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High-Income Earner? Learn How You Can Reduce Your Taxable Income

Published 19/11/2024 | Last Updated 27/11/2024

Written by:
Joel Simmonds
Head of Advice  

For high-income earners in Australia, managing taxes can feel like an uphill battle. You’ve worked hard to reach your level of success, but the reality of Australia’s progressive tax system means a significant chunk of your income goes straight to the government. The higher your income, the higher the tax burden, leaving many high earners wondering, “Is there any way to keep more of what I earn?”

The good news is, there are legal and effective strategies to reduce taxable income that offer other advantages. From salary sacrificing to debt recycling, this guide explores proven methods that can help you minimise taxes and build lasting wealth.

Table of Contents

Why Tax Planning Matters for High-Income Earners

High-income earners face unique challenges when it comes to managing their finances. While your income may place you in the top tax brackets, lifestyle pressures and poor tax planning can erode the benefits of earning well.

Without a proactive strategy, many high earners miss opportunities to legally reduce their taxable income and grow their wealth.

James’ Tax Dilemma: A Common High-Income Struggle

Take James, for example. James earns $220,000 a year as a senior project manager. On the surface, he’s doing incredibly well — living in a great home, taking family holidays, and driving the car he always dreamed of. But at tax time, James finds himself frustrated. His taxable income places him in one of the highest brackets, and he feels like half of his hard work disappears before it even hits his bank account.

James isn’t alone. Many high-income earners find themselves in a similar position, unaware of the strategies available to them. With a little knowledge and planning, James could reduce his taxable income, save thousands of dollars, and redirect those savings into building long-term financial security.

Why You Shouldn’t Wait Until Tax Time

For many high-income earners, tax planning only becomes a priority as the end of the financial year (EOFY) approaches. It’s easy to put off thinking about tax strategies until deadlines are looming, but by then, you’ve missed months of opportunities to save.

The truth is, effective tax-saving requires a proactive, year-round approach. By integrating strategies like salary sacrificing, super contributions, and investment planning into your financial routine early, you can spread the benefits throughout the year — and avoid the stress of scrambling at the last minute.

What Happens When You Wait Until EOFY?

  • Missed Opportunities: You may lose the chance to make the most of annual caps, like concessional super contributions.
  • Limited Cash Flow: Large last-minute contributions or investments can strain your finances unnecessarily.
  • Rushed Decisions: Hastily implemented strategies are more likely to result in mistakes or missed benefits.

Building Your Year-round Tax Strategy

Think of tax planning as a marathon, not a sprint. By reviewing your finances regularly and working with a financial adviser, you can:

  • Identify areas for improvement early.
  • Spread out contributions and investments to reduce financial pressure.
  • Stay ahead of changes in tax laws that might impact your plans.

Why Taxes Hit High-Income Earners So Hard

Australia’s progressive tax system means the more you earn, the higher your tax rate. For individuals like James, earning over $180,000 annually puts him in the 45% marginal tax bracket, not including the Medicare Levy or additional surcharges. That’s nearly half of every dollar above that threshold going to taxes.

For many high-income earners, this often leads to a sense of financial frustration: “Why bother earning more if so much goes to tax?” But the truth is, with the right strategies, there are ways to legally reduce your taxable income and keep more of your money working for you.

9 Proven Strategies to Reduce Taxable Income

Reducing your taxable income doesn’t have to feel like an impossible task. With the right strategies, you can minimise your tax burden while setting yourself up for financial success. These nine proven methods are tailored to help high-income earners like you take control of your finances, reduce tax liabilities, and make the most of every dollar you earn. 

1. Salary Sacrificing

Salary sacrificing into superannuation is one of the most effective ways to reduce taxable income. By contributing a portion of your pre-tax salary into your super fund, you lower your assessable income and benefit from the concessional tax rate of 15% applied within the fund.

How It Works:

  • If you earn $200,000 annually and salary sacrifice $20,000 into super, only $180,000 is taxed at your marginal rate.
  • The $20,000 is taxed at just 15% within your super fund, potentially saving you thousands compared to the top marginal rate of 45%.

Additional Benefits:

  • Your retirement savings grow faster thanks to compounding over time.
  • Employers may allow you to salary sacrifice other expenses, such as a car under a novated lease, which can provide further tax savings.

Tip: Always check your total concessional contributions (employer + salary sacrifice) to ensure you don’t exceed the $27,500 cap.

2. Claim Work-Related Deductions

Work-related deductions can significantly lower taxable income, yet many high-income earners overlook these opportunities. Eligible expenses must directly relate to earning your income and can include:

What Can Be Claimed:

  • Professional Memberships and Subscriptions: Fees for industry organisations or unions.
  • Work-Related Travel: Flights, accommodation, meals, and transportation for business purposes.
  • Home Office Expenses: Internet, electricity, and depreciation of office equipment if you work remotely.
  • Self-Education Expenses: Courses or certifications that directly relate to your current job, such as a project management course for a manager.

