
import Link from "next/link"

The key to reducing your income tax is to maximise your deductions and manage your reportable income. Did you know that you 

Want to see how much tax you could save? Use the **[Income Tax Calculator](/calculators/tax-calculator)** and model salary sacrifice, deductions and work-from-home hours.

## How to pay less tax in Australia (legally)

The wealthy have made reducing their tax an art form. While we all need to contribute our fair share, **the ATO only expects you to pay the tax you're legally required to pay — nothing more**.

This guide walks through a number of strategies that Australians use to minimise tax, boosting long-term wealth, and keeping more of what they earn. 

---

## Table of contents
1. [Salary sacrifice to super](#salary-sacrifice-to-super)
2. [Work-related deductions & work from home](#work-related-deductions--work-from-home)
3. [Investment deductions & negative gearing](#investment-deductions--negative-gearing)
4. [Offsets & levies](#offsets--levies)
5. [Structuring & timing strategies](#structuring--timing-strategies)
6. [FAQ](#faq)
7. [Disclaimer](#disclaimer)

---

## Salary sacrifice to super

Salary sacrifice means directing part of your pre-tax income into super. It reduces your **taxable income**, and the contribution is taxed at **15% inside super** (instead of your marginal rate, which may be 32%, 37% or 47% incl. Medicare).

To establish a salary sacrifice strategy, you need to ask your employer to direct a portion of your pre-tax salary directly into your super fund.
For example, lets say you earn $100,000 per year and have a surplus income of $200 per fortnight that you'd like to invest.
Your marginal tax rate is 32% including Medicare Levy. That means you could ask your employer to salary sacrifice
$294 per fortnight into your super fund, which will reduce your take home pay by $200 per fortnight after tax ($294 less 32% tax = $200).

> **Key limit:** The concessional cap is **$30,000 per year** (from 1 July 2024), including employer SG and any salary-sacrificed amounts.

**Why it works**

- Reduces taxable income now  
- Your super gets more money invested for retirement  
- Tax rate on contributions is lower than your marginal rate  
- Immediate tax saving equal to your marginal tax rate less 15%

**But… take-home pay drops**

Salary sacrifice improves your net financial position, but does **not** increase take-home cash. Instead:

- Your take-home pay reduces (because you're diverting income into super)
- Your super balance increases, and the tax savings end up in your super fund
- Over time, compounding inside super amplifies the benefits

**When it makes sense**

- You're in a higher tax bracket (greater than $45,000 taxable income) 
- You can comfortably reduce take-home pay (you have surplus income)
- You're saving for long-term retirement goals

**When to be cautious**

- If cashflow is tight, or you might need the money before retirement
- Or you are already close to the concessional contribution cap

If you are self employed, you can still make use of this strategy by making a tax-deductible contribution to super.

---

## Work-related deductions & work from home

Most office workers now have a regular schedule of work from home days. 
To allow for the additional costs incurred when working from home, the ATO allows you to claim a deduction for home office expenses.
You can also claim deductions for other expenses incurred which relate to your work.

### What you can claim

To claim a deduction, an expense must:

- Be **directly related to earning income**
- Be paid by you (not reimbursed)
- Be properly **apportioned** if partly private use

Common deductions include:

- Professional memberships & union fees  
- Tools & equipment (depreciated if >$300)  
- Work-related training relevant to your role  
- Protective clothing  
- Income protection insurance that is paid personally

### Work-from-home (WFH) deductions

ATO’s fixed rate applies per hour worked from home. If you have specific receipts, you could choose the actual expenses method.
The method chosen will depend on which is more favourable to you. Keep:

- Records of hours worked
- Supporting receipts if also claiming specific items

Use a logbook, timesheet, or digital work records. 
In the 2025-26 financial year, the ATO allows you to claim $0.70 per hour for the fixed rate method.
For example, working from home 2 days per week for 48 weeks a year, is 730 hours in claimable expenses.

> Claiming WFH hours doesn't put cash in your pocket immediately — it reduces your taxable income, lowering your final tax bill.

