How to Legally Reduce Your Tax in Australia

Tax Minimization vs. Tax Avoidance

Before diving into strategies, it's important to understand the difference between legitimate tax minimization and illegal tax avoidance or evasion:

Tax Minimization (Legal)

Tax minimization involves using legal methods within the tax system to reduce your tax liability. This includes:

• Claiming all eligible deductions and offsets
• Structuring your affairs in a tax-effective manner
• Timing income and expenses strategically
• Taking advantage of government-incentivized tax breaks

Tax Avoidance & Evasion (Illegal)

Tax avoidance involves schemes that technically comply with the letter of the law but violate its spirit, while tax evasion is the illegal non-payment of tax. Both can result in severe penalties. Examples include:

• Deliberately hiding income
• Claiming deductions for expenses that weren't incurred
• Using artificial arrangements with the dominant purpose of avoiding tax
• Participating in tax schemes that have no commercial substance

All strategies in this guide fall under legitimate tax minimization. When in doubt, consult a qualified tax professional and remember the ATO's warning signs of tax schemes.

Superannuation Strategies

One of the most effective tax minimization strategies in Australia is making smart use of the superannuation system.

Concessional (Pre-tax) Contributions

Contributing to super from your pre-tax income can significantly reduce your tax bill:

• Salary sacrifice: Arrange with your employer to contribute part of your pre-tax salary directly to your super fund. These contributions are taxed at 15% rather than your marginal tax rate (which could be up to 45%).
• Personal deductible contributions: Self-employed individuals or those with minimal employer support can make personal contributions and claim a tax deduction.
• Contribution limits: The concessional contributions cap is $27,500 per year (2025-2026). Exceeding this cap can result in additional tax.

Catch-up Concessional Contributions

If you haven't used your full concessional contributions cap in previous years (starting from 2018-19), you may be able to "catch up" by using the unused amounts in later years, provided your super balance is less than $500,000 at the start of the financial year.

Spouse Contributions

Contributing to your spouse's super can provide tax benefits if they earn less than $40,000:

• You may be eligible for a tax offset of up to $540 when you contribute to your spouse's super
• This can be particularly effective for equalizing super balances between spouses

Government Co-contribution

Low to middle-income earners making non-concessional (after-tax) super contributions may be eligible for government co-contributions of up to $500 per year, effectively giving you a 50% return on your contribution.

Maximizing Tax Deductions

Claiming all eligible tax deductions is one of the simplest ways to reduce your taxable income.

Work-Related Expenses

Ensure you claim all legitimate work-related expenses, including:

• Home office expenses (utilities, internet, phone, equipment)
• Vehicle and travel expenses for work purposes (not commuting)
• Tools, equipment, and professional supplies
• Uniforms and protective clothing
• Self-education expenses related to your current job
• Professional subscriptions and union fees

For detailed information on eligible deductions, see our Tax Deductions Guide.

Investment-Related Expenses

If you have investments, you can claim expenses related to generating that investment income:

• Interest on investment loans
• Property management and maintenance costs
• Depreciation on investment properties
• Investment advice fees
• Investment-related subscriptions and software

Prepaying Expenses

Consider prepaying certain expenses to bring forward deductions:

• Professional subscriptions
• Income protection insurance premiums
• Interest on investment loans

This strategy works best when used near the end of the financial year if you expect to be in a lower tax bracket in the following year.

Charitable Donations

Donations of $2 or more to registered Deductible Gift Recipients (DGRs) are tax-deductible. Consider bundling multiple years of donations into a single financial year if you expect to have higher income that year.

Tax-Effective Investments

Some investments offer better tax treatment than others. Here are some tax-effective investment options:

Negative Gearing

Negative gearing occurs when the expenses from an investment (including interest on loans) exceed the income it generates. The resulting loss can be offset against other income, reducing your overall tax liability.

• Commonly used with property investments
• Can also apply to share portfolios purchased with borrowed funds
• Most beneficial for high-income earners in top tax brackets

Remember that negative gearing should never be the sole reason for an investment decision—the investment should be fundamentally sound with good long-term growth prospects.

Investment Bonds

Investment bonds (also known as insurance bonds) are tax-paid investments where earnings are taxed within the bond at the company tax rate of 30%:

• No need to declare investment earnings in your tax return
• After 10 years, withdrawals are completely tax-free
• Can be an effective alternative to super for those who have reached their contribution caps
• Particularly beneficial for investors in higher tax brackets

Franked Dividends

Australian shares that pay fully franked dividends come with tax credits (franking credits) for the company tax already paid:

• If your tax rate is less than 30%, you may receive a tax refund for the difference
• If your tax rate is more than 30%, you'll only pay the difference
• Particularly beneficial for retirees and low-income earners

Capital Growth vs. Income

Investments that focus on capital growth rather than income can be more tax-effective:

• Income is taxed annually at your marginal tax rate
• Capital gains are only taxed when realized (when you sell)
• Assets held for more than 12 months receive a 50% CGT discount

Income Splitting Strategies

Income splitting involves diverting income to family members in lower tax brackets, reducing the family's overall tax burden. These strategies must be implemented carefully to avoid anti-avoidance provisions.