How to Maximise This Strategy:

Keep detailed records and receipts for all eligible expenses. Using apps or software to track your spending makes it easier to claim deductions and ensures compliance with ATO requirements.

3. Investment Property Deductions

Owning an investment property opens up several tax-saving opportunities, particularly for high-income earners.

Depreciation:

  • Claim depreciation for the decline in value of fixtures and fittings, such as appliances, carpets, or air conditioners.
  • You can also claim depreciation for the building itself if it was constructed after July 1985.

Negative Gearing:

If the costs of owning the property (loan interest, maintenance, depreciation) exceed the rental income, the resulting loss can be deducted from your taxable income.

Example:

If your rental property incurs $25,000 in expenses but generates $15,000 in income, the $10,000 loss can be deducted from your taxable income, reducing your overall tax liability.

Tip: Engage a qualified quantity surveyor to prepare a depreciation schedule, ensuring you make the most of your claims.

4. Make Additional Super Contributions

Beyond salary sacrificing, personal concessional contributions are another tax-effective way to reduce taxable income. These contributions are also taxed at just 15%, providing significant savings compared to your marginal tax rate.

Carry-Forward Rule:

If your super balance is under $500,000, you can carry forward unused concessional caps from the past five years. For example, if you contributed $20,000 last year (leaving $7,500 unused), you can make up the difference this year, allowing you to contribute $35,000 and claim the entire amount as a deduction.

Tip: Regularly review your super balance and contribution caps to maximise this opportunity.

5. Charitable Donations

Donating to charity not only supports meaningful causes but also helps reduce your taxable income. Any donations of $2 or more to registered charities in Australia are tax-deductible.

What to Keep in Mind:

  • The charity must be a Deductible Gift Recipient (DGR). Check their DGR status before donating.
  • Only monetary donations or eligible gifts (e.g., certain shares) qualify for deductions.

What to Keep in Mind:

If you earn $200,000 and donate $5,000 to a DGR-registered charity, your taxable income decreases to $195,000. At a marginal tax rate of 45%, this equates to a tax saving of $2,250.

Tip: Keep receipts for all donations and consider regular giving to spread the tax benefit throughout the year.

6. Use Tax-Efficient Investment Strategies

Investing wisely can help you reduce taxable income while building wealth. High-income earners often benefit from strategies that minimise tax on investment income and capital gains.

Examples of Tax-Efficient Investments:

  1. Franking Credits: Dividends from Australian companies come with franking credits, which offset the corporate tax already paid. For high-income earners, this reduces your overall tax liability.
  2. Exchange-Traded Funds (ETFs): ETFs provide diversified exposure to shares and often have lower taxable capital gains than actively managed funds.
  3. Dividend Reinvestment Plans (DRPs): By reinvesting dividends instead of taking them as cash, you can defer tax on income and compound your investment growth.

Tip: Work with a financial adviser to align your investment strategy with your tax goals and risk tolerance.

7. Family Tax Planning

For high-income earners with families, strategies like income splitting and family trusts can significantly reduce the household’s overall tax burden.

Income Splitting:

This strategy involves allocating income-producing assets (e.g., rental properties or shares) to a lower-income spouse or family member. Income generated from these assets is taxed at the recipient’s lower marginal rate.

Family Trusts:

A family trust allows you to distribute income or investment returns to beneficiaries in lower tax brackets, reducing the overall household tax liability.

Example:

If a family trust generates $50,000 in income, you could allocate $20,000 to a non-working spouse and $15,000 each to two children (who are taxed at lower rates). This avoids a significant portion of tax that would otherwise be incurred if all income was attributed to the high-income earner.

Caution: Trusts must be set up and managed carefully to comply with ATO regulations. Seek professional advice before implementing this strategy.

8. Avoid the Medicare Levy Surcharge

The Medicare Levy Surcharge (MLS) applies to individuals earning over $90,000 (or $180,000 for families) who don’t have private health insurance. While taking out private health insurance avoids this surcharge, it’s important to choose the right level of cover.

Why Basic “Junk” Cover Isn’t Enough:

Some policies meet the technical requirements to avoid the MLS but offer little actual coverage. These so-called “junk policies” leave you exposed to high out-of-pocket expenses for medical care.

How to Choose the Right Cover:

  • Young Professionals: Focus on policies that cover hospital stays and common procedures but exclude extras like pregnancy care.
  • Families: Ensure your plan includes maternity services, paediatric care, and emergency cover for the whole family.
  • Midlife or Older Individuals: Look for coverage for age-related procedures like joint replacements, heart surgeries, or cancer treatments.

By selecting a plan tailored to your health needs, you avoid the MLS and gain valuable protection against unexpected medical expenses.

9. Avoid the Medicare Levy Surcharge

Debt recycling is a powerful strategy for high-income earners to reduce taxable income while building long-term wealth. It involves converting non-deductible home loan debt into tax-deductible investment debt.

