How can I minimise my tax?

Kavaguru on 08/08/2018 - 10:07

Hi fellow ozbees,

I've recently had a pay rise which has taken me just over the 90k mark, for the first time in my life!

I've had a look at the tax brackets and wonder if I can reduce my pay to 90k through salary sacrificing, would I be paying less tax and taking home more pay?

It seems like a huge difference in tax when earning $37,001 – $90,000 you pay only $3,572 tax plus 32.5c for each $1 over $37,000.

But if you earn between $90,001 – $180,000 you pay $20,797 tax plus 37c for each $1 over $90,000.

A huge difference in the tax base rate from $3,572 to $20,797 don't you think?

Or am I reading this wrong?

Any advice would be much appreciated.

Will have some kava while I wait to hear from ya.

Financial Tax

Comments

  • Nugs on 08/08/2018 - 10:10
    +13

    if earn $89k; 3572 + 0.325x(89000-37000) = 20472 tax
    if earn $91k; 20797 + 0.37x(91000-90000) = 21167 tax

    so earning an extra $2k in that scenario means paying 695 tax (roughly a third).

    .

    • CyberMurning on 08/08/2018 - 10:12
      +6

      means not much different. i wish i have 90$ salary, if i get that i promise will donate $10 to ATO every year and not complaining about my tax at some random forum.

      my principle in life: never afraid to pay more tax because it means i earn more.

      -peace-

      • spiff on 08/08/2018 - 11:39
        +3

        So you want to perpetuate ignorance on tax rules just because you earn a higher salary? The more I earn the more I want to minimise my tax so at least OP has the right idea, albeit completely wrong understanding of the PAYG system and salary sacrificing.

        Tax rules are straightforward once you bother to read them and others have already outlined what the OP should be looking into. But you shouldn't pay any more or any less than you're required to within these rules.

      • HighAndDry on 08/08/2018 - 11:56
        +1

        That's rather a pointless hypothetical if you don't command that kind of salary in the jobs market. For people whose skills, abilities and experience are worth that much, they should certainly try to keep as much of it as possible.

        I mean - does anyone think the government uses money more effectively or efficiently than they could themselves, even just donating to a charity?

        • dp1 on 09/08/2018 - 15:53

          Yes I'm sure we would be better off using the money ourselves. Remind me, how are you going setting up your personal private police force, fire service, school, ambulance, hospital, freeway etc for $20,472 a year?

        • HighAndDry on 09/08/2018 - 15:58
          +1

          @dp1: Wait, you think our current taxes are somehow struggling to pay for those basic services? I'm not saying to pay ZERO taxes, I'm saying to pay the minimum required by the law.

        • philart on 10/08/2018 - 08:41

          @ HighAndDry

          I've not seen or heard of an individual directly sponsor the building of a section of road or any other service which is funded via taxation. I do however see massive screen TV's and $1000 iphones for kids walking out the door at our local HN store. Taxation is necessary in a developed society to pay for the stuff Individuals would neglect. So yes I do believe that government's/councils can better spend money on infrastructure and services than the Individual. It's also reasonable to expect those best financially fixed to chip in more than those just getting by.

          But as a taxpayer I do ensure that I claim back what I'm entitled to in order to lower personal tax.

        • HighAndDry on 10/08/2018 - 09:42

          @philart:

          But as a taxpayer I do ensure that I claim back what I'm entitled to in order to lower personal tax.

          Good, now work on reading comprehension because THIS PART HERE was all I was saying, because I was replying to this comment:

          my principle in life: never afraid to pay more tax because it means i earn more.

      • SlickMick on 09/08/2018 - 11:09
        +1

        You're all right.

        Going into a higher tax bracket is in no way a bad thing. You still pay the same tax on the first portion of your income, even if ato wants a bigger slice of the extra.

        And obviously everybody wants to do what they can to minimise the tax they have to pay.

      • [Deactivated] on 10/08/2018 - 08:59

        You can never earn enough. Just ask bill gates.

