Why Saving Tax is All about Marginal Tax Rates (Almost)

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Why Saving Tax is All about Marginal Tax Rates (Almost)

Saving tax is all about marginal tax rates – almost. When you split, defer, offset, offshore or hide income to save tax – whether this is actually worth the effort depends on marginal tax rates.

2024 Tax Brackets

If you are an Australian tax resident, your 2025 marginal tax rate comes from these five brackets, until there is another change:

  • 0% for your first AUD 18,200
  • 16% for AUD 18,201 to AUD 45,000
  • 30% for AUD 45,001 to AUD 135,000
  • 37% for AUD 135,001 to AUD 190,000
  • 45% from AUD 190,001

Marginal Tax Rate

Your marginal tax rate is the tax rate of the highest tax bracket you hit. Any additional income will be taxed at this marginal tax rate until you hit a new bracket.
You only ever have one marginal tax rate. ONE. Not more and not less. And it is always one of these five – 0%, 16%, 30%, 37% or 45%. Unless tax rates change, of course.
Everybody with an Australian tax file number has a marginal tax rate. Even if you have no income, you have a marginal tax rate. It just happens to be nil if your income is nil.

Income v Marginal Tax Rate

Reducing your income reduces your tax debt. But it doesn’t necessarily reduce your marginal tax rate. Why?
Because marginal tax rates move in jumps from bracket to bracket. So if your income changes within a tax bracket, there is no change to your marginal tax rate.
Let’s say your actual income is AUD 300,000 and now you move AUD 110,000 to your adult children via a discretionary trust. You save tax but your marginal tax rate doesn’t change.
But if your income drops further below AUD 190,000, then your marginal tax rate does change since you now hit a different tax bracket.

Tax Strategy

Why is saving tax all about marginal tax rates (almost)? The answer is about tax arbitrage. The gap between different marginal tax rates.
There are nine ways to save tax and all nine have something to do with marginal tax rates. Not always 100% exclusively, but marginal tax rates are there in all of them.

Summary

So this is why saving tax is all about marginal tax rates (almost). The higher your marginal tax rate, the more you benefit from moving income to lower marginal tax rates and expenses and losses to higher marginal tax rates.

Makes sense? Reach out when you are ready to pay less tax.

The 9 Ways to Pay Less Tax: There is Nothing Else But These 9

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The 9 Ways to Pay Less Tax: There is Nothing Else But These 9

There are a million tricks to pay less tax—we are just guessing; we didn’t count them—but all these just come down to nine things: the nine ways to pay less tax. There is nothing else but these nine.

To pay less tax you:

1 – Split

2 – Defer

3 – Offset

4 – Move

5 – Offshore

6 – Qualify

7 – Find

8 – Hide

9 – Downsize

That’s all. There is nothing else.

1 – Split

Splitting income is all about marginal tax rates. You move income away from a higher marginal tax rate to a lower marginal tax rate.

2 – Defer

Deferring income is also about marginal tax rates. You move income from a high-income tax period to a lower-income period to hit lower marginal tax rates.

3 – Offset

Offsetting income is about strategically claiming deductions, expenses or losses against your assessable income in the most tax-effective way, often using tax rate margins between entities.

4 – Move

You move your tax residency to a lower tax jurisdiction, for example, UAE, Singapore or Ireland.

5 – Offshore

You offshore operations, income or assets (for example Intellectual Property) to a lower tax jurisdiction.

6 – Qualify

You qualify for a tax incentive. Tax incentives are usually non-refundable, so you only benefit when you have a tax debt to start with.

7 – Find

You find a gap in the legislation or tax treaty – aka a loophole – that doesn’t cover a particular scenario, transaction or income. The problem with loopholes is that they don’t stay open for long.

8 – Hide

Hiding income is about receiving income in a way that makes it difficult to trace. That usually means cash. But it could also – for example – mean channelling income to entities with bearer shares and nominee directors layered across several tax havens.

9 – Downsize

When you downsize your income you pay less tax. This might be a conscious decision – you want to work less. Or it might be unintentional – you get so focused on saving tax that you neglect your business, miss profitable opportunities and waste money just to get a tax deduction.

So this is it.

These are the only 9 ways to pay less tax. There is nothing else. Everything we do as tax agents comes down to these nine things – actually, skip the last two, we as tax agents just work with the first seven.

Makes sense? Reach out when you are ready to pay less tax.

Should I Buy or Lease a Business Car in Australia?

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Should I Buy or Lease a Business Car in Australia?

There is no straightforward answer. No size fits all. It depends on your circumstances. Consider these 10 points in your decision to lease or buy your car.

