Tax Tip 391: Reducing Tax

Many are pre-occupied with reducing the amount of tax they pay. If that is all you want to do the easiest way to achieve it is to reduce your income. But they often want the income together with the tax being reduced.



The amount of tax payable is worked out by the working out the taxable income and multiplying this by the tax rate and then deducting any available tax offsets


From this we can see that reducing tax needs a reduced assessable income (or the tax rate, which we can’t do anything about).


Assessable income includes ordinary income and statutory income

Ordinary income includes wages, interest, rent, dividends etc

Statutory income is income which was not usually classed as income but for being legislated as income. And this includes capital gains. Believe it or not capital gains were not taxed in Australia before 1985 as it is not normally considered as income


Taxable income = assessable income – deductions

So taxable income can be reduced by reducing the assessable income or increasing the deductions.


Let’s deal with increasing deductions first.

You must first make sure that you are claiming all possible deductions available to you. When investing in property there are many potential deductions, and many people miss some.

But claiming everything possible is just one side of the story as you should also be structuring things so that deductions are increased. The main one here is the deductibility of interest. An example might be using $100,000 cash deposit on your investment property while you have $100,000 in non-deductible debt. If the interest rate was 3% that would be $3,000 in lost deductions which would increase your income by $3,000 resulting higher taxable income and higher tax payable.


Decreasing income is next. There is not much you can do about decreasing income that you earn on wages. But there is a lot that you can do on the income from investments – if you plan ahead about. The simplest way to reduce your income is to make sure that you don’t own the asset that generates the income. If spouses are on different incomes having the spouse with the lowest income own the asset will mean they are the ones that are assessed on the income generated by that asset – which will save tax if the income is positive. But tax is only one aspect to consider here as by not owning an asset you are losing some degree of contract and there are many legal aspects to consider.