    • FirstWizard on 10/08/2018 - 10:27

      Exactly, the hight rate only applies to the margin, not the whole lot.
      Where you would get stung is the Medicare levy surcharge, if you don't have private health insurance. Because it applies to the whole lot, not just the margin.

      if earn $89k; 3572 + 0.325x(89000-37000) = 20472 tax

      take home = $68,528

      if earn $91k; 20797 + 0.37x(91000-90000) = 21167 tax

      take home with PHI = $69833
      take home without PHI = 69,833 - 910 = $68,923

      so earning extra $2k would only give you $400 take home.

  • CyberMurning on 08/08/2018 - 10:15
    +1

    that tax calc, all from taxable income, right? so just increase your deduction to bring taxable income lower than $90k.

    by investment property negative gearing, or margin lending to invest in long term stocks.
    this is how richs become richer (because they can leveraging) and poors are still poor (because they got trapped with cc debt for life)

  • iforgotmysocks on 08/08/2018 - 10:15
    +14

    You don't pay 37% tax on your entire income the moment you earn over 90k, it's every additional dollar you earn over 90k gets tax. E.g. if you earned $90,100, you'd have to pay $20,797 + $37.

    If you earn exactly 90,000 you pay $20,797 in tax.

    This is calculated by $3,572 + 53,000*32.5% (I.e. every additional dollar over 37,000 taxed at 32.5%)

  • boostpak on 08/08/2018 - 10:15
    +10

    how old are you mate

  • redpump on 08/08/2018 - 10:15
    +3

    the jump from 3k to 20k is because the 3k tax you would of paid on the first 37k, whereas the $17,225 covers the 37k - 90k gap. Not sure if that is the question you are asking or not.

    90,000-37,001 = 52,999 x 32.5c = $17,225

    • Kavaguru on 08/08/2018 - 14:39
      +1

      Thanks for saving me doing the numbers which I am not good with.

  • pantsparty on 08/08/2018 - 10:16
    +10

    You are paying the same amount of tax on the first $90k regardless of whether you make over $90k or not. You just pay a little more on amounts in excess of $90k

  • CyberMurning on 08/08/2018 - 10:17
    +1

    Will have some kava while I wait to hear from ya.

    i heard too much kava isnt good….

    • Kavaguru on 08/08/2018 - 14:40

      nah it's good mate, good medicine

      • anonymous01 on 10/08/2018 - 10:22

        I had Kava once, got my face red and swollen. Thought it was the prawns I had earlier. Tried it again and same thing happened again. I like Kava, too bad it doesn't like me.

  • bobbified on 08/08/2018 - 10:34
    +8

    Or am I reading this wrong?

    Yes, this!

    I think it'll be helpful to first sit down with someone that can explain to you how the basic tax brackets works here. It'll be much easier to understand with examples that simply trying to read. The basics is definitely something that is worth learning about.

    I have to be honest and admit that I'm still very surprised at the number of people who don't understand how the basic tax principles work here. I think it's this lack of understanding that contributes to the outcry every time the media reports a "tax cut" and outlining how much benefit a higher earner gets vs a lower earner.

    • Kavaguru on 08/08/2018 - 14:40

      Yes that's a great idea. I thought I did understand it like the millions of other Australians, but obviously I don't.

  • schede on 08/08/2018 - 10:41
    +3

    Most of these comments spot on.

    But if you do still want to reduce your taxable income, one of the easiest and best ways is to salary sacrifice into superannuation. Taxed at 15% instead of 32.5% or 37%, up to $25k pa. If you are young, I understand this option will be super boring.

    • [Deactivated] on 08/08/2018 - 10:54
      -2

      Putting more money than I need to into a scheme that the government can do anything with for the next half a century?

      Yeah… nah.

      • schede on 08/08/2018 - 11:21

        Don't know how old this person is, but assume they're not 20. Question was how can they minimise tax. If you have another idea, feel free to add.