---

## Investment deductions & negative gearing

The ATO allows you to claim expenses relating to your investments. 
If your expenses are greater than the income earned from your investments, that results in a tax loss, which reduces your taxable income.

Learn more about borrowing to invest with our **[Debt Recycling Calculator](/calculators/debt-recycling)**

### Investment deductions

If you invest, you may deduct:

- Loan interest for borrowings used to purchase income producing investments  
- Management fees & platform fees  
- Accounting costs related to investment income  
- Brokerage fees (capital cost base treatment may apply)  
- Research subscriptions
- Software and subscriptions used to manage your investments  

### Negative gearing

If expenses & interest exceed investment income, the loss can be claimed on your personal taxes.
This is negative gearing.

Good to know:

- Helps reduce tax, but you are still making an overall loss. You are 'spending a dollar to get 32 cents back'
- Should be a byproduct of a sound investment strategy, not the main reason for an investment
- Interest rate rises can affect your investment strategy

---

## Offsets & levies

A tax offset reduces the amount of tax you owe. This is different to a tax deduction which lowers your taxable income.

### LITO (Low Income Tax Offset)
Available for incomes generally up to **$66,667**, reducing tax for lower-income earners.

### SAPTO (Seniors & Pensioners Tax Offset)
Significant relief for eligible retirees based on thresholds and tapering rules.

### Medicare Levy & MLS
- Medicare levy: generally 2% of taxable income
- Medicare Levy Surcharge (MLS): 1%–1.5% if income exceeds thresholds and no private hospital cover

>Private hospital cover may cost less than the MLS for higher earners. 
Get quotes for the minimum level of Private hospital cover if you earn over the MLS income levels.

---

## Structuring & timing strategies

Holding the right assets in the right structure can signifcantly reduce tax liabilities, especially for high income earners.
Holding assets in trusts can divert income to lower income earners, or investing via superannuation can reduce earnings tax to 15%.

Timing the receipt of capital gains for low income years can help to minimise tax.

- **Bring forward deductions** if this year’s income is higher  
- **Defer income** where appropriate (realsing a capital gain in a low income year)
- Hold assets **>12 months** for the CGT 50% discount  
- Consider whether holding assets in **super**, **personal names**, or a **company/trust** is appropriate (seek professional advice)

---

Ready to run your own numbers? Try the **[Income Tax Calculator](/calculators/tax-calculator)** and see how salary sacrifice, deductions and work-from-home hours affect your tax.

---

## FAQ

**Does salary sacrifice increase take-home pay?**  
No — it reduces take-home cash but can **improve overall after-tax wealth** by lowering tax and growing super.

**Can I claim work clothes?**  
Only **occupation-specific** or protective clothing. Not everyday clothing.

**Are charitable donations deductible?**  
Yes, if made to **DGR-registered charities** and you receive no material benefit.

**Is negative gearing a tax strategy?**  
It's an **investment strategy with tax consequences**, not a tax trick.

---

## Disclaimer

Tax rules change and everyone's situation is different. This article is **general information only** and does not constitute financial or tax advice. 
Consult a qualified tax adviser to understand your specific circumstances.

---


A plain-English, legally sound guide to reducing your Australian income tax through deductions, salary sacrifice, investing, franking credits, and offsets.

How to Pay Less Tax in Australia: A Practical Guide for 2025


**Debt recycling** is a strategy used by Australian homeowners to pay off their non-deductible home loan faster and build an investment portfolio at the same time.

The aim of the stragegy is to:
- reduce “bad debt” (your home loan),
- increase “good debt” (a tax-deductible investment loan),
- boost after-tax cashflow through franking credits and negative gearing,
- Be in a “debt free” position sooner.

This guide will walk you through:
- what debt recycling actually is,
- what the tax benefits are (why the ATO treats the loans differently),
- step by step how it works in practice,
- who it suits and who it doesn’t suit,
- real risks you need to understand before doing it,
- and how to model it with our free **[Debt Recycling Calculator](/calculators/debt-recycling)**.

