Every 7 out of 10 clients we have are concerned that they are overpaying in taxes. Of course, when we talk taxes optimization, there are many wise ways and numerous dangerous paths. Which ones should you choose to reduce your tax burden? The main thing is that you just need to know the rules by which IRS and big money businesses play in that respect.

When viewed globally Australia is one of the heaviest taxing countries. Acknowledging that, we can all breath a collective sigh of relief. All because Australia is not on the podium for high tax rates. These awards tend to go to EU states, which have more left-leaning, social democratic economic policies.

Still it’s always useful to remember that taxes build our roads, pay for our infrastructure and keep our hospitals going. You only have to travel a short trip north to the ever popular tourist destination of Bali to see how lucky we have it in this country. Of course, the big   dispute is that the Australian officials are not spending the tax dollars wisely. That reminds me of the famous quote from the late Kerry Packer, at the time the richest man in Australia:

I pay the tax I am required to pay, not a penny more, not a penny less. If anybody in this country doesn’t minimize their tax, they want their heads read. That’s because, as a Government, I can tell you they’re not spending it that well that we should be donating extra.

No doubt that such a doubtful approach has been lingering on well since the taxes were first invented in an ancient Egypt…

Here’s an ultimate list of top 5 tips to maximize your tax returns & pay taxes efficiently:

1. Use superannuation

Superannuation is the most efficient tax structure available in Australia, with a maximum tax rate of 15%. According to this, you should take advantage of the superannuation to build long-term capital. This comes with a footnote that if you are 30 years or older, you will have to wait 30 years until you can access the funds in this structure. Contrarily, if you are 50 or 55 years of age, you should be very excited to take full advantage of the superannuation relatively soon. Consider to explore the retirement strategy of that kind, if applicable. Also you can take full advantage of superannuation with few ifs involved here. Salary sacking in order to maximize the top allowable concessional contribution through your employer is such an option. Ask your company’s recruiter or your accountant about how to do this. After maxing out the above options, make extra contributions to superannuation from your personal cash savings. The key is that superannuation is by far the most tax effective structure for accumulating the wealth. So start doing everything in your power to max out the amount of capital you have built up in this structure.

2. Limit your investments in personal name

Oftentimes you can see people making large investments in their personal names. Most of the times it’s not a sensible strategy.  Especially if you are already generating income, such as a salary, from another source. Australia uses a marginal tax rate system.  This means the more your income is, the more tax you pay. Of the available ways that can be used for investment, companies will only ever pay a maximum of 30% in tax. If you are a high-income earner it will usually be far more tax effective to employ a trust structure.  That one will let you take advantage of lower corporate tax rate. Of course, the simplest solution is to invest in your partner’s name if they have a better tax rate.

3. Invest tax returns efficiently

It’s a common knowledge that the easiest way to reduce tax payments is to invest tax returns more efficiently. But ask yourself, what exactly is a tax effective investment? Company shares are preferred by investors because they generate what is arguably, the most tax effective income source. Also, that’s due to it being fully franked dividends. A truly franked dividend is a dispersion from a company that has already paid 30% tax. Therefore, it provides you with a tax credit. If your marginal tax rate stays at a level above 30%, you will pay higher taxes for the difference. However if your tax rate is 30% or less, you will either pay no extra tax or you will receive a tax refund. Self-funded retirees are well aware of the tax benefits of fully franked dividends. The other big tip is to not do investments that will reveal significant capital growth. If you are trading and earn money on investment assets that have been held for less than 12 months, you will be taxed at the maxed out, marginal tax rate. Still, if you are a long-term investor and hold your investments for 1 year or more, you will receive a 50% capital gains tax discount.  This can save you a notable percentage of taxing in the longer run. Warren Buffett became rich by strategizing long-term and seeing the big picture. We would suggest you take a page from his playbook to achieve same impressive results. Keep in mind, though, that there are very few investment options in Australia that we would consider tax effective by large.

4. Keep good debt, not bad debt

The Australian tax system is modeled towards using debt to generate assessable income. What does it mean? Explained shortly, you will get a tax reduction for any expenses that are involved in order to generate an income. The simplest example of this is that the interest rates will eventually sum up to a mortgage over an investment property that is tax reducible. While at the same time the interest rates on your home mortgage will not. Investment credits (loans used to buy investment assets or property) are classified as good debt. That is because they are tax deductible. While on the other hand loans for personal assets such as homes, cars and personal expenses (credit cards) can be not.

5. Fund a business

We just have to analyze annual BRW top lists of rich people to see that  top earners will never be featured among the wealthiest members of our society. Why is that so? If we’re talking about pros and cons for business owners and employees on a paycheck, it’s that the salary earners take the security of a regular paycheck over the cash flow. Highs and lows that are involved in owning and operating your own business are what makes it a bit harder

So basically the difference is that though it’s easier to earn and expand a principal capital while having your own business, salary provides for more security in the short-term. And of course, it initially takes, at least, some capital at your disposal to start a business in the first place. We highly recommend you to get in touch with us so we can advise you on taxing, investing and business capital management in regard to any specific jurisdiction and business industry.