How can Australians lower their tax rate? Is it possible to avoid paying tax as an Australian citizen?
There are plenty of strategies for how to avoid paying taxes that can be applied to people from anywhere in the world although they may vary from country to country. Today we’ll be talking specifically about how to pay less taxes in Australia.
Australia is one of the highest tax countries in the world. It is considered one of the four high-tax Western countries alongside the US, the UK, and Canada. As these other three countries have rumors of new and increasing taxes, there is also a possibility that Australian tax rates will continue to increase in the future.
If you are an Australian citizen reading this, don’t think this means you’re doomed. There are legal ways to lower your tax rate to as low as zero.
Continue to read if you would like to avoid high taxes and pay low or even no tax as an Australian.
In this article, we’ll discuss:
- Income Tax in Australia
- Tax-free Threshold
- Who Has to Pay Tax in Australia?
- Taxes for Foreigners and Temporary Residents
- How Can Australians Lower Their Tax Rate?
- Getting a Second Residence
- Where Should You Go to Lower Your Taxes?
- Ways to Lower Australian Tax Without Moving
- Take Advantage of Tax Deductions
- Using a Trust
Income Tax in Australia
How does income tax work in Australia?
If you qualify as a tax resident in Australia, you’ll be obligated to pay income tax on your worldwide income. This means that even if you are earning income in St. Lucia, you’ll still be paying tax on that income in Australia.
This is different from the US tax system. Australia only taxes Australian citizens who are residing in Australia or qualify as an Australian tax resident.
US citizens, on the other hand, are obligated to pay US income tax on their worldwide earnings no matter where they reside. They do not have an option to become a tax nonresident. The only way for them to fully escape the US tax net is by renouncing their US citizenship and cutting all ties.
Australian citizens do not currently have to renounce their citizenship in order to eliminate their Australian tax obligation. Later in this article, we’ll go over some strategies for how to pay less taxes as an Australian citizen.
The amount of tax you have to pay is determined by the tax brackets in Australia. Here are the tax rates for 2020 – 2021.
|0 – $18,200
|$18,201 – $45,000
|19 cents per $1 over $18,200
|$45,001 – $120,000
|$5,092 plus 32.5 cents per $1 over $45,000
|$120,001 – $180,000
|$29,467 plus 37 cents per $1 over $120,000
|$180,001 and over
|$51,667 plus 45 cents per $1 over $180,000
Some members of the Green party in Australia are looking to pass a new wealth tax on the super-rich. While this proposed tax would only impact around 120 Australians, there’s no guarantee this won’t expand even further in the future.
The tax year in Australia goes from July 1 to June 30. Australians report and pay their taxes to the ATO (Australian Tax Office).
Australia offers a yearly tax-free threshold. If you’re a new Australian tax resident, you won’t have to pay tax on the first $18,200 of your income.
If you are a first time tax resident, the amount is adjusted to $13,464 with an additional $4,736 apportioned based on the number of months you were in Australia if you’ve moved to the country in the middle of the financial year.
For example, if you become an Australian tax resident on May 1, then you’ll count May and June as the two months you were there.
Your tax-free threshold would be equal to $13,464 + (($4,736 x 2)/12)).
So you won’t be taxed on the first $14,253.33 of the income you’ve made that year.
Who Has to Pay Tax in Australia?
There are four tests that determine whether or not you are going to have to pay personal income tax in Australia.
Resides test – This test looks at your ties to the country. This includes family ties, business connections, location of assets, and social ties.
Domicile test – your domicile is where you live. One way to get out of paying taxes in a high-tax country is by establishing a domicile in a different country. If you want to get out of paying Australian taxes as an Australian citizen, you’ll need to have a permanent home where you live outside of the country.
183-day test – You may have already heard of the 183-day rule. For instance, you may have heard that you don’t have to pay taxes in a country if you spend less than half the year (183 days) there.
This isn’t necessarily true, because even if you spend less than 183 days in a country, you could get pulled into its tax net if you do business there or have other significant ties.
The 183-day test is still important to know because if you spend 183 or more days in a country, you’ll be pretty much guaranteed to be caught up in its tax net.
Commonwealth superannuation test – The commonwealth superannuation test covers government Commonwealth employees. Those who are considered members of the superannuation scheme under the Superannuation Act of 1990 are also going to be considered Australian tax residents.
If you qualify under any of these four tests, you’re going to be obligated to pay income tax in Australia.
Taxes for Foreigners and Temporary Residents
If you are not a citizen or permanent resident of Australia and are working and earning money in Australia, you will still have to file and pay taxes in Australia.
Foreign residents staying in Australia have to report all income they’ve earned in Australia including income from employment, rentals, Australian pension and annuities, and capital gains from any Australian assets.
Foreign residents do not have a tax-free threshold.
You also would not have to pay Medicare levy as a foreigner in Australia. When you file your tax return, you would claim an exemption.
Australian sourced dividends, royalties, and interest do not have to be reported if the company that pays you withheld the tax.