1 – Car Limit

2 – Instant Asset Write Off

3 – Cash Flow

4 – Interest Rates

5 – Deposit

6 – Credit Rating

7 – Ownership

8 – Costs

9 – Cash Management

10 – Preference

There are different types of car leases, but we assume here that you are offered an operating lease since that is the most common type of lease for small to medium businesses in Australia.

1 – Car Limit

Is the purchase price for your new car above or below the car limit? In 2024 the car limit is AUD 68,108. This car limit applies to all, so it doesn’t matter whether you are a sole trader, partnership, company or trust or a combination of those. If you buy the car, you can only claim GST and depreciation up to the car limit. If you lease, you can tax-deduct all lease payments and claim all GST irrespective of the car limit (unless it is a hire purchase). So if the purchase price is above the car limit, that is a tick for leasing.

2 – Instant Asset Write Off

Is the purchase price above or below the threshold for the instant asset write-off? In 2024 the threshold is AUD 20,000 (Thank you, Albo.)
Below the threshold, you get to write off the car in one go. So that is a tick for buying. But anything more and you have to pool or depreciate the car over 8 years. So you pay the money now but only get a tax deduction slowly in little drapes and drops year by year. Not great.
But when you lease, you get a tax deduction for every cent you pay. So under AUD 20,000, give buying a tick. Over AUD 20,000, give leasing a tick.

3 – Cash Flow

Monthly lease payments are usually lower than monthly repayments. Yes, insurance premiums are higher for a leased car, but that difference is usually not as big. So if cash flow is an issue, give leasing a tick.

4 – Opportunity Costs

Even if you don’t need a loan, consider the opportunity costs of spending the money on a car. If you could make more money investing the money into something else than buying a car, then that is a tick for leasing.

5 – Deposit

To buy a car – even if you take out a car loan – you need a deposit. If that is an issue, give leasing a tick.

6 – Credit Rating

It is easier to qualify for a leasing contract than a car loan. So if your credit rating is not that flash right now, give leasing a tick.

7 – Ownership

If you buy the car, it is yours. If that is a problem – for example when facing insolvency, bankruptcy or divorce – then give leasing a tick.

8 – Costs

When you count every single cent you will spend on your car (less the money you get back when you sell), all up you will pay more for a lease than if you buy the car. And that is usually true even when you have to take out a loan to buy the car and hence add the total interest to the cost of the car. So if you want to pay the least amount possible all up, give buying a tick.

9 – Cash Management

Leasing requires self-discipline. It means you must be able to put money aside in a good month to cover the leasing rates in a bad month.
If that isn’t you, then that is a tick for buying.

10 – Personal Preference

Leasing is like renting. You pay for the right to use somebody else’s assets. If that isn’t you and you rather own than rent, that is a tick for buying.

Decision Time

Some of the above is about doing the maths – comparing the total cost of leasing to the total cost of buying. But a lot of it is about you. And that is why there is no clear-cut answer that will apply to everybody.

It all depends on where you and your business are at. And that is why you should speak with your accountant before you make the decision whether to buy or lease.

Makes sense? Reach out when you are ready to pay less tax.

PSI, PSE and PSB – Get This Right and Pay Less Tax

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PSI, PSE and PSB – Get This Right and Pay Less Tax

If your business provides a service, PSI, PSE and PSB are the three most important acronyms for you to pay less tax. In short: If you earn PSI through a PSE that qualifies as a PSB, you pay less tax.

PSI

If you mainly get paid for your efforts and skills, then you earn Personal Services Income aka PSI. Mainly means more than 50%.
But if 50% or more of your income is for other things, for example, the machines you use, then you don’t have PSI from that income source. It is an all-or-nothing approach.

PSE

If your PSI income is paid to another entity, for example, a company or trust, that entity is a PSE, a Personal Services Entity. Any entity that is not an individual and receives PSI is a PSE.

The question is whether this PSE qualifies as a Personal Services Business (PSB). If it does, you will pay less tax.

PSB

PSI is taxed like employment income (unless you qualify as a PSB).

You can’t do much with employment income. You can’t defer or split it. You can’t offset it against losses or claim all the deductions a real business could. 

But as a PSB you can do all that. You get treated like any other real business. So you want to be a PSB, because a PSB means less tax.

Makes sense? Reach out if you need help.

Why Do Child Support Assessments and Income Tax Go Hand-in-Hand?

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Why Do Child Support Assessments and Income Tax Go Hand-in-Hand?

Why do child support assessments and income tax go hand-in-hand? The answer is simple. Whatever reduces one usually also reduces the other.

If you pay child support and receive child support assessments, the higher your income the higher your child support.

Guess what. Your income tax is the same. The higher your income the higher your income tax. So whatever you do to reduce your tax, often also reduces your child support if you are the one paying child support.

