If you are a PAYG employee, you probably feel like you are paying more than your fair share of tax, and you are not wrong! The system is not built in your favour. One of the most common questions we get from PAYG earners is: “What can I do to legally reduce the amount of tax I pay?”
This blog answers that question.
Why is the system stacked against employees?
Individuals contribute the largest share of Australia’s total tax revenue, more than 51%, which completely dwarfs second place: companies, at just 24%.
The reason individuals shoulder such a large portion of the tax burden is that tax systems deliberately apply lower tax rates to corporate profits. The idea is that this benefits the country in the long run. Lower company tax means less of a deterrent for (overseas) investors, and it leaves businesses with more after-tax income to reinvest in the company, such as capital investment, expanding their workforce, or paying dividends to shareholders (some of which will eventually flow back into the local economy). It’s advantageous for an economy to attract investment and incentivises reinvestment of profits.
However, there’s a downside. When personal income is heavily taxed, individuals have less money to spend or invest, which can slow economic growth.
That’s why many developed countries have been gradually reducing their reliance on income and company tax and instead raising more revenue through consumption taxes (like the GST). These taxes are harder to avoid and don’t discourage investment or wealth creation in the same way.
Unfortunately, Australia is not following this trend, and our individual average tax rate has been increasing each year and is expected to follow that trend.
The harsh reality is that you can’t do much about income tax
There are a few key factors that limit a PAYG employee’s ability to reduce the amount of tax they pay.
Firstly, they have no control over the timing or structure of their income. Even if you set yourself up as a contractor, the Personal Services Income (PSI) rules usually prevent you from gaining any real tax advantage. In practice, all your earned income is attributed to you personally, meaning it’s taxed entirely in your own name. The result: a large tax bill.
Secondly, PAYG employees generally have very few meaningful deductions beyond legitimate work-related expenses, and even these are tightly regulated. At present, taxpayers can claim up to $300 in work-related expenses without keeping receipts. The government has proposed introducing a standard $1,000 deduction for work-related expenses from 1 July 2026, but that’s not yet law. Until then, employees must itemise their claims, use prescribed methods, and comply with strict substantiation rules to claim any significant deductions.
With no ability to split income and few legitimate deductions available, PAYG employees are left with only a handful of effective strategies to legally reduce their tax burden.
Only two main ways to reduce your taxable income are…
Ultimately, there are only two meaningful ways for PAYG employees to reduce their tax bill: contribute to super and/or borrow to invest.
Superannuation
Individuals can contribute up to $30,000 per year into super and claim a personal tax deduction for these contributions. These are known as concessional contributions. The concessional contributions cap is indexed in $2,500 increments, based on movements in Average Weekly Ordinary Time Earnings (AWOTE). The concessional cap is expected to be increased to $32,500 on 1 July 2026.
For individuals with an adjusted taxable income below $250,000, concessional contributions are taxed at a flat rate of 15%, which is a tax saving of up to 32%! If your income exceeds $250,000, the tax rate doubles to 30%, and unfortunately, there’s no way around this, other than earning less.
If your super balance is under $500,000 at the start of the financial year and you have not fully used your concessional contribution caps in the previous five years, you can carry forward any unused amounts into the current year. This can create an excellent opportunity to make larger deductible contributions when you have surplus cash or higher-than-usual taxable income (maybe due to a capital gain).
Negative gearing
If you borrow to purchase an investment, such as a property, and the interest expense exceeds the property’s net income, you can offset that rental loss against your other taxable income (for example, your PAYG income). This is known as negative gearing.
Let me be very clear: negative gearing is not a tax strategy. It’s a wealth-building strategy. The goal is not to lose money for the sake of a tax deduction – it’s to invest in an asset that’s expected to grow in value over time. The assumption must be that, in the long run, the property’s capital growth will more than compensate for any short-term negative cash flow.
Where the real tax planning opportunities are…
My advice to PAYG employees is simple: stop focusing on reducing your income tax and start focusing on reducing the tax on your wealth. That’s where your energies are probably best spent.
Aim to have $2 million each in super by the end of your 60s
In this blog, I suggested that most individuals should aim to fully utilise the Transfer Balance Cap (TBC), which is currently $2 million. This is the maximum amount you can hold in super that earns tax-free income, including investment earnings, capital gains, and pension payments. For a couple, that means up to $4 million in combined super, generating completely tax-free income in retirement.
The challenge, of course, is getting the money into super. Superannuation is highly effective but also highly restricted – you can only contribute within the set limits. These include the concessional contribution cap (discussed above) and the non-concessional contribution cap, currently $120,000 per year.
Because of these limits, it’s important to plan your ownership structures carefully. From a tax perspective, it may not be economical to sell assets held in your personal name just to move that wealth into super as the capital gains tax can outweigh the benefits. That’s why I suggest making it a long-term goal to maximise your TBC by your 60s.
The TBC is indexed over time, so the cap will continue to rise. Based on current projections, it’s expected to reach around $2.5 million in 10 years, and about $3.2 million in 20 years.
Main residence GCT exemption
Aside from super, the only other major tax-free opportunity available to individuals is the main residence capital gains tax (CGT) exemption. If you are going to own property, it makes sense to ensure you can benefit from this exemption.
Even if you do not plan to live in the property long term, you may still be able to take advantage of the six-year rule, which Mena and I discussed in detail on The Holistic Accountant podcast. This rule can allow you to treat your property as your main residence for CGT purposes for up to six years after moving out, provided certain conditions are met.
The main residence exemption can also be used strategically to build wealth through downsizing. I recently met prospective clients who generated several million dollars in tax-free gains using this exact approach. This is a powerful example of how effective this exemption can be when applied thoughtfully.
Tax effective investment structures
Your goal should be to minimise the tax you pay on investment earnings held outside of super, while positioning yourself to potentially transfer that wealth into super over time in a tax-effective way.
One common approach is to use family trusts, sometimes in combination with a corporate beneficiary. This can help cap your effective tax rate at 30%, whilst also generating franking credits for any tax paid at the company level. Later, when you are in retirement and on a lower tax rate (or nil), those franking credits can often be refunded, effectively reducing your overall tax burden.
Of course, the ideal structure depends on your personal circumstances, income levels, and the value of your assets. But the overarching goal remains the same – to ensure your investments are as tax-efficient as possible, without compromising on control, flexibility, or long-term strategy.
You can’t control the tax system, but you can control where you build wealth
If you are a PAYG employee, my advice is do not waste time chasing minor tax-saving measures, as they are unlikely to move the dial. Once you have optimised your super contributions and gearing strategy, your focus should shift to playing the long game.
That means concentrating on how to minimise tax on your investment returns over your lifetime, not just this financial year. The key to building lasting wealth is not short-term tax tricks; it’s structuring your wealth so that more of your investment returns stay in your pockets, year after year.