---

## Quick Summary: What Is Debt Recycling?

At a high level, debt recycling is the process of gradually replacing non-deductible home loan debt with tax-deductible investment debt.

You do this by:
1. Paying down your home loan (non-deductible debt) with a lump sum (such as funds in an offset account).
2. Redrawing that same amount as an investment loan (deductible debt).
3. Investing the redrawn amount into income-producing assets (typically shares / ETFs / managed funds).
4. Directing all after-tax investment income (including franking refunds and negative gearing tax benefits) back into the home loan to pay it off faster.

You don't need to make extra repayments (although that helps).  
You’re just recycling dollars from the “bad debt” bucket into the “good debt / investment” bucket.

You can simulate that process year-by-year with our **[Debt Recycling Calculator for Australia](/calculators/debt-recycling)**.  
It models franking credits, negative gearing, redraw timing, capital gains tax on exit, and shows when you could theoretically be debt free after selling down your investment portfolio.

---

## Why Home Loan Debt Is ‘Bad Debt’

Your main residence in Australia does not produce assessable income (you don’t earn rent from living in your own house), so:
- The interest on your home loan is not tax-deductible.

That makes it “bad debt”:
- You pay the full cost of the loan from your after-tax income.
- You can’t claim it as a deduction on your tax return.

---

## Why Investment Debt Is Treated Differently

If you borrow money to invest in assets that are expected to produce assessable income (e.g. shares that pay dividends), then:
- The interest on that investment loan is generally tax-deductible in Australia, because it’s incurred in the course of producing income.
- If the interest cost exceeds the income produced by the investment, you are making an investment loss. This is known as negative gearing.
- The investment loss is claimed as a deduction on your tax return, and reduces the amount of income tax payable.  
 
On top of that:
- Australian shares often come with franking credits (imputation credits). Franking credits represent company tax already paid at (usually) 30%, and they’re refundable, meaning if your tax bill is lower than the credits, you may get the difference back as a refund.
- Those franking credits and the tax deduction on interest boost your after-tax income.

That after-tax cash flow is then paid directly into your home loan as additional repayments, helping to pay down your home loan faster.

---

## Step-by-Step: How Debt Recycling Actually Works

Let’s walk through the mechanics using a simplified version of the strategy.

### Step 1. You make an extra repayment into your home loan  
Say you have $30,000 in an offset account and use that to make a lump sum repayment into your home loan.  
This immediately reduces your non-deductible home loan balance.

### Step 2. You redraw that $30,000 as an investment split  
You split your home loan and redraw that same $30,000 as a new, clearly identifiable investment loan split.  
Important: this split must be used only for investment purposes. Mixing purposes (e.g. using redraw for a car, holiday, renovations) risks contaminating the tax deductibility.

### Step 3. You invest that money  
You use the $30,000 investment split to buy income-producing assets such as ETFs or Australian shares. Best practice is to establish a new brokerage account and pay those redrawn funds directly into that account.

Now you’ve got:
- a smaller home loan (non-deductible debt) which has reduced by $30,000, and
- a new investment loan (deductible debt) of $30,000, and
- an investment portfolio worth ~$30,000.

### Step 4. The investments generate cashflow  
Over the next year, those investments (especially Australian shares / ETFs with franked dividends) pay:
- cash distributions, and
- franking credits

Depending on the level of income generated, you may also receive a tax refund from negative gearing, where the investment loan interest is greater than the income earned on your investments.

You take that net cash and pay it into your home loan as extra repayments over the following 12 months.

### Step 5. Repeat annually  
At the end of the year:
- Your home loan is now even lower (because you’ve made your normal repayments plus the investment cashflow).
- You redraw the extra repayments again as a fresh investment split.
- You invest that redrawn amount into your portfolio.
- Your investment loan increases (your home loan balance doesn't change in the step)

That repeating loop is the “recycling”.

You can see this redraw and reinvest cycle, year by year, in the **Year by Year Comparison** table in the calculator.

