Did you know the type of income you have could affect how much tax you pay?
How do I pay less in tax? How do I get a bigger tax refund? Spiffy questions that always get tossed around during the tax season. But they’re not quite the same thing, right?
Simply put, you get more of a refund if you owe less tax than was taken from your pay. Which does not, by itself, say much about the tax amount you actually owed.
After all, you could be paying the same overall amount in tax every year and yet get a larger refund at tax time than previously because, well, more tax was withheld from your weekly earnings that year.
How do I pay less tax?
So, of these two related but unequal questions the one to focus on is the first: how do you get to owe, and therefore, pay less tax as a share of your income for this and in future years?
Now, don’t get me wrong! Taxes have obvious benefits, and if you’re fine with more of your money landing in the government’s capable hands, you need read no further.
But if you’re concerned that taxes are making too much of a dent in your pocketbook, you will want to pay attention, for starters, to the difference between your assessable and your taxable income.
What is assessable income?
Your assessable income is all the income you’ve earned during the financial year, whether from wages you’ve collected or allowances you earned, from rental property you own or assets you sold. This amount, in all likelihood, got reported in full to the ATO.
What is taxable income?
Your taxable income, on the other hand, is your assessable income minus any deductions you choose to claim and, of course, qualify for. Tellingly, if you take zero deductions, your assessable and taxable income are one and the same.
Your taxable income is also, as its name indicates, the income which determines your actual tax liability and the tax bracket you fall into. Simply put, more income equals more tax owed, less income equals less tax. That’s the basic rule of progressive taxation: the greater your income, the higher your effective tax rate, the larger your tax burden.
Decrease assessable income or increase deductions
It follows that you basically have two avenues to reduce the tax you owe, outside of being eligible for a tax offset which directly reduces your tax.
- decrease the amount of your assessable income; or
- increase the number of deductions you claim so as to minimize your taxable income.
In the first case, assuming it’s unlikely you’d merely opt to bludgeon about and make less money, you can reduce your assessable income through such measures as deferring income to the next financial year, for instance by delaying collecting on some invoices, or through salary sacrifice arrangements.
The catch here is that any such strategies to reduce assessable income must be effective prior to the start of tax season. If you were thinking to defer income as you read this now think again to next year.
With the second case scenario, you can pay full attention to the wide array of deductions the tax office makes available at tax time, starting with the near automatic deduction for work related expenses adding up to less than $300 which requires no written evidence, only a fair estimate, to make the cut.
Once the decision is made, its time to lodge
And we can help! Regardless of whether your assessable income is high or low, you’ll need to lodge your tax return for the year. With E-Lodge, you’ll save yourself the cost of paying a private accountant while still achieving a quality experience.
Updated 27 July, 2016