Discover proven tax planning strategies that can save high-income earners thousands of dollars annually while remaining compliant with ATO regulations. Our expert tax accountants share essential tips to optimise your situation and direct your money towards what matters most to you.
What is Tax Planning?
According to the ATO, tax planning is an Australian taxpayer’s right to arrange their financial affairs to keep their tax to a minimum. While this sounds straightforward, implementation requires careful consideration.
When organising your financial affairs, doing so legitimately and within legal grounds is essential. Unlawful methods such as tax avoidance and tax evasion carry heavy penalties and could even result in imprisonment!
What Makes a High-Income Earner in Australia?
Definitions vary depending on context, but generally, someone earning above $190,000 per year is considered a high-income earner. Australia’s highest income tax bracket starts at $190,001, where you’ll pay $51,638 in tax, plus 45 cents for each $1 over $190,000.
However, tax planning benefits aren’t limited to those in the highest bracket. Even if your taxable income is half that amount, you can still benefit from the strategies in this guide. For instance, reducing your taxable income to $97,000 for individuals or $194,000 for families can help you avoid the Medicare Levy Surcharge.
Effective Tax Planning Strategies for High-Income Earners
Our tax experts have compiled these tips as general advice only. If you have specific circumstances, we recommend seeking personalised tax advice for your situation. Remember, this guide is not a substitute for professional guidance.
1. Get Expert Accounting and Tax Advice
Seeking professional tax advice is crucial to ensure you’re implementing strategies that will benefit you long-term. A qualified tax accountant can present all available tax offsets & deductions while highlighting which options you can claim based on your individual, family, and business circumstances.
We find that when helping high-income earners with tax planning, fees charged can be recouped generally through a more tax effective position. Remember, the cost of managing your tax affairs is also tax deductible.
2. Early Stage Innovation Company (ESIC) Tax Incentives
Investing in Early Stage Innovation Companies (ESICs) offers significant tax incentives for high-income earners. The ATO’s ESIC scheme rewards investors who support eligible Australian innovation with two key tax benefits:
- Immediate Tax Offset: A 20% non-refundable tax offset on investments, capped at $200,000 per investor per year (including affiliates). This can reduce your tax liability by up to $40,000 annually.
- Capital Gains Tax Exemption: If you hold ESIC shares for at least 12 months but less than 10 years, any capital gain on these shares is tax-free. This provides substantial upside potential with reduced risk.
For high-income earners in the top tax bracket, these benefits can significantly reduce your annual tax bill while supporting Australia’s innovation ecosystem. However, proper due diligence is essential as not all startups qualify under the ESIC criteria, and investments must be in newly issued shares.
3. Utilise Family Trusts for Tax Planning
Family trusts (discretionary trusts) can be highly effective tax planning structures for high-income earners, offering flexibility in income distribution and potential tax savings.
Key advantages include:
- Income streaming: Trustees can distribute income to beneficiaries in lower tax brackets, potentially reducing the overall family tax burden
- Asset protection: Trust structures can help protect assets from business or professional risks
- Flexibility: Distributions can be adjusted annually to respond to changing circumstances or tax rates
- Tax-effective investment: Capital gains may be streamed to beneficiaries with capital losses or lower tax rates
While family trusts involve setup costs and annual compliance requirements, they can deliver substantial tax benefits over time. The ability to distribute income to adult children, retired parents, or spouses with lower incomes can lead to legitimate tax savings while building intergenerational wealth.
4. Make Additional Superannuation Contributions
Contributing to your super fund not only grows your retirement nest egg but can also reduce your tax bill.
Each year, individuals can contribute up to $30,000 in ‘concessional contributions’ to their super fund, including the 11.5% super guarantee payments made by employers. These contributions are taxed at 15%, significantly less than the 37-45% tax rates of the top two tax brackets.
Note: If your income and concessional super contributions total more than $250,000, check if you must pay Division 293 tax.
5. Avoid the Medicare Levy Surcharge with Private Health Insurance
The Medicare Levy is 2% of an individual’s taxable income and is paid by most Australian taxpayers to fund our public health system.