Try it yourself with the **[Debt Recycling Calculator](/calculators/debt-recycling)**.

---

## The Goal: Be “Debt Free”

We model this by looking at the option of just making your normal home loan repayments vs employing a debt recycling strategy.

### 1. Home loan balance hits $0  
Under Strategy A (just pay the home loan normally), this eventually happens, but it may take decades.

Under Strategy B (debt recycling), the goal is to get there faster. This happens because you’re channelling every after-tax dollar of investment income, franking refunds, and negative gearing benefit to repay your home loan faster.

### 2. “Debt free overall after sell-down”  
In our calculator we also show the year where, if you sold your entire investment portfolio, paid capital gains tax (with the 50% CGT discount assumed), then used the after-tax proceeds to clear both:
- the remaining home loan, and
- the outstanding investment loan

That is your “debt free” crossover in Strategy B.  
In other words: you could liquidate your investment portfolio, pay CGT, repay both your home loan and investment loan, and walk away with a positive cash balance.

On the calculator, this shows up in:
- the summary card “Year you could clear all debt”, and
- the bar chart titled “When will I be debt free?”.

That bar chart compares:
- your remaining home loan in Strategy A, and
- your after-tax “walk away” position in Strategy B.

---

## Does Debt Recycling Mean I’m Paying More Each Month?

Not necessarily.

One of the most misunderstood parts of debt recycling is cashflow. You keep making the same repayments to your home loan in both scenarios. Only in the debt recycling strategy, part of your repayment goes towards your home loan, and a portion goes to your investment loan.

In our model, we ask you for just one number:
- **“Monthly repayment ($/mo)”** → what your current repayments are.

Then we compare that to our calculated minimum repayment required to keep the total debt (home loan and investment loan splits) on track over the remaining term.

If you’re already paying at least that amount, we assume there are no increasing in monthly repayments. You’re just redirecting where those dollars go:
- first to minimum repayment on the (deductible) investment split,
- then the remainder to the (non-deductible) home split,
- plus the after-tax investment income sweep also paid to your home loan.

---

## Should the investment loan be principal and interest or interest only repayments?

Most advisers suggest having your investment loan balance changed to interest only repayments and keep your home loan on principal and interest repayments.
However, there can be a significant differential in interest rates between interest only and principal and interest loans (around 0.60% pa or more). 
Also, lenders will likely ask you to complete a new credit application if you request a switch to interest only repayments.

The general view, given the interest rate differential, is to:
- Keep both loans on principal and interest repayments,
- Make only the minimum required repayment towards the investment loan,
- Pay extra towards the home loan.

We have allowed for different rates between investment loan and home loans in the calculator, but have assumed that both loans have principal and interest repayments.

---

## Who Debt Recycling Can Suit

Debt recycling is generally more appropriate for people who:

- Own (or are buying) their own primary residence with a mortgage in Australia.
- Have a decent income and tax rate (30% marginal tax rate and above), so deductions and franking actually matter.
- Are comfortable holding investments for 10 or more years.
- Can tolerate market volatility without selling.
- Are disciplined enough to direct distributions / refunds back into the home loan.

It can be especially attractive if:
- You’re on a higher marginal tax rate (because deductions and franking credits are more valuable to you).
- You’ve got a solid buffer (e.g. emergency fund, stable employment).
- You wish to invest for long-term wealth creation, as well as pay down your home loan.

---

## When Debt Recycling Is a Bad Idea

Debt recycling comes with additional risk.

It may not be suitable if you:
- Are very uncomfortable with investment risk or market volatility.
- Are likely to need that money in the short term (e.g. for maternity leave, career change, income drop, capital expenses).
- Don’t have an emergency buffer outside this strategy.
- Are already very stretched with repayments.
- Would emotionally struggle if markets fell 30–40% in one year (which may happen).

Specific risks to understand:

### 1. Market risk  
Shares can fall. If you’ve geared into investments and markets fall, your portfolio value may drop below the size of the investment loan.

