Australia is one of the highest taxing countries in the world – so many individuals and businesses in Australia tax plan in order to keep their tax to a minimum. However, taxpayers must be mindful when tax planning to ensure that their means are legitimate and do not risk their original investment.
In simple terms, tax planning when taxpayers structure their affairs to reduce their tax liability to make savings legally. According to the Australian Taxation Office (ATO) “You have the right to arrange your financial affairs to keep your tax to a minimum – this is often referred to as tax planning, or tax-effective investing. Tax planning is legitimate when you do it within the letter and the spirit of the law.” Most commonly, taxpayers utilize deductions, exemptions, and structures in order to save money.
The major difference between tax planning and tax avoidance is its intent. Tax planning is organizing finances most effectively and effectively to save money, rather than avoiding taxes altogether. It is crucial to stay away from tax avoidance schemes that exploit the tax system.
Tax Planning Tips
Almost all taxpayers can benefit from tax planning – if completed correctly. According to Tax Fitness, 95 percent of taxpayers can legally reduce the amount of tax they pay yet only 50 percent of taxpayers use legal tax planning strategies. You may find yourself asking what the easiest ways to pay less tax while not falling into tax avoidance and here are a few simple ways to save you money:
- Keep Records: Many taxpayers miss deductions they could have claimed, every year. That’s thousands of dollars that the ATO keeps, instead of putting in tax returns. All tax deductions claims need receipts in case the ATO asks for more information.
- Claim Everything: In general, if you have to spend money on anything that relates to “earning income,” make sure you claim it. Be sure to claim everything you are allowed to claim to increase your tax refund and pay less. If you are unsure on whether you can claim a particular item, be sure to save the receipt and ask a tax advisor.
- Manage Deductible Expenses: If you know in advance that you will have to purchase a major tax-deductible item, consider what financial year to purchase in. If you need to buy an expensive tax deductible item and it’s late in the financial year, then buy that item in the financial year when your income will be higher. That helps to maximize the value of your tax deduction.
Australian taxpayers can and should take advantage of tax planning efforts in order to minimize their taxes and maximize their return. However, taxpayers need to ensure that their efforts are in good intent rather than avoiding paying taxes.