The Medicare Levy Surcharge (MLS) is an additional tax of up to 1.5% of taxable income, payable by singles earning over $97,000 without appropriate private health insurance. For families, the threshold to avoid MLS is $194,000.
Having private health insurance or reducing your taxable income are the only ways to avoid the MLS.
Note: Income for MLS purposes includes your total reportable fringe benefits.
6. Negative Gearing Investments such as Property
Negative gearing can apply to any investment but is commonly associated with property. It occurs when expenses associated with an asset (such as interest, maintenance, and management costs) exceed the income earned.
Those who are negatively geared may deduct losses against salary and other taxable income. While the property might create a short-term loss, the long-term capital gain can result in significant wealth accumulation.
Negative gearing can be a powerful tax minimisation strategy for high-income earners, but we recommend seeking expert tax advice before proceeding. Detailed calculations on deductions, rental return, and capital growth need consideration to ensure you’re making tax-effective property investment decisions.
7. Make Regular Donations to Charity
From pandemics to natural disasters and geopolitical upheaval, the world can feel overwhelming. Action is the antidote to despair, and taking small steps towards a better future can make a significant impact—and provide a tax deduction!
Individuals passionate about giving back to their community or particular causes can make tax-deductible donations to registered Australian Deductible Gift Recipients (DGRs).
8. Invest in Income Protection Insurance
Income protection insurance safeguards you, your family, and your finances during uncertainty. It protects your current income if you’re unable to work due to illness or injury. The premiums you pay to protect your income (salary and wages) are tax deductible.
Income protection insurance pays up to 75% of an individual’s gross annual income (including superannuation repayments) in monthly instalments to cover day-to-day expenses until you’re ready to return to work.
Consult with your tax accountant about the tax implications of income protection insurance for your specific situation.
9. Get Reimbursed for Continuing Your Educational Journey
Education that enhances a taxpayer’s skills in their current employment role is eligible for tax deductions. The following educational expenses can be claimed:
- Further study
- Professional development
- Training
- Self-education
- Executive coaching services
10. Make the Most of Your Home Office
Since the pandemic, working from home (WFH) and hybrid work have become commonplace. The ATO now sets the home office deduction at 67c per hour, with a new calculation method.
If you WFH, keep records of hours spent and costs incurred to maximise your deductions. Find out more about WFH tax deductions and ask your accountant which method works best for you.
A Snapshot of the Revised Fixed Rate Method:
The increased revised fixed-rate method includes internet, mobile, home phone, stationery, computer consumables, and energy expenses related to WFH.
You can’t claim additional separate deductions for anything covered under the fixed-rate method.
You can still calculate separate deductions for depreciation of assets used when WFH, like computers, stand-up desks, or ergonomic chairs.
11. Stay On Top of Your Records and Documents
In the event of an ATO review or audit, taxpayers must provide relevant documentation to substantiate claims made throughout the financial year. It’s crucial to maintain access to:
- Credit card statements
- Bank statements
- Sales receipts
- Expense invoices
- Tax invoices
- Employee records (only applicable for employers/business owners)
12. Get Ready to Lodge Your Tax Return Early
Keeping updated records means you can lodge your tax return as soon as possible after the end of the financial year (30 June). Lodging early helps avoid late penalties and fees and potentially returns money to your pocket sooner.
That money could reduce debts, be placed in an offset account to reduce home loan interest, or be invested in the stock market earning immediate returns. Whatever you choose, it’s better in your hands than with the ATO!
Ready to Take Your Tax Planning to a New Level?
Our accountants work with high-net-worth individuals, families, and small business owners to optimise tax outcomes and ensure compliance. If you’re looking for expert tax advice to manage your tax professionally while remaining ATO-compliant, contact our team at Fullstack Advisory for a no-obligation discussion.
Disclaimer: This article is intended as general information only and should not be considered advice on any matter and should not be relied upon as such. The information has been prepared without taking into account any individual objectives, financial situation, or needs. You should therefore consider the appropriateness of the information regarding these factors before acting, or seek advice before making any financial decisions.
