You’ve just started a job. You know you need to pay tax in your income, but you’re not exactly sure that it is or how much you need to pay. Let’s break it down.
What Is Income Tax?
Income tax is a percentage you are obligated to pay to the Australian Taxation Office (ATO) once you earn over $18,200. Your employer will take out a certain percentage based on the amount you earn from your before-tax income. The difference you receive is your after-tax income. That’s the income you take home.
Australian has a progressive tax system, meaning the more you earn, the more tax you’ll need to pay. Your taxes are used to fund local, State and national development to benefits the whole of society, such as schools, the police force, the army, roads and capital works.
What Are The Tax Rates?
The personal income tax rates for 2020-21 for Australian residents for tax purposes is:
|Taxable Income||Tax to be paid on this income|
|0 – $18,200||Nil|
|$18,201 – $45,000||19 cents for each $1 over $18,200|
|$45,001 – $120,000||$5,092 plus 32.5 cents for each $1 over $45,000|
|$120,001 – $180,000||$29,467 plus 37 cents for each $1 over $120,000|
|$180,001 and over||$51,667 plus 45 cents for each $1 over $180,000|
What Is PAYG
PAYG stands for Pay As You Go. This is the incremental amount of money that is taken out of your wage by your employer before they pay you your after-tax income in each pay period, which could be weekly, fortnightly or monthly. Your employer then will pay the ATO your tax withholding on your behalf. The tax you pay will be on your end of year income statement, which is used by a tax agent to claim your tax deductions.
What Are Tax Deductions?
Tax deductions are work expenses that you have incurred throughout the year that you can claim back when you lodge your tax return. There are three things you need to remember about claiming tax deductions:
- You must have already spent the money and be out of pocket. You can’t claim expenses on things you haven’t bought yet
- The expense must relate to the way you earn your income. You’ll get into trouble if you claim expenses that are fake or are private in nature
- You must be able to prove your expense, so keep your receipts, bank statements, tax invoices and any sort of financial documentation to prove your expense. The ATO can ask to see your proof for up to five years from when you lodged you tax return.
Pro Tax Tip: You can keep electronic copies of your receipts if they are a clear and true representation of the original. There are good apps that can help you keep a track of your expenses and also categorise them. The key to getting the best tax refund you can is to be organised.
Generally speaking, the types of expenses that can be claimed are:
- Vehicle expenses
- Travel and meals
- Uniforms and clothing
- Home office
- Unions fees, subscriptions, journals, licensed, certifications
- Your tax accountant
Tax time is between 1 July and 31 October, so you’ll have four months in which to lodge your tax return. You might even have up to the 15 May the following year if you book an appointment by 31 October with a tax agent and use them to lodge your tax return.
Your Income Statement
At the end of the financial year, your employer (or employers if you have more than one job) will finalise your income statement so that you can lodge your tax return. Your income statement is like your pay-slip, only you get your whole years worth of information. It shows:
- Your year to date salary or wage
- The tax that has been withheld
- The superannuation amounts your employer is obligated to pay for you
Pro Tax Tip: As of 1 January 2021, your employer must offer to contribute into your choice of superannuation fund, as well as offer their default fund. Read more here (link to superannuation blog).
Do You Need An Income Statement?
You will need an income statement in order to lodge your tax return at the end of the financial year. Your tax agent will be able to access that information on your behalf. Your tax agent will also advise if your income statement is tax ready. It’s important to only lodge your tax return when your income statement is tax ready, otherwise your tax refund could be delayed. Only yourself, your employer, your tax agent, a nominated person (such as a family member) and the ATO should have access to your income statement.
What Is A Tax Refund?
After you lodge your tax return with the ATO, you will receive your tax refund if entitled. A tax refund is the difference between what you have paid out in tax throughout the year and the amount of the reduced tax payable due to tax deductions and rebates you have been able to claim. A tax return is the paperwork you fill out at tax time and send to the ATO.
Pro Tax Tip: Tax is complex. A tax agent will be able to get a bigger tax refund than you could do yourself because they know and understand all the valid claims you can make. Even if you think your tax return is only simple, there will be deductions you may not have even known about that can be claimed. Don’t miss out.
How To Get The Best Tax Refund
How can you maximise your tax refund and minimise the amount of tax you need to pay? Well, the best way is to claim everything you’re legally allowed to claim. You shouldn’t be out of pocket for your work expenses, and claiming everything you can is the key.
A log book, receipt storing app or diary is the best way to ensure that you don’t forget what you’ve bought. Log your expense as soon as you incur it. If you forget you’ve bought it, chances are you’ll also forget to claim it a few months later.
Keep your receipts straight away. Spending five minutes at the end of the day to go through your purchases and log your expenses will go a long way at tax time. Even if you’re not sure, keep it anyway. Your ITP Tax Accountant can let you know if your expense can be claimed.
The best way to ensure you’re claiming everything you can is to go to see someone who knows. A tax agent is on your side when it comes to claiming all of your expenses. They studied to be able to help people and businesses avoid paying more tax than they have to and can help you understand and spot any deductions you might be missing. They’ll also lodge your tax return for you and make sure there are no mistakes so everything goes smoothly.
Did you know that lodging a tax return is legally your responsibility? If there’s a mistake, you’re ultimately liable. Using a tax agent gives you the extra support you need for something so important and to ensure that things run smoothly with the ATO.
Pro Tax Tip: Are you 21 or under? ITP have a special price for lodging your tax return. For only $79, an ITP Tax Accountant will guide you through your tax return, claim your eligible tax deductions and lodge you tax return with the ATO on your behalf so you won’t have to worry about a thing. You can even claim their fees on next year’s tax return. Bonus!
ITP The Income Tax Professionals have helped Australian individuals and businesses for 50 years. Phone 1800 367 487 and for a friendly, no-obligation chat with a tax accountant today, or book an appointment online at www.itp.com.au.