with your lifestyle and goals. This isn’t a one-size-fits-all approach.
The wrap
Individually, these three tax-saving strategies can save you money. But when used together, they can easily cut your tax bill by $20,000 or more each year - which is money you can then reinvest to grow your money faster.
Over a decade, that’s a solid six figure difference in your position, not to mention the extra growth you get on the money. And the kicker here is that you don’t need to earn an extra dollar more to get there. This is simply about using what you already have more effectively.
Tax is high in Australia, but if you aren’t using the tools you have available to you, you’re playing the game with one hand tied behind your back. The people cutting their tax bills and using the money to get ahead faster aren’t lucky - they’re better informed, and have decided to play smarter.
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 on Amazon | Audiobook.
If you want some help with your money and investing, you can book a call with Pivot Wealth 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.
