How to Reduce Taxable Income in Australia

Taxable income is the portion of your earnings subject to income tax, calculated by subtracting allowable deductions from your assessable income. The Australian Taxation Office (ATO) uses this figure to determine your final tax liability, influencing whether you receive a tax refund or owe additional tax.

Allowable Deductions

Deductions are expenses incurred in earning income that reduce taxable income. To claim a deduction, the expense must have been incurred by you, directly relate to earning assessable income, and not have been reimbursed.

Work-related expenses are a common area for deductions. Car expenses can be claimed using either the logbook method or the cents per kilometre method. The cents per kilometre method allows a claim of up to 5,000 work-related kilometres at a fixed rate (88 cents per kilometre for 2025/26), covering fuel, registration, insurance, and wear and tear. This method is simpler as it only requires a record of kilometres travelled. The logbook method permits claiming the business-use percentage of all actual car expenses, including fuel, maintenance, insurance, and depreciation, requiring a logbook for a continuous 12-week period. This logbook remains valid for up to five years, provided usage patterns remain consistent.

Work-related travel expenses, beyond regular commuting, are deductible. This includes costs such as:

• Airfares
• Public transport fares
• Accommodation
• Meals if required to travel overnight for work
• Parking fees
• Tolls incurred during work-related travel

However, travel between your home and regular place of work is typically private and cannot be claimed, except in specific circumstances, such as when your home is a base of employment.

Deductions are permitted for specific types of work-related clothing and laundry. This includes occupation-specific clothing not worn for everyday purposes, protective clothing necessary to shield you from risks of injury or illness, and compulsory work uniforms. Conventional clothing, even if worn for work, is not deductible. Laundry costs for eligible work clothing can be claimed at a reasonable rate, such as $1 per load if only work clothes are washed, or 50 cents per load if mixed with other items. If your total claim for work-related laundry expenses is $150 or less, written evidence is not required.

Self-education expenses can be claimed if the course or training connects to your current employment activities. This connection is established if the education maintains or improves specific skills required for your current job, or is likely to result in an increase in your current employment income. Deductible expenses can include tuition fees (for full-fee-paying places), general course expenses, and the decline in value of depreciating assets used for study. Travel costs to attend self-education activities, including car expenses or public transport fares, are claimable. Tuition fees for Commonwealth supported places or repayments of HELP loans are not deductible.

Donations made to eligible deductible gift recipients (DGRs) are tax-deductible. Expenses incurred in managing your tax affairs, including fees paid to a registered tax agent for preparing and lodging your tax return, are also deductible. Investment-related expenses, such as interest on loans used to purchase income-producing investments and ongoing management fees, can be claimed.

Understanding Tax Offsets

Tax offsets directly reduce the amount of tax you have to pay, rather than reducing your taxable income. If your tax offsets exceed your tax payable, they can lead to a refund.

The Low Income Tax Offset (LITO) is a non-refundable offset that can reduce your tax payable to zero, but it cannot create a refund on its own. For the 2024–25 financial year, eligible Australian residents with a taxable income up to $66,667 can receive this offset. The maximum LITO of $700 is available if your taxable income is $37,500 or less, and it gradually tapers down as income increases, phasing out completely at $66,667. The ATO automatically calculates and applies LITO when you lodge your tax return.

The Private Health Insurance Rebate helps reduce the cost of private health insurance premiums. Eligibility and the amount received depend on your income and age. The rebate can be claimed as a reduced private health insurance premium throughout the year or as a tax offset when you lodge your tax return.

Franking credits are tax credits attached to dividends distributed by Australian companies. These credits represent the tax the company has already paid on its profits, preventing double taxation. When you receive a franked dividend, you include both the dividend amount and the attached franking credit in your assessable income. The franking credit then acts as a tax offset, reducing your personal income tax liability. If franking credits exceed the tax you owe, you may be eligible for a refund of the excess credits.

A tax offset may also be available for superannuation contributions made on behalf of your spouse. You can claim a tax offset of up to $540 if you make an eligible super contribution to your spouse’s complying super fund or retirement savings account. To be eligible, your spouse’s income must be less than $40,000, and the contribution must not be deductible by you. The maximum offset of $540 is available if you contribute $3,000 and your spouse’s income is $37,000 or less; the offset amount reduces as your spouse’s income increases, phasing out entirely at $40,000.

Strategic Superannuation Contributions

Strategic superannuation contributions can reduce taxable income. Concessional contributions, also known as before-tax contributions, reduce your assessable income and are taxed at a lower rate of 15% within the superannuation fund.

Individuals can make concessional contributions in two ways. One is through salary sacrifice arrangements, where an employee agrees with their employer to forgo a portion of their pre-tax salary, paid directly into their superannuation fund. This reduces taxable income as the sacrificed amount is not counted as part of salary for tax purposes. The second method involves making personal contributions to your super fund and then claiming a tax deduction. This allows individuals to make contributions from their after-tax income and convert them into tax-deductible concessional contributions.

To claim a tax deduction for personal superannuation contributions, you must notify your super fund of your intent to claim a deduction by submitting a “Notice of intent to claim a deduction for personal super contributions” form. Ensure this form is acknowledged by your fund before lodging your tax return or accessing your super.

Be aware of concessional contribution caps, which limit the amount of before-tax contributions you can make each financial year without incurring additional tax. For the 2025-26 financial year, the general concessional contributions cap is $30,000. This cap includes employer contributions (e.g., Superannuation Guarantee) and salary sacrifice amounts.

Exceeding this cap can result in excess concessional contributions, included in your assessable income and taxed at your marginal tax rate, with a 15% tax offset for tax already paid by your super fund. Unused concessional cap amounts from previous years can be carried forward for up to five years, allowing larger contributions in later years, provided your total super balance is below $500,000 at the end of the previous financial year.

Preparing and Lodging Your Tax Return

Preparing and lodging your tax return requires careful attention to detail and organized information. Comprehensive record-keeping is essential for supporting any claims, including retaining receipts, invoices, logbooks, and statements for all income and expenses. These records are essential for substantiating claims if the Australian Taxation Office (ATO) requests them.

Several methods are available for lodging your tax return. The most common is myTax, the ATO’s free online service. To use myTax, you need a myGov account linked to the ATO. This online portal often pre-fills income information from employers, banks, and government agencies by late July, simplifying data entry. You then review pre-filled information, add missing income, and enter deductions and offsets.

Another option is to engage a registered tax agent. Tax agents can prepare and lodge your tax return, providing expert advice and ensuring compliance. They often have access to systems that pre-fill information and can help identify eligible deductions and offsets, potentially maximizing your refund or minimizing tax payable. Using a tax agent may also extend your lodgement due date beyond the standard 31 October deadline.

Information from previous sections is entered into specific categories on the tax return form. Work-related expenses have dedicated sections for car expenses, travel, clothing, and self-education. Deductions for donations and managing tax affairs are entered into relevant deduction sections. Tax offsets, such as the Low Income Tax Offset, Private Health Insurance Rebate, and franking credits, are applied in the offsets section, directly reducing your tax liability. Details of superannuation contributions, including personal deductible contributions and spouse contributions, are reported in the superannuation section. After all relevant information is entered, review the entire return for accuracy before submitting it to the ATO. The ATO will then assess your return and issue a notice of assessment, detailing your refund or tax payable.