INSIDE INVESTOR: The simple, super way to pay less tax

There are many ways to minimise your tax burden and diverting more of your salary into superannuation one of the easiest and most effective.

July. You know what that means. It’s time to lodge your income tax return.

Whether you are a business owner or an employee, organising your income tax affairs early can not only save you a substantial amount of money but make you much wealthier in the future.

Every citizen has a legal and moral obligation to pay their full share of income tax. But that doesn’t mean you should pay more than you really need to.

Over the years, the federal government has altered the tax system to offer incentives to Australians that will allow them to use part of their income to invest in various avenues such as superannuation, property and even shares.

These incentives usually allow you to reduce your personal income taxes. One of the easiest and most effective means of achieving this is to contribute more in superannuation.

Effectively, you reduce the amount of income you receive by diverting that into your superannuation fund. Because you have a lower income, you pay less tax.

Every Australian has 9 per cent of their salary diverted into superannuation.

Under the rules, you can divert an extra $25,000 a year into your superannuation account, either through an employer contribution or as part of a salary sacrifice arrangement.  Either way, it is a pre-tax contribution.

While you will pay a 15 per cent contributions tax on that extra cash you divert to your super account, depending on your annual salary, that tax rate will be a great deal lower than you ordinarily would have paid.

The benefits of this are twofold. Not only do you lower your taxable income and pay less tax but you also contribute substantially more to your super balance. And that extra balance will have a multiplier effect on the amount of cash you will receive in retirement.

Through what is known as compound interest, the bigger your balance, the bigger the absolute return on your investment. And because those extra returns are reinvested, you end up with a snowballing effect in your superannuation.

What’s in this for the government? With our ageing population, the federal government realised 20 years ago that younger workers would be unable to support the growing number of retirees. So it introduced a system that would put more responsibility on the private system and individuals to take responsibility for their own retirement.

By offering that tax carrot, the federal government hopes to entice more Australians to tip more of their earnings into long term savings.