### 2. Interest rate risk  
If interest rates go up, both the home loan and the investment loan get more expensive to service. Your monthly repayment may increase and you'll need to make additional repayments.

### 3. Behavioural risk  
This strategy assumes discipline. The model assumes you reinvest redraws annually and that you pay every dollar of after-tax investment income into your home loan.

### 4. Tax / structure risk  
You must keep the investment loan purpose clean. The ATO looks at what the borrowed funds are used for. If you mix personal use and investing in the same loan split, you can contaminate deductibility.

This is why debt recycling is usually set up with a broker and tax professional who understands structuring.

---

## Does the ATO Allow Debt Recycling?

Debt recycling is a common strategy.  
Borrowing to invest in income producing assets and claiming the interest is, in principle, allowed under Australian tax law.

Where people get in trouble is:
- incorrect loan structuring,
- claiming deductions on interest for loans that weren't actually used for income producing purposes,
- or mischaracterising lifestyle spending as “investment”.

If you’re thinking about doing this:
- speak to a tax professional or adviser,
- speak to a mortgage broker who has actually implemented this before,
- and make sure each investment redraw is documented.

---

## How to Model Your Own Numbers

Want to see how this could look for you?

Use the free **[Debt Recycling Calculator](/calculators/debt-recycling)**.

It lets you:

- Enter your home value, home loan balance, offset balance and interest rates.
- Set how much you’d initially move from your offset into the loan and redraw on day one.
- Compare Strategy A (no recycling) vs Strategy B (debt recycling).
- See when you could theoretically become completely debt free, allowing for CGT.

You’ll also see:
- your projected net wealth under each strategy,
- the year-by-year loan balances,
- and the **“When will I be debt free?”** chart.

---

## Frequently Asked Questions About Debt Recycling

### Is debt recycling the same as an offset account strategy?
No. An offset account reduces the interest charged on your home loan, which is good, but it doesn’t generate investment income or tax deductions.

Debt recycling deploys some of that cash, converts it into deductible debt, and aims to accelerate wealth building alongside debt reduction. You’re taking on investment risk to (potentially) get ahead faster.

### Do I need to invest only in Australian shares?
No. In reality most people use a diversified mix (Australian shares, international shares, ETFs, managed funds).  
In our calculator we model franking credits explicitly for the Australian share portion, because franking is uniquely valuable in Australia.

### Is this “tax avoidance”?
Claiming interest on money borrowed to invest is standard. Where you get in trouble is if you’re not clear on where the investment loan funds are deployed. The ATO cares about purpose.

### What happens if the market crashes?
Your portfolio value can drop sharply. If that happens in the early years, Strategy B can actually look worse than Strategy A for a while. If that possibility keeps you up at night, you may not be suited to leveraging into shares.

### Can I do debt recycling inside super instead?
Super is taxed differently and contributions are capped. Debt recycling is specifically about turning home loan debt into tax-deductible investment debt in your own name(s), outside super.

---

## Key Takeaways

- Your home loan is non-deductible “bad debt”.  
- Investment debt (used to buy income-producing assets) can be tax-deductible.  
- Debt recycling is about gradually swapping one for the other.
- Franking credits and negative gearing can boost after-tax cash that you can pay straight into your home loan.
- This strategy is not free money. It uses leverage and carries risk.
- You should get professional advice to ensure the strategy is appropriate for your personal circumstances.

Want to see if it might work for you — with your numbers, tax rate, and interest rates?

Run the numbers using the **[Debt Recycling Calculator](/calculators/debt-recycling)**.

---

*Disclaimer: This article provides general information only and does not constitute personal financial, credit, or tax advice. You should seek professional advice before implementing a debt recycling strategy.*


A practical Australian guide to debt recycling — how to convert your home loan into tax-deductible investment debt, accelerate wealth, and aim to become debt-free sooner. Includes franking credits, negative gearing, and a free debt recycling calculator.

#franking credits

How to Pay Less Tax in Australia: A Practical Guide for 2025

Debt Recycling in Australia: How It Works, Risks, Tax Benefits, and a Step-by-Step Example