Temporary residents of Australia need to report any income that was earned in Australia as well as income earned overseas while they were a temporary resident of Australia.
If you leave Australia, you’ll need to file your taxes before you go or you will then have to file them from outside of the country.
How Can Australians Lower Their Tax Rate?
How can you get rid of your Australian tax obligations? The easy answer: leave Australia.
Obviously, it’s a bit more complicated than that, but the best solution to avoiding a high tax is moving away and cutting all ties from that high-tax country.
While US citizens need to get a second passport in order to completely escape their tax obligation, Australians just need to have a second residence that they can claim as their tax home.
Your tax home is going to be the place where you spend the most time or have the most significant ties. In order to get tax non-residence, you’ll need to cut ties with Australia and establish a domicile in another country.
It isn’t possible to pay no tax by leaving Australia for a 183-day vacation and then returning back to your home and family in Sydney or Melbourne or wherever. To avoid paying taxes in Australia, you’ll need to spend more time and have more significant ties to a new country or domicile.
This domicile can be where you have a permanent residence, own a home, have a job, etc.
Getting a Second Residence
Why should Australians get a second residence? Not only does a second residence in a country allow you to travel and live there, but having a permanent residence in a country outside of Australia will also help you to lower your tax obligation.
As we’ve learned, in order to no longer pay income tax in a high-tax Western country like Australia, you’ll need to be able to become a tax non-resident in the country. To be able to claim a tax non-residence you have to spend less time in that country.
Getting a second residence in some cases can eventually lead to getting a second citizenship through naturalization. It’s still a good idea for you to get a second citizenship, even if you aren’t planning on renouncing your Australian citizenship.
A second citizenship acts like an insurance policy. It’s a great Plan B in case anything were to ever happen and you would need to renounce your citizenship. While Australia doesn’t currently have a citizenship-based taxation program like the US does, that could change in the future.
Where Should You Go to Lower Your Taxes?
Truthfully, there isn’t one place that will offer the perfect solution to all of your tax problems. You’ll need to come up with a tax plan that works for you. This is going to be different than any other tax plan you might find online, as it should be personalized to fit your needs.
You can decide to live in one low-tax country, apply a trifecta method, or travel the world. Whatever you do, you’ll need to pay attention to the tax laws in the countries where you spend your time so you won’t get caught up in any tax nets that will make your tax obligation even higher.
Consider moving to a zero-tax, low-tax, and territorial tax country. Zero-tax and low-tax countries are pretty self-explanatory, but what is a territorial tax country? A territorial tax country is a country that taxes you only on the income that you earn within that country.
It’s also a really great idea to look at countries that aren’t ultra-popular. Singapore was a great place for expats to go a few years ago, but now it’s much more popular and costs more to live and incorporate there.
Some up-and-coming places you could consider instead include Georgia, Montenegro, Panama, Mexico, and Colombia. You want to go to a place that’s not yet super popular and works for your lifestyle and tax plan.
Instead of just picking a country based on a list you found on the internet, try traveling first and find the country that best fits your lifestyle and needs.
Ways to Lower Australian Tax Without Moving
Leaving your home country can also be a hugely emotional decision. Are there any ways you can lower your Australian income tax rates without going offshore or moving overseas?
It isn’t possible to pay zero tax while living in a high-tax country like Australia but you can still lower your tax obligation by quite a bit without leaving.
Take Advantage of Tax Deductions
While this can get tedious, you can significantly lower your tax obligation by taking advantage of available tax deductions.
In order to take advantage of all these deductions, you’ll need to make sure you are keeping detailed tax records. If you claim a deduction, you’ll need to be able to back up that claim to the ATO. You’ll want to keep receipts for any purchases you include on your tax deductions.
Many people don’t take full advantage of available tax deductions. Any money that you spend on something that relates to how you earn your income can be claimed as a tax deduction. Even an item that you use for both work and personal use can be partially claimed as a tax deduction.
Additionally, every donation that you make over $2 to a registered charitable organization can be deducted from your taxes. The amount you donate is subtracted from your taxable income. This means that you’re going to get a percentage back from what you would have had to pay.
Make sure to keep your charity receipts as well so you can back up your deduction claim.
Use a Trust
How can using a trust help you to save money on taxes? If you are a high-income earner you can create a discretionary family trust. This trust redistributes the wealth that you earn to your family members in lower tax brackets. The money earned can then be taxed at their tax rate instead of yours.
Another option is to set up a bucket company (holding company) that then receives funds from a discretionary trust.
If the money is left in a trust and not distributed, it will be taxed at 48.5%. Using a bucket company drops that tax rate to 30%.
Going offshore and moving overseas to a low-tax country is the guaranteed best way for you to lower your taxes. While it’s a huge decision and takes a lot of planning, lowering your tax rate to zero is worth it.
If you are determined to stay in Australia, make sure you are structuring your tax properly and claiming the tax deductions that you qualify for. There’s no reason you should be paying more than you have to.
Speak with a professional tax planner to come up with a plan that will work for your unique situation.