Family Trusts

Family discretionary trusts can be used to distribute income to family members in the most tax-effective manner:

• Income can be distributed to family members with lower marginal tax rates
• Capital gains can be directed to beneficiaries with capital losses
• Franked dividends can be allocated to those who can best use the franking credits

Note that distributions to children under 18 for unearned income are taxed at penalty rates, and the trust must have genuine commercial purpose beyond tax minimization.

Spouse Arrangements

Couples can employ various strategies to balance income:

• Holding investments jointly or in the name of the lower-income spouse
• Employing a spouse in a family business (must be genuine employment)
• Making spouse super contributions

Company Structures

Companies pay a flat tax rate (25% for small businesses), which can be beneficial if most family members have marginal tax rates above this level:

• Income retained in the company is taxed at the company rate
• Dividends can be distributed to shareholders when they're in lower tax brackets
• Franking credits ensure no double taxation

Strategic Timing of Income & Expenses

The timing of when you receive income or incur expenses can significantly impact your tax liability.

Deferring Income

If possible, consider deferring income to the next financial year if you expect to:

• Be in a lower tax bracket next year
• Have significant deductions next year
• Be able to offset the income against expected losses

This could include deferring bonuses, delaying the sale of investments, or postponing billing for services (for businesses or self-employed individuals).

Bringing Forward Expenses

Conversely, bringing forward expenses into the current financial year can be beneficial if:

• You're in a higher tax bracket this year
• You expect lower income this year
• You want to offset unusually high income (like a capital gain)

This might include prepaying expenses, purchasing work-related items, or making charitable donations before June 30.

Capital Gains Timing

The timing of capital gains can significantly impact your tax bill:

• Holding assets for more than 12 months to qualify for the 50% CGT discount
• Realizing capital losses to offset capital gains
• Spreading large capital gains across tax years if possible
• Timing the sale of assets for years when you have a lower income

Salary Packaging Benefits

Salary packaging (or salary sacrificing) allows you to pay for certain expenses with pre-tax income, effectively reducing your taxable income.

Common Salary Packaging Options

• Superannuation: As discussed earlier, this is usually the most tax-effective option.
• Novated leases: A three-way arrangement between you, your employer, and a finance company to lease a vehicle using pre-tax income.
• Electronic devices: Laptops, phones, and tablets used primarily for work purposes.
• Work-related expenses: Professional memberships, education, and certain other work costs.

Fringe Benefits Tax Considerations

Fringe Benefits Tax (FBT) may apply to certain benefits, potentially reducing or eliminating the tax advantage. However, some organizations (particularly not-for-profits) have FBT exemptions or concessions that make salary packaging particularly attractive.

Industry-Specific Benefits

Some industries have specific salary packaging arrangements:

• Healthcare workers: Often have access to additional FBT-exempt benefits
• Not-for-profit employees: May have access to FBT-exempt meal entertainment and accommodation benefits
• Remote area employees: Can access special housing and travel concessions

Tax Strategies for Business Owners

Business owners have additional tax minimization opportunities not available to employees.

Business Structure Selection

The choice of business structure significantly impacts your tax position:

• Sole trader: Simple but all profits taxed at your personal rate
• Partnership: Allows sharing income but partners jointly liable
• Company: Flat tax rate (25% for small businesses) but double taxation issues without proper planning
• Trust: Flexible income distribution but complex and higher setup costs

Small Business Concessions

Small businesses (generally those with an aggregated turnover of less than $10 million) can access various tax concessions:

• Instant asset write-off for eligible business assets
• Simplified depreciation rules
• Small business income tax offset (for unincorporated businesses)
• CGT concessions when selling business assets
• Immediate deduction for certain startup expenses

Superannuation Strategies for Business Owners

Business owners can use additional super strategies:

• Making personal super contributions and claiming a tax deduction
• Contributing business real property to a self-managed super fund (SMSF)
• Implementing a transition to retirement strategy while continuing to work

Effective Tax Planning Tips

To maximize your tax minimization efforts, follow these key principles:

Plan Early and Regularly

Effective tax planning happens throughout the year, not just at tax time:

• Review your tax situation quarterly
• Maintain good record-keeping systems year-round
• Plan major financial decisions with tax implications in mind
• Consider both short-term and long-term tax consequences

Seek Professional Advice

Tax law is complex and constantly changing. A qualified tax professional can:

• Identify strategies suitable for your specific situation
• Help you avoid costly mistakes or ATO scrutiny
• Ensure you're aware of all available deductions and concessions
• Provide advice on the structure of investments and businesses

The cost of good tax advice typically pays for itself many times over in tax savings.

Keep Substantiation and Documentation

Always maintain thorough records to support your tax positions:

• Keep receipts and invoices for all claimed expenses
• Document the business purpose of expenses when relevant
• Maintain logbooks, diaries, and other required records
• Keep records for at least five years (longer for some assets)

Stay Informed About Tax Changes

Tax laws and thresholds change regularly. Stay informed through:

• ATO updates and publications
• Tax professional newsletters
• Industry association resources
• Our Tax News section