If you’re a high-income earner, you’ve felt the sting of the Australian tax system’s progressive nature. With income brackets that push those earning over $190,000 per year into the highest threshold, it can often seem like a significant portion of your wages disappears into a black hole.
While business owners and investors enjoy more tax flexibility, employees have fewer options.
At First Financial, we specialise in financial and retirement planning as well as tax-effective strategies. If you’re a high-income earner, whether you make $300,000 a year or $800,000, there’s no magical solution for drastically reducing your tax burden.
However, you can take small steps to mitigate it and remain mindful of not worsening your situation. Here’s what you need to know.
The reality of the Australian tax system
Our tax system operates on a progressive income structure, where higher earners face steeper rates. For those in the highest bracket (over $190,000), this means paying up to 45% in tax (plus 2% medicare).
The system ensures that higher earners contribute more, funding essential services like healthcare, education and infrastructure.
However, this often results in hefty amounts for those earners. As an employee, you lack the options that business owners have, such as redirecting income or leveraging trusts and companies to distribute it.
Instead, you are subject to pay-as-you-go (PAYG) taxes, with income flowing directly onto your individual tax return.
While the system may appear rigid, understanding it is the first step in effectively navigating your circumstances. High-income earners should familiarise themselves with the rules and leverage available strategies where possible. However, it is essential to recognise that options for substantial relief are limited.
Strategies for marginal tax minimisation
Though there may be no magic bullet for dramatically reducing your tax responsibility, a few strategies can help at the margins. For instance, consider maximising your superannuation by topping it up with concessional contributions. Additionally, if you have unused caps from previous years, you may be able to carry them forward.
Another common strategy is purchasing an investment property and utilising negative gearing, allowing you to offset related costs against your taxable income. This is particularly beneficial if the property generates less income than the expenses of ownership and management. While these strategies won’t drastically lower your tax bill, they can provide some relief.
Additionally, leasing a car can provide minor tax benefits. While these methods won’t fully resolve the issue, they can help reduce your taxable income in certain ways.
Avoiding common tax mistakes
While significantly lowering your taxable income may not be possible, you can take steps to avoid worsening the situation.
One effective strategy is ensuring that additional income-generating assets are not held in your personal name.
Instead, consider placing these assets in a family trust or self-managed superannuation fund. You can also hold assets in your spouse’s name if their income is lower or explore investment bonds that can cap that tax on your investment earnings at 30%.
By making informed decisions about asset ownership, you can better manage your tax responsibilities.
This is where professional financial advice becomes critical, as you don’t want to unintentionally hinder your wealth-building efforts through poor asset structuring. Always seek expert planning and guidance.
Thinking long-term and planning for the future
While tax minimisation strategies may help in the short term, long-term financial planning is crucial for high-income earners. Building wealth requires a careful approach that considers not only your current tax situation but also your future goals and plans. Achieving financial freedom requires accumulating enough assets to support your lifestyle today and in the future.
With a systematic approach, anyone can build wealth by starting early. Our investment philosophy emphasises proper asset allocation. We analyse your current circumstances to establish an appropriate allocation, then discuss your risk tolerance to ensure you feel secure in your investment choices.
Talk to the experts in tax-effective strategies
Nobody enjoys paying taxes, and for high-income earners, the realisation of how much they’ve paid can feel like a raw deal.
It’s no surprise that “How can I pay less tax?” is one of our most frequently asked questions.
At First Financial, we specialise in tax-effective strategies that help you keep more of your hard-earned money.
As a high-income employee, while you can’t drastically reduce your tax liability, small adjustments can make a difference. We’ll ensure your asset structure is optimised to prevent unnecessary tax burdens.
If you want to learn more about high-income taxation, asset structuring or starting your wealth-building journey, contact a friendly member of our team today.
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