How It Works:

  1. Use surplus income to pay down your mortgage (non-deductible debt).
  2. Re-borrow the repaid amount to invest in income-generating assets like shares or property.
  3. The interest on the new loan is now tax-deductible because it’s used for investments.

Example:

If you pay off $50,000 of your home loan and re-borrow that amount to invest in shares, the interest on the $50,000 becomes tax-deductible. At the same time, the dividends or rental income from the investment further offset your tax liability.

Tip: Debt recycling involves market risks, so ensure your investments align with your risk tolerance. Learn more about this strategy in our comprehensive debt recycling guide.

The Takeaway

Paying less tax as a high-income earner in Australia requires a proactive, strategic approach. By leveraging strategies like salary sacrificing, super contributions, and debt recycling, you can reduce taxable income while building wealth and securing your financial future.

If you’re ready to optimise your tax position, book a no-cost consultation today. Let’s craft a tailored plan that works for your unique financial goals.

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FAQs for High-Income Earners

If you’re a high-income earner in Australia, navigating the world of taxes can feel overwhelming. You might have questions about which strategies are right for you, how to avoid common pitfalls, or whether certain approaches apply to your situation. To help, we’ve compiled answers to some of the most commonly asked questions we get from clients looking to reduce their taxable income while building wealth.

1. When is the best time to start implementing tax-saving strategies?

The earlier, the better. Tax-saving strategies work best when they’re implemented as part of your year-round financial planning, rather than waiting until the end of the financial year. For example, spreading out concessional super contributions throughout the year reduces cash flow pressure and ensures you don’t miss key deadlines.

2. How can I figure out which tax-saving strategies are right for me?

The best strategies depend on your personal financial situation, goals, and risk tolerance. For instance:

  • If retirement savings are a priority, salary sacrificing into super may be ideal.
  • If building wealth is your focus, debt recycling or investment property deductions could be better suited.
    Consulting a financial adviser can help tailor a strategy to your specific needs.

3. Are there any risks associated with debt recycling?

Yes, debt recycling involves borrowing money to invest, which comes with risks such as market fluctuations, potential investment losses, and higher interest payments. If your investments don’t perform well, you could end up losing money while still servicing the loan. It’s essential to ensure your risk tolerance and financial stability align with this strategy.

4. Can I still reduce my taxable income if I’ve already made large purchases this year?

Yes, even if you’ve spent a lot this year, there are still ways to save on tax. For example:

  • Make a personal concessional contribution to super before the EOFY.
  • Bring forward planned charitable donations or prepay expenses like insurance premiums.
  • Claim work-related costs, including depreciation on any assets you’ve purchased for your job.

5. Should I prioritise paying off my mortgage or investing to reduce taxable income?

This depends on your financial goals. Paying off your mortgage improves financial security but doesn’t reduce taxable income. Investing, particularly through strategies like debt recycling or negatively geared property, provides tax benefits and wealth-building potential. A balanced approach is often best.

6. What happens if I exceed the concessional super contribution cap?

If you exceed the $27,500 concessional cap, the excess amount will be taxed at your marginal tax rate, minus a 15% offset for the contributions already taxed in your super fund. You also have the option to withdraw the excess amount, which avoids additional penalties. It’s important to monitor contributions carefully to avoid these issues.

7. How do I know if a family trust is the right tax strategy for me?

A family trust is ideal for individuals or families with multiple income-earning members in lower tax brackets. It’s also suitable for managing income from investments or businesses. However, trusts come with setup costs, ongoing administration, and legal responsibilities. A professional assessment can determine if the benefits outweigh the complexities.

8. Are there tax-efficient ways to handle bonuses or large one-off payments?

Yes, you can reduce the tax impact of bonuses by:

  • Salary sacrificing a portion into super.
  • Using the funds for negatively geared investments.
  • Prepaying interest on investment loans, which brings forward tax deductions.


Tip: Consider spreading large payments across financial years where possible to minimise the immediate tax hit.

9. What’s the risk of using “junk” health insurance to avoid the Medicare Levy Surcharge?

While junk health insurance avoids the MLS, it offers little to no real coverage for medical expenses. This could lead to significant out-of-pocket costs if you need treatment. Instead, look for a policy that balances affordability with genuine benefits tailored to your health needs.

10. Can I benefit from tax-efficient investing even if I’m already in a high tax bracket?

Yes! Tax-efficient investments like Australian shares with franking credits, dividend reinvestment plans (DRPs), and ETFs help offset your tax liability while allowing your wealth to grow. Holding investments long-term also reduces capital gains tax, providing additional tax efficiency.

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This is a publication of Direct Wealth Pty Ltd, a wholly owned subsidiary of Direct Wealth Group Pty Ltd.

General Advice Warning – The information contained in this article is of a general nature and does not take into account your particular objectives, financial situation or needs. You should therefore consider the appropriateness of the advice for your situation before acting on it. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decisions regarding any products or strategies mentioned in this publication.

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