As the end of financial year approaches, you may have started thinking about potential deductions for your lodgement, or even started planning out how you’ll be spending your tax return. In this blogpost today, we’ll be answering some frequently asked questions to help demystify the world of taxes and hopefully make some of your life admin less painful.
Am I entitled to a tax return every year?
The short answer is no, however, this is a very common misconception which isn’t helped by the phrase “lodging a tax return”. In Australia, we have a progressive tax system which essentially means your tax rate increases as your taxable income increases. In the current financial year, we have the below income-tax brackets:
Source: SuperGuide
If you are an employee, your employer is obligated to withhold the appropriate level of tax from your payslip and pay this amount to the ATO. This should be outlined on your payslip (usually as the difference between your gross pay and your net pay unless you have other pre-tax deductions) and will also be summarised on your PAYG statement, provided by your employer at the end of the financial year.
In theory, if your employer has withheld the correct amount of tax for your taxable income, you will not receive a “tax return” from the Australian Tax Office (ATO). Receiving a “return” from the ATO, means you have overpaid tax (your employer has withheld too much tax from your payslips) throughout the financial year. On the flip side, if you have multiple income streams and have not been paying any tax on your side hustles (e.g. Uber income), you may actually find that you owe money to the ATO for not paying enough tax throughout the year.
The reason many Australians receive tax returns every year is through claiming deductible expenses which lower your taxable income and corresponding tax payable. We will cover some of these eligible expenses later in the article.
When do I need to lodge my tax return?
An individual can lodge their tax return between the 1st of July and 31st of October for the previous financial year (1/06/2019 – 30/06/2020). Failure to lodge on time may result in a penalty from the ATO of over $1,000. If you have neglected your taxes for the past few years and you’re afraid of incurring additional fees, it may be worthwhile seeking a tax agent for further guidance. One thing is for sure, the sooner you get this issue sorted the faster you’ll have peace of mind!
What are tax deductions? What type of expenses can I claim on?
First, you need to know that you only pay tax on your “taxable income”, and this amount can be reduced through claiming eligible expenses. You should try and claim as many relevant expenses as possible to lower your tax payable because this means more money in your pocket.
It is important to note that an expense can only be claimed as a tax deduction if it meets the following three criteria:
- You must have spent the money
- The expense must be directly related to earning your income
- You must have a record to prove it
There are some exceptions to this rule which we previously covered in our blog post “4 tips to maximise your tax return” including an outline of some deductible expenses that don’t require receipt evidence.
If you are still confused about how this all works, here is an example: Katelyn is a consultant that earns a gross income of $80,000 per annum. Her role requires her to drive to different locations for work every day, and to wear a uniform with her company’s logo when presenting to clients. As such, Katelyn can claim travel expenses (such as petrol) for the duration or miles she drives in between work locations, the cost of purchasing her work uniform, and also the cost of dry cleaning for her uniform, as these are all expenses that relate to Katelyn performing her role and generating an income. After claiming all these deductible expenses, Katelyn’s taxable income may only be $76,300 for this financial year. Therefore, her annual tax payable reduces from $18,067 to $16,791 (saving her $1,276).
*Special Covid-19 work from home deduction rules
With coronavirus forcing thousands of Australians to transition