It’s that time of the year again, when we send off our tax information and pray to the accounting gods that we end up with some sort of a refund. It can sometimes seem as though the ATO picks a number out of the air when determining what sort of refund/payment we are eligible for, however it’s really a fairly simple equation:
Gross Income – Allowable Deductions = Taxable Income.
Once we know what our taxable income is, it’s fairly easy to overlay this onto the tax rates to determine how much tax we should have paid, as well as what our marginal tax rate is.
Individual Income Tax Rates 2014-15
Taxable Income (per annum) Tax on this income*
0 – $18,200 Nil
$18,201 – $37,000 19c for each $1 over $18,200
$37,001 – $80,000 $3,572 plus 32.5c for each $1 over $37,000
$80,000 – $180,000 $17,547 plus 37c for each $1 over $80,000
$180,001 and over $54,547 plus 47c for each $1 over $180,000
*The Tax Rates above do not include Medicare Levy or the effect of any Low Income Tax Offset
Here’s a quick example, if you earn $50,000 per annum you would pay a total of $8,547 in tax. Your marginal tax rate would be 34.5%, which is the amount you pay on the top portion of your income (between $37,001 and $50,000). If you earn $100,000 per annum, you would pay a total of pay a total of $26,947 in tax. Your marginal tax rate would be 39%, which is the amount you pay on the top portion of your income (between $80,000 and $100,000). This means that in this case you would be paying 39c out of every dollar that you earn to the tax man.
Have a look at the table below, and see how much you would have paid in income tax for the year depending on your taxable income:
Taxable Income (per annum) Total Tax Payable (per annum)
$40,000 $4,947 ($4,547)
$60,000 $12,147 ($11,046)
$80,000 $19,147 ($17,547)
$100,000 $26,947 ($24,047)
How to reduce the amount of tax paid
Nobody really wants to hand over their hard earned cash to the tax man, so how do you reduce this? And more importantly, how do you reduce the tax you pay without spending money on things that aren’t going to make our future better? For example, you could spend money on a new work vehicle, however 10 years down the track all you will have to show for it is an old vehicle without much resale value.
A strategy that ticks both of these boxes? Salary sacrificing to superannuation. What this means is that a portion of your money is contributed from your pay directly to your super fund (before income tax is paid). This money then builds up in your super fund, and adds to your retirement savings. This can seem pretty boring, and it may not seem to make much of a difference, until you start to look at the effects of this over the long term.
For example, if you were earning $100,000, and gave up $200 per week from your net income, this would allow you to salary sacrifice $17,049 per annum. Where does this get you?
After 10 years, your super balance would have grown by an additional $281,648 compared to what you would have without the salary sacrifice.
Starts to look a bit more interesting now doesn’t it? Of course, if you’re going to be putting this money into super, you want to make sure it’s going to work hard for you as well. And $200 per week may not suit everyone. And there are a number of other things that will be different for each different situation.
That’s where we come into the picture. By booking your complimentary 1st appointment with Lighthouse Financial Advisers Townsville, we can help you work out a way to get ahead over the long term, while also minimising the tax you pay. Our team is just a phone call away.
Assumptions: Assumes income and salary sacrifice amount is indexed by 3% each year. Disregards any additional tax payable for breaching concessional contributions cap. Assumes 10% before tax return. Tax rates include medicare levy.
Written by Michael Hogue.
Dallas Davison, Michael Hogue and Ali Hogue.