All The Things You Should Know About Tax But Still Don’t
From July 1, it’s officially tax season. Whether you’re pumped for a return or dreading the whole process, there are some basics you need to know.
Tax is confusing at best, so it’s only natural that a bunch of us do what any sane person would: give it to someone else to deal with. But if you can’t afford that, want to do it yourself or just want to sound informed this time of year, we’ve rounded up the basic things that are helpful to pocket in your mind pants.
What is tax?
First things first, tax is a compulsory contribution we have to pay the government. We pay it because it’s supposed to fund various public services; like a health care system, transport infrastructure, education and so on.
When do you start paying tax?
If you earn money from your work or from investments, you will usually pay tax on that money. So you start paying tax when you start working, or by some miracle happen to own investments, or both.
Just to be clear, it’s not a thing that kicks in when you’re 18. It depends on your personal situation related to income you earn from work or investments.
When do you need to start lodging tax returns?
When you have tax withheld from any payments made to you through work or investments.
If you earned less than the tax-free threshold but had tax withheld, the Australian Taxation Office (ATO) won’t automatically sort you out. You’ll need to lodge a tax return – but it’s not so bad because you’ll likely get all of it back! It’s like a second birthday!
Also, know this: if you don’t work or earn less than the tax-free threshold one year and don’t have any tax withheld, you still need to file a notice. Yes, that’s right; you need to file a Non-Lodgement Advice to let the ATO know that you won’t be lodging a tax return.
Basically, the ATO is your nosy parent who always needs to know where you’re going dressed like that. If you cooperate by keeping them in the loop (i.e. lodging your taxes) it makes your life much easier. And if you’re naughty and you don’t, you could have the threat of punishment hovering over your head (more on that later).
But wait, what’s a tax-free threshold?
The ATO won’t tax your income until it reaches a certain level. This level is $18,200 per year – so that’s 18,200 sweet, tax-free dollars.
After that, you’re taxed at different levels, like income earned between $18,201 and $37,000 will be taxed 19c for each dollar. Then there’s a lump sum of $3,572 plus 32.5c for each $1 over $37,000 (up to $80,000).
If you have more than one job, can you claim the tax-free threshold twice?
Nope, it’s a one-gig offer. You’ll want to nominate the job that you earn the most from for the tax-free threshold.
What happens to me if I forgot to/didn’t file my tax return by the 31 October deadline?
Most people think that if they forget to lodge a return they’ll automatically be fined, which then makes them put it off even longer. But if you were owed a refund, the reality is that nothing will probably happen.
If they owe you money, the ATO aren’t likely to fine you for not lodging one year or lodging late. They just want you to start talking to them again, maybe give them a call everyone once in awhile like you used to.
But if you owe them money or have a dodgy lodging history, that’s a different story. Never forget: the ATO wants its money, and it’ll fine you for it if you don’t hand it over. So if this is the case just get it out of the way because it’s not going away. Better to just take the rap on the knuckles and never forget to lodge again.
If I can’t afford to pay my taxes this year, what should I do?
The ATO’s alright, you know, if you have a legitimate reason why you will struggle to pay your tax. They’ll work something out with you. We mentioned this before, but the last thing the ATO wants is to be ignored; it hurts their feelings when you act like they don’t exist. But they love it when you communicate your situation, because for this situation, they have payment plans.
How can I make sure I get the most amount of money humanly possible back on my tax return?
A deduction means you pay less in tax. It is a reduction of the total amount of your income that the government is entitled to tax. Usually achieved by way of expenses, deductions are – at their most effective – even capable of dropping you from one tax bracket into a lower one.
And we love them. About 8.5 million Australians claim $19.7 billion in work-related expenses each year. Which is why the ATO is cracking down on them, so make sure if you plan to claim any work-related expenses, you got the proof.
Just remember, deductions can’t be personal. You have to prove they’re business related.
What are some deductions and expenses I can claim?
An expense can be any money you spend to do anything work related/for business reasons. And if it’s not clear-cut and you spent money on something that’s partly for work and partly for your own amusement, then you can claim a percentage portion of the total amount.
Here are some good’uns:
If you spend time working from home in a dedicated home office you can claim 34c per hour. It might not seem like much, but a few hours a week across the year adds up.
Washing your uniform
If you wear a uniform for work (like a chef’s uniform, for example) you can claim up to $150 per year for washing expenses – without receipts.
The magic 300
Don’t be a chump and forget about the magical $300 tax deduction limit allowed by the ATO. Basically, if your total claims for tax deductions are under $300, then you aren’t required to provide any evidence/receipts. Easy win.
If you want to get an accountant to handle your taxes, you can claim the fee you had to pay as a deduction the following year.
Claiming your brand new laptop as a depreciating asset, along with home internet use and taking work calls on your mobile phone, are all legit as long as they’re work related.
If you can prove that your handbag can fit a laptop/is used for work (although that proof might mean keeping a logbook, ugh) then yes, women can claim their handbag as a tax deduction.
Sun protection and work wear
Other lesser-known deductions include sunglasses, make-up and moisturiser via a sun protection claim for people whose roles mean they’re outside a lot (like an athlete, a teacher or even a journalist).
But this doesn’t mean you can claim your suit, heels or any other work wear – unless it’s a specific uniform you couldn’t really wear anywhere else (cue Chef again).
There are so many deductions that are specific to your job and industry, so it’s best to either have an accountant handle it or do your research to ensure you’re claiming what you’re entitled to and are reducing the amount of income the government can claim tax on.
Special professionals can use a wonderful thing called ‘income averaging’
This might be one for a tax accountant to handle, but if you’re a ‘special professional’ (so a sports person, author or freelancer, production worker, performance artist or inventor) the ATO totally gets you and the fact your income year on year is probably akin to an EKG.
Because you can’t guarantee the same income each year, paying set tax rates can be pretty harsh some years. So the ATO allows you to pay tax on the average of your income.
This averaging can see you get back quite a pretty sum on your tax return, so be sure to look into it or bring it up with your accountant if you’re eligible.
Explain the whole Medicare Levy thing to me, please
Technically there’s another tax we pay in addition to income tax, and that’s a 2% levy of our taxable income taken to help fund our public health system. So if you went to a public hospital and received free treatment, it’s because taxpayers, like yourself, gave 2% of their net income to the government for this specific purpose.
If you’re a low income earner or aren’t able to use our public health system (because you’re a foreign resident, for example) then you’ll have it reduced or not have to pay it at all.
Why are there so many ads telling people to get hospital cover?
The reason why everyone rushes to get private hospital cover by June 30 for the following tax year is because if you don’t have appropriate hospital cover, the ATO will slap you with an extra % charge depending on your level of income. Probably because they want to dissuade people from forgoing private hospital cover and rorting the free system.
There you have it.
This just scrapes the surface of the whole tax shtick – so considering you can get a deduction the following year for using a tax agent, it might be worth investing in one; they’re usually privy to a bunch of deductions you might never have claimed otherwise. But if you want to go rogue and use the online myTax system, hopefully this is a good start to understanding the complex and confounding arena of taxes.
Figure out if you need to read the rest of this article by seeing if you ace this ridiculous quiz. Get psyched for tax season guys:
Sonia is the editor of The Cusp and only just this year learned about income averaging.