        • CheapskateQueen on 08/08/2018 - 12:10
          +1

          super contributions are also now tax deductible up to the concessional limits so you don't even need to salary sacrifice so long as do the process right

        • Zachary on 09/08/2018 - 08:36

          he said he was 39…

      • Zachary on 09/08/2018 - 08:37

        i thought superannuation was like a side bank of money that you can't touch until you're old enough?

        • [Deactivated] on 09/08/2018 - 09:31
          +2

          old enough

          That's the problem. Define "old enough"?

          Yesterday it was 55, today it's 65, tomorrow it might be 90?

          What happens if I go from paycheck to paycheck while I'm around and bite the dust at 70?

          That cash doesn't do anything for me.

        • Zachary on 09/08/2018 - 18:32
          +1

          @KaptnKaos: Well your savings won't do you anything either if you bite the dust at 70 and still have lots in it….hoping to spend it on a holiday when you're 71 or something….

        • miwahni on 09/08/2018 - 22:07
          +1

          @KaptnKaos: are you confusing the pension age with the superannuation release age? Because you can start withdrawing super from 55yo at present via partial pension, and can take the lot tax free at 60 provided you meet conditions of release (eg retired from work).

        • Ace26 on 10/08/2018 - 08:25

          @KaptnKaos:
          https://www.ato.gov.au/individuals/super/accessing-your-supe…

          As far as I know preservation age has not changed in the recent past. You get to access your super when you reach preservation age and retire. Or at age 65 regardless whether you retire or not. Retirement in this conext is based on a work test over a 30 day period.

          Earning within super are taxed at 15% where earnings within an allocated pension account are not taxed.

          Most people get their wires crossed with age pension eligibility and retirement and accessing their own super money.

          Hypothetically speaking when government says no age pension until age X, what they mean is have enough money in super account to pay for your own retirement to at least that age X.

      • SlickMick on 09/08/2018 - 11:13

        More than you need? Can I assume you have >$1M in super then??

        The government can't touch my super any more than they can my personal bank account.

        lol they implement a scheme to help us save and we assume it must be a conspiracy

        • [Deactivated] on 09/08/2018 - 11:15

          The gov't of the day might not be able to access your super, but they sure can dictate the terms of accessing that money.

          I'll access my money on my terms, thanks. Just like I do with my bank account.

          Plus, when I said "more money than I need to" I meant in the context of superannuation contributions.
          In fact, all employees are obliged to contribute a minimum of $0 into their super. Employers credit your super based on your salary.
          Of course this is assuming you are an employee of a business, as opposed to being self-employed. That's another story.

          So, by making any voluntary contributions, it is exactly putting "more money than I need to" into my super.

        • SlickMick on 09/08/2018 - 11:25

          @KaptnKaos:

          I contribute to super for the portion of my life I am eligible to use it. If I die earlier, my daughter will be thankful.

          Since it looks like I'm chronically unemployed, I will definitely need a source of income before super. But I wouldn't have contributed less even if I could change things now.
          Super allows be to accumulate twice what I could without it.

          If you can afford additional savings (albeit not as tax efficient) that would be great too.

  • [Deactivated] on 08/08/2018 - 10:46
    +17

    How is anyone who doesn't know how the incredibly simple Australian income tax system works, earn anywhere near $90k a year?

    This should be a job interview question, and if you can't get it right then you don't get the job. Also, have a law enforcing this requirement with capital punishment behind it.

    • CyberMurning on 08/08/2018 - 11:10

      agree. like got threw rocks on the street.

  • [Deactivated] on 08/08/2018 - 11:04
    +7

    stop working, then you won't have to pay any tax

    • Zachary on 09/08/2018 - 08:38
      +1

      …well technically speaking, you would still need to pay tax for things you buy…..

      • orangetrain on 10/08/2018 - 09:08
        +1

        Don't buy anything then. No more tax paid.

  • Godric on 08/08/2018 - 11:06

    earn less

  • DarkOz on 08/08/2018 - 11:32
    +3

    Get on the unemployment benefit and tax the government back.

    • SlickMick on 09/08/2018 - 11:15

      Caution: the government has loopholes. You may need your spouse to do likewise.

