Have you ever wanted to say that you found a loophole in something so you can feel like some sort of genius? Well, it’s not as hard as you think. And it isn’t illegal as long as you do it the right way!
When navigating the web of Australia tax laws, like with using a taxation loophole, you need to make sure you’re not actually doing anything illegal, so you don’t end up in trouble with the Australian Taxation Office.
In this article we will discuss one of the most common loopholes in the Australian tax system and how it can be implemented. So, sit back, get comfortable, and keep on reading below for how to save tax in Australia.
What is a Taxation Loophole?
Also referred to as ‘Tax Planning’, it’s not illegal, but it’s also not something the ATO wants you to do. The ATO has made tax deductions and tax offsets to help the taxpayer minimise tax in Australia, while loopholes are points in the law that the ATO have overseen.
If you want a hand with your deductions, come check out our Tax Return platform.
Loopholes are legal and allow income and assets to be moved around in different accounts, or be reported in different ways, lessening your tax burden. If you want to reduce taxable income in Australia, a loophole is a method you can use.
Ever heard of a company moving their headquarters or manufacturing overseas in order to maximise profits? Well a lot of the time the reason for this is because by moving some part of the business overseas, they are paying significantly less tax.
Why is this example important to you?
You might not be able to operate on a global level, but the logic is the same. By moving your income and assets around in certain accounts or trusts, you can legally reduce some of the tax you pay.
The family trust loophole
Wondering what is an example of a tax loophole, or are tax loopholes real? The family trust is one of the most common loopholes people in Australia use to legally reduce the amount of tax they pay.
What is a family trust?
In basic terms, a family trust is an agreement between two parties where one holds the assets for a time until they can pay another party. The family trust consists of four elements:
- The trust deed: The terms on which the family trust is made and maintained.
- The beneficiaries: The beneficiaries are the people entitled to the income of assets from the trust.
- The trustee: The trustee is the one that holds the assets and is responsible for the trust. The trustee has the power to conduct the trust and manage the assets.
- The settlor: The settlor gives the assets to the trustee. They are the third party, such as an accountant, lawyer or tax specialist that sets up the trust account.
The benefit of a family trust
The main reason a family trust is so successful for lowering the amount of tax you pay is because:
- You can split income with other beneficiaries of the trust.
- The tax is paid on the distributed income of the trust.
- The tax is calculated based on the recipient, not the trust.
Let’s say you have your own side business and the income goes directly to a family trust that you’ve set up. You earn $200k a year from your day job and your partner stays at home, and doesn’t earn any income. Your side business earnt $100k for the year.
If you paid that money directly to yourself, you’d be taxed $45k on your $100k payout.
However, if you paid that money directly to your partner, who has no income, you’d only get taxed approximately $22,967, reducing your tax payable by nearly 50% before deductions.
This is only a brief example of how you can move your income around using a family trust, and it doesn’t even cover tax deductions or donations. If you have kids, you can also distribute a small amount of income to them, tax free.
Who can get paid out from a family trust?
It is very important that only the people outlined in the family trust deed, the beneficiaries, get paid out from the family trust.
The ATO states:
“A consequence of making a family trust election is that any distributions (broadly defined) outside the family group of the family trust by the trust will be taxed at the top marginal rate applying to individuals plus the Medicare levy.”
What to do if you need help with your tax deductions
You might have an idea on the sorts of tax deductions you can claim, but you probably don’t know them all. Claiming every deduction you can will mean you pay less tax.
If you want a hand claiming tax deductions on your Tax Return, check out One Click Life’s online taxation platform. You won’t need an appointment or any annoying paperwork but you’ll still get help from a qualified accountant and be able to get your Tax Return done in minutes from anywhere.
You can also claim your tax agent/Tax Return fees back on tax (this includes One Click Life!), so why wouldn’t you let us help you minimise your tax and maximise your money?
Let One Click Life take care of your Tax Return and life’s essential tasks, so you can spend more time doing the things you love.
Our Numbers Geeks are available to help. Either book a meeting to discuss, message us when you’re completing your return, email us at [email protected], or if you prefer just to call, our number is 1300 707 117.
A disclaimer on loopholes from OCL* Although some loopholes may be legal, some can be very risky and can still attract unwanted attention from the ATO. As such, OCL does not condone the use of any loopholes, and you should always be very transparent and honest with your Tax Return (which we can help you with!).