The amount of tax you pay is calculated as a percentage of what the government calls your 'taxable income'. In addition to your salary, this income may include money you receive from investments or other sources such as government payments.
When it comes time to submit your tax return, you may be able to claim deductions for some items that you essentially had to spend money on in order to earn your income.
It is not that the Australian Taxation Office (ATO) refunds you this money, but rather that your taxable income—i.e. the proportion of your income that you are required to pay tax on—is reduced by the amount of your deductions.
On top of your deductions, you may also be entitled to further reduce your tax payable by claiming tax offsets.
Here's five ways you may be able to reduce your tax bill.
1. Claim up to $300 with no receipts
As a general rule, the ATO allows you to claim up to $300 worth of work-related deductions without showing receipts.
Keep in mind, though, if you are claiming for more than this amount, you must have written evidence for your total expenses, not just the amount over $300.
There are a few types of expenses that have different requirements and the ATO website has more information about what 'written evidence' you may need to show for what types of claims.
2. Take advantage of all deductions available
Deductions are typically interest on investment loans, income protection premiums and work-related expenses. However, the latter of these three, work-related expenses, may include items you have not necessarily thought about claiming.
If, for example, you've worked from home at some point during the year you may be able to claim some of your internet and phone costs.
You may even claim for washing powder to wash eligible work clothes.
Again, the ATO website is the place to go for a complete list of allowable deductions.
3. Claim any gifts or donations to charity
You can claim any donations above $2 made to registered charities—charities with 'deductible gift recipient' status—as tax deductions. The donation may be either cash or property transferred. Your gift is reduced from your taxable income, meaning you can save on the amount of tax you pay while also having a positive impact in the lives of others.
Items such as event tickets or auctions, where you get something in return for your money, are not able to be claimed.
Check the ATO website for up-to-date lists of what types of charitable gifts you can and cannot claim.
4. Take out private health insurance
Depending on your salary and other circumstances, there may be some tax advantages to taking out private health insurance, such as eligibility for a rebate or tax offset.
If your income is above a certain threshold and you don’t have what the ATO deems as the ‘appropriate’ level of private hospital cover for the full year, you may have to pay a Medicare levy surcharge (this is in addition to the Medicare Levy).
Keep in mind that any health insurance rebates or offsets in your Medicare Levy are calculated based on the number of days within a financial year you held the relevant insurance.
So, while taking out private cover towards the end of a financial year will not bring you much advantage for the period that has passed, you may receive a tax benefit from that point forward.
If you’re under the age of 31, taking out private health insurance may also be a cost effective move for your future, as it can mean you won't later have to pay an additional lifetime health cover loading.
5. Top up your super
Though neither a deduction nor an offset, salary sacrificing into your super may nevertheless be an effective way to potentially reduce the amount of tax you pay as well as build up your retirement nest egg, depending on your personal circumstances.
Should you choose to swap some of your salary for increased employer super contributions, instead of being charged at your marginal tax rate (which varies depending on your level of income), salary sacrifice for most people is taxed at 15% when it’s received by your fund.
The ATO website explains the rules around salary sacrificing into your super in detail, including the limits for how much you can put in within a single year.