      Source: 2 years unemployed and not a cent from gov.

    • spiff on 08/08/2018 - 11:48

      You're right. OP if you don't have hospital cover in your PHI then make sure you incur some deductions that will bring your taxable income under 90k.

      • SlickMick on 09/08/2018 - 11:17

        Note that ato looks at most deductions (eg. super, property investment) when determining your income for medicare levy purposes.

  • CheapskateQueen on 08/08/2018 - 12:15
    +8

    yeh im baffled at this one.

    tax really needs to be taught in high school as part of the curriculum. we need enforced "life financial skills" lessons, just like P.E. is compulsory, teaching how to save, how credit cards work (and what interest free period means/closing balance/interest risks etc), what a mortgage is/different types, basic tax concepts, just some basic financial skills.

    1 hour a week forced lessons in yr 10 or yr 11.

    for me, this stuff is like breathing, i just got it. it just seems like so many people have no sense of it though. like me trying to understand chemistry. i guess we're all wired differently.

    • Solarlux on 09/08/2018 - 09:14
      +2

      Yeah I understand this and chemistry and physics and grammar and spelling and shed loads of other things yet I never got near 90k a year. I guess what I didn't know was the right people.

      • SlickMick on 09/08/2018 - 11:19

        You got in the wrong game.

        Hairdressing is the way to go: I just spent $32 on a haircut. how long does it take - 5 minutes? That must be close to what CEOs earn!!??

        • Micko179 on 09/08/2018 - 11:41

          You go to the wrong 'Hairdresser' mate, $11 at the local shops, or if I want to go upmarket, I splash out & go the $15 shop!

        • SlickMick on 09/08/2018 - 12:27

          @Micko179:

          Yeah, I paid $10 in Brisbane, but can't find an affordable haircut in Gladstone.

          Once had a $5 haircut, but my wife wouldn't let me go back to that place.

          Still, it's pretty lucrative, for minimal outlay.

        • Ace26 on 10/08/2018 - 08:33

          @Micko179:
          Still $10 for hair cut near Sydney Central.

        • Ace26 on 10/08/2018 - 08:34

          @Micko179:
          Still $10 for hair cut near Sydney Central.

    • orangetrain on 10/08/2018 - 09:11
      +1

      I did maff and they do teach tax brackets etc. I'm thinking its probably hysteria from culture or media.

  • catichau on 09/08/2018 - 07:22
    +1

    Someone said to me once their goal was to pay$1,000,000 in tax each year. That statement changed my views!

    • Zachary on 09/08/2018 - 18:38

      Did that guy ever reach to paying 1 million dollars in tax each year…?

    • orangetrain on 10/08/2018 - 09:12

      What would their income be? I'd love to pay the same.

      • DesiredUsername on 10/08/2018 - 09:43
        +1

        Assuming no deductions around $2.3 million. So CEO of a big company levels of money

  • HeWhoKnows on 09/08/2018 - 14:49

    You are reading it all WRONG.
    Just focus on 2 things.
    For $$ earnt under $90K you are paying 32.5c tax (but not on the whole lot)
    For every $$ over $90K you are paying 37c tax - only that amount over $90K , not the whole lot!

    ie Focus on the marginal tax RATE. Not the amount of tax.

    Now having said that SUPERANNUATION is still your best salary sacrifice option but be aware that you pay 15% contribution tax on any salary sacrifice superannuation. So if you choose to salary sacrifice every dollar over $90K the nett tax saved is 37-15=22. So stil very worthwile!

    Also remember that you wont be able to access your superannuation until age 65.

  • idonotknowwhy on 10/08/2018 - 08:16

    Congratulations on your payrise.
    As others have said, you don't really need to drop to a lower tax rate. Just do the standard things to minimize tax legally (see an accountant).

    Unfortunately from this point, pay rises make less of a difference (90k to 110k is less significant than 60k to 80k) due to both the higher tax rate and the fact that your baseline needs are already met.

    But don't fall into the trap of spending on tax deductible items that you don't really want/need just to reduce tax.

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