The same applies to deferring part of your income. Whatever you do to defer income for tax usually also defers your income for child support.

However, some things work for tax but not for child support: 10 Ways NOT To Reduce Your Child Support

Makes sense? Reach out when you feel ready. It all depends on the details.

Who Does What Around Child Support?

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Who Does What Around Child Support?

There are family lawyers, child support lawyers, tax lawyers, and child support tax agents. Most couples never use any of them. But the higher the income and wealth at stake, the more help you need to manage child support – to pay less if you are the payer or receive more if you are the payee. So let’s look at who does what?

Family Lawyer

A family lawyer helps you with the legal side of a relationship breakdown, like property settlement and custody arrangements.
Less than 30% of separating couples get a family lawyer. 

Child Support Lawyer

A child support lawyer is a family lawyer who specialises in child support. They help you negotiate your child support arrangements and draft your agreement.

A child support lawyer doesn’t replace your family lawyer. They just come in as a specialist when you need an expert. 
Most couples don’t involve a child support lawyer. It all depends on how much income and wealth there is, and how much you want to lawyer up. 

Tax Lawyer

A tax lawyer often comes in when you either face significant capital gains tax issues or want to set up a child maintenance trust. 

Accountant

Your accountant – make sure they understand child support and tax – helps you structure your affairs to optimise your child support and tax. Lawyers know the law, but accountants know the numbers and tax (assuming they are registered tax agents).
Involve us early if you are negotiating an agreement, since agreements are hard to change once signed.
The same applies if you are thinking about a child maintenance trust (‘CMT’) since a CMT only works if set up at the time of separation. 

Makes sense? Just reach out when you are ready.

Five Things That Determine Your Child Support

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Five Things That Determine Your Child Support

The amount of child support you pay or receive is not a number that fell from the sky. It is calculated. What you pay or receive, depends on the following five things.

1 – Child Support Arrangement

2 – Income

3 – Care Percentage

4 – Other Children

5 – Ex’s Income.

Let’s look at this from the paying parent’s perspective (if you receive child support, read this the other way around).

1 – Your Child Support Arrangement

There are four types of child support arrangements. The two most common ones are assessments and agreements.
If you use child support assessments, your child support will fluctuate as your income, care percentage and number of your other children.
If you signed an agreement, that agreement would have considered the following four things. But once you signed, your child support is locked in – unless you make a new agreement.

2 – Your Income

The more you earn, the more child support you pay. Depending on the type of your income and the structure of your wealth, you can influence the amount of that income.

As an employee, there is some wiggle room but not much.

As a contractor, you have a bit more space, how much depends on your set-up.

But if you run a full-fledged business with third-party employees, the world is your oyster.

In addition, you can use companies and trusts to split and defer your income. For this one, you need an accountant who understands child support.

3 – Your Care Percentage

The more time you spend with your children, the less you pay if you use assessments – as long as you spend at least 30% with your children.

4 – Your Other Children

The more children you have, the less child support you pay for a child.

Let’s say you have a child from your teenage years but are now happily married with children. The more children you have with your wife, the less child support you pay for your first child.

5 – Your Ex’s Income

The less difference between your income and the other parent’s income, the less you pay.

Summary

The more you can control these five things, the more you control the amount of child support you pay or receive.

Here is more: 25 Ways To Reduce Child Support

Makes sense? Just reach out when you are ready.

6 Arguments AGAINST Child Support AGREEMENTS

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6 Arguments AGAINST Child Support AGREEMENTS

Without a child support agreement, family law will dictate how much child support there is to pay based on both parents’ income, care percentages, and other dependent children. With an agreement, you decide this between the two of you without involving Services Australia or the law.

Anybody can enter an agreement. Most parents enter an agreement when there is significant income or wealth or when the parents want certainty.
Whether you are better off with an agreement or an assessment depends on your circumstances. But it also depends on whether you pay child support or receive it.
So let’s look at this from the paying parent’s perspective (if you receive child support, some of this affects you the same way and some works the other way for you).
Here are 6 arguments against child support agreements, assuming you are the payer.

1 – Legal Fees

You need a family or child support lawyer to draw up the agreement and that of course costs money. So an agreement usually only makes sense when you have enough wealth or income to warrant such an expense.

2 – Binding

A binding agreement is just that: binding. To change it, you usually have to go to court, unless the other parent agrees to the change, which they usually don’t.

3 – Inflexible

If you hit hard times, bad luck. Agreed is agreed. An agreement is about a fixed amount or fixed expenses. It doesn’t link your child support to your income.

4 – No Wiggle Room

Since an agreement doesn’t link your child support to your income, you can’t change your child support by changing your income.
However, if you are an employee or contractor working for yourself, then your wiggle room to adjust your income is very limited anyway.

5 – No Family Tax Benefit

If you enter into an agreement, then the parent receiving child support usually doesn’t qualify for the Family Tax Benefit, hence they will require more support from you.
We say ‘usually’ since there are some exceptions to the rule. For these exceptions, we involve a child support lawyer.

6 – Higher Child Support

An agreement usually results in perceived higher child support. Otherwise, why would the receiving parent sign an agreement? So that would be a downside for you as the payer. But we say ‘perceived’ for a reason. It all depends on what your future incomes do over the years.
So these are 6 arguments that might speak against entering an agreement. But make sure you also consider the other side: 7 Arguments FOR Child Support AGREEMENTS

Makes sense? Reach out when you are ready. There is no size fits all.

7 Arguments FOR Child Support AGREEMENTS

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7 Arguments FOR Child Support AGREEMENTS

Whether you are better off with an agreement or an assessment depends on your circumstances including the amount of income and wealth at stake. But it also depends on whether you pay child support or receive it.

Here are 7 arguments FOR an AGREEMENT, assuming you are the payer – read this the other way around if you receive child support.

1 – Extras

You can agree on one parent paying specific expenses, for example, private school fees and health insurance. 
So if you are the payer, rather than paying money to the other parent and God knows what they spend it on, you pay directly for things that are important to you.
And if you are the payee, you have certainty that these extras are covered for good and don’t get caught up in other disagreements and tugs-of-war.
Assessments try to mimic this flexibility by allowing Non-Agency Payments, but these NAPs are a minefield for misunderstandings. So if you want to lock in extras, an agreement does that.

2 – Time with your Children

In an assessment, the receiving parent has a financial incentive to limit your care percentage. The less you see your kids, the higher the child support they receive. 
With an agreement, that financial incentive is gone. So the other parent is usually more open to expanding your contact hours.

3 – Certainty

Better the devil you know than the one you don’t. With an agreement you know exactly what you will pay and you can plan accordingly.
You no longer fear letters from Services Australia increasing your child support yet again.

4 – Future Free

Your child support is not linked to your income. So as your career progresses or your business grows, your child support stays the same. Future gains are all yours. So it doesn’t stifle your motivation in a way an assessment might do.

5 – No Services Australia

Once all is signed and dusted, you can farewell your lawyers and hopefully will never hear from Services Australia again.

6 – Got your Back

Services Australia is usually not on your side. But your lawyer negotiating the agreement for you is.

7 – Child Maintenance Trust

Your agreement can include a Child Maintenance Trust (‘CMT’). You transfer capital out of before-tax income into the trust and then distribute it to your children at adult tax rates.
So these are some of the advantages an agreement has. But make sure you also consider: 6 Arguments AGAINST Child Support AGREEMENTS

Makes sense? Just reach out when you are ready. The devil is in the detail.

8 Arguments FOR Child Support ASSESSMENTS

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8 Arguments FOR Child Support ASSESSMENTS

Child support assessments are the most common form of child support arrangements in Australia. While they are not the best thing since sliced bread, there are some strong arguments in their favour.

Here are eight arguments For an ASSESSMENT – assuming you pay child support. If you receive child support, read this the other way around:

1 – Gives you a Break during Hard Times

If you hit hard times, your child support also eases off. The link to your income works both ways.

2 – Considers Other Children

The assessment formula takes other children into account. So if you re-partner and have another kid, child support to your ex will decrease accordingly.

3 – Considers Your Care Contribution

The higher your care percentage, the lower your child support. So you can reduce your child support by spending more time with your kid.

4 – Shields You From the Other Parent

You don’t have to talk to the other parent about child support. Services Australia does it for you.

5 – Saves You Legal Fees

You don’t need a family lawyer, hence assessments come without legal fees attached.

6 – Results in Lower Child Support

An assessment usually results in lower child support than an agreement at the time you make the agreement. Otherwise, why would the other parent sign an agreement?

7 – Gets you Family Tax Benefit

You can only get a Family Tax Benefit with an assessment (assuming you meet some other criteria as well). With a child support agreement, you are usually barred from Family Tax Benefit unless you engage a child support lawyer who can help you around this pitfall.

8 – Gives you Wiggle Room

An assessment allows you to optimise your child’s support. This is where we come in and make a difference. However, how much wiggle room you have depends on your circumstances: 5 Things That Determine Your Child Support

Summary

So these are 8 arguments FOR Child Support ASSESSMENTS. But also consider the: 9 Arguments AGAINST Child Support ASSESSMENTS

Makes sense? Just reach out when you are ready.