By Harrison Dell, Director.
Understanding Australia’s tax system can be tough, especially for people who earn a lot of money. However, there are different legal ways to lower the amount of taxes they need to pay. Some of these methods are popular, while others are not often talked about. This article explains six of these strategies for people who want to make the most of their tax situation in Australia.
1. Structuring Businesses Efficiently
For people who start businesses, invest, or own businesses, setting up their business in a smart way, like using companies or trusts, can lead to big tax savings. This method lets them divide income and profits from selling assets among different parts of their business, benefit from lower corporate tax rates, and take advantage of special tax breaks like the Small Business Capital Gains Tax Concessions.
2. Investment in Negative Gearing
Negative gearing, particularly in real estate, allows taxpayers to deduct the costs of owning an income-generating property from their overall income, potentially reducing their taxable income. Negative gearing can apply to any debt to acquire income generating assets, such as shares or crypto.
3. Income Splitting with Family Members
Distributing income among family members in lower tax brackets, through mechanisms like family trusts, can effectively decrease the total tax burden for the family unit.
4. Capital Gains Tax (CGT) Strategies
Smart management of capital gains, such as timing the sale of assets to qualify for CGT discounts, can significantly reduce tax obligations. Using discounts effectively is a key tax strategy for any investment.
5. Investing in Tax-Effective Vehicles
Engaging in investments that offer tax incentives, such as certain managed funds, Early Stage Innovation Companies (ESIC’s), can reduce overall taxable income – even generating a significant tax credit of up to 20% of the amount invested.
What are Early Stage Innovation Companies?
Early Stage Innovation Companies (ESIC) are a specific type of company in Australia designed to encourage investment in innovative startups. These companies are relatively new and focus on developing or commercialising a product, process, or service that is innovative and has the potential for high growth. The Australian government has set specific criteria for a company to be recognised as an ESIC, which includes factors like the age of the company, its income, and expenses.
Investors in ESICs are offered attractive tax incentives
6. Smart Realisation of Capital Losses
Using losses from one investment to offset gains in another can effectively minimise taxable income, particularly useful in portfolio management. Capital losses from most assets can be used against any other asset, the main exemption to this rule is collectibles.
Employing these strategies can lead to significant tax savings for high-income earners in Australia. However, it is important to ensure that these strategies are in line with current tax laws and tailored to individual circumstances.
Disclaimer: This material is produced by Cadena Legal, a NSW-registered legal practice. It is intended to provide general information and opinions on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Contact us here for advice.