We have spoken about finance and tax previously (here) but we thought that we would take it back a notch and start at the beginning for those that are struggling with taxes and are just not sure what you are supposed to do.
We all have to pay tax and most of us do it through gritted teeth, with everything on our to do list and feeling overwhelmed the last thing we need is to add taxes to that list.
It can be hard to get our heads around how taxes work and knowing what we can claim and not is really complicated and confusing, and who has to time to work it out really.
We know that we are all time poor and just want it to be simplified. So, we have broken it down and simplified it for us all. Taxes can actually be a really good thing in our lives if used in the right way. Surprising right!
You can use tax as a forced savings allowing us to have money available for holidays or home renovations.
But lets go back to the start first and look at what is tax?
What is income tax?
Income tax is paid on all forms of income, including wages from your job, profits from your business and returns from your investments such as bank interest and dividends.
You are allowed to have income of up to $18,200 each year without paying income tax. This is called the tax-free threshold. If your income is more than $18,200, you will probably have to pay tax.
It is still a good Idea to lodge a tax return every year even when you are below this threshold has you will still hold a tax number. Plus it set’s you up to know what you need to be doing in the case we you start to earn over the threshold.
Australia has what is called is a ‘progressive tax system’. That means that the higher your income, the higher the rate of tax you have to pay. Our lowest tax rate is 19% and this kicks-in on the first dollar you earn over the tax-free threshold. Our highest tax rate is 47% but this is only charged on income over $180,000. Most people pay somewhere in-between.
NB: Keep in mind that these may change from year to year so keep an eye on your pay slip and the ATO website for more information and any changes.
How do I pay income tax?
If you work for an employer, income tax will be automatically deducted from your wage or salary each time you are paid. The amount you receive in your bank account every payday is the amount after tax is taken out. Your employer pays this straight to the Australian Taxation Office (ATO).
Which means you don’t need to work it out. But it is still a good an idea to know what you are paying. In some cases, your employer may not be paying enough and therefor at tax time you may owe the tax-man money.
With other forms of income, such as business profits or bank interest, you have to account for income tax yourself, so you will need to show the amount you have earned and the interest earned on that income when you lodge your tax return.
No need to panic, your bank actually works this out for you too. Most people do internet banking and this information can be found there. The banks will also include this on your bank statement.
Every year, you will need to complete an income tax return. This records all your income and works out your tax liability. Sometimes, your employer will already have paid enough tax on your behalf during the year, so you won’t owe any tax to the taxman. Often, in fact, you’ll have overpaid tax and you’ll be due a refund. If you earn other income outside your job, or if none of your income is from a paid job, the chances are that you’ll have to pay tax based on the liability you calculate in your tax return.
As well as recording your income, you can also use your tax return to claim deductions for certain expenses which you incurred within the year.
These deductions reduce your taxable income and may get you a tax refund after you have lodged your return. This is where you can start your savings from.
The most common deductions are those which relate to money you spent as part of your work. If you have spent money on something in order to do your job, you may be entitled to claim them as a tax deduction, such as
- purchasing uniforms
- paying for travelling
- Private health insurance
- Income protection insurance
And let’s not forget that home office. With so many of us working from home now and it looks like it may be the way we continue to work. You may be able to claim that as well. Things like
- Internet (WiFi)
- Laptops (percentage over 3 years)
- Furniture (up to a certain amount)
- Running cost for heating/cooling
- Maintain cost of equipment or furniture
- Plus stationary.
There a few more that you may be able to claim check out the Australian Tax Office (ATO) for the full list here https://www.ato.gov.au/individuals/income-and-deductions/deductions-you-can-claim/home-office-expenses/#runningexp
Remember to only claim what you are entitled to. You cannot claim private expenses or things that have been reimbursed by your employer.
Private expenses include:
- Utility bills
- Food expenses
- White goods, fridge/washing machine etc.
So, we just took at look at what is income tax, how to pay taxes and what you can deduct. Now how to do we turn a boring and painful time to our benefit.
Now just a little disclaimer, we are not accountants or financial advising this is only general advice so always check with a professional before doing anything.
Okay savings, so, it works like this. On your statement at work mark the box that allows you increase and pay extra tax each pay.
The amount you get back at the end of the financial year will depend on your taxable income (how much you earn). Another thing to keep in mind is that you will not earn interest on this money. Just some food for thought, but still a great way to have some forced savings at the end of the financial year to help with those bigger bills or that holiday.
This is great especially if you struggle to maintain a savings account and always tapping into it, when your short on cash. It allows for that savings but not seen money to attempt you.
‘tax is taken out of your pay — you don’t miss it as you never had it — and every tax time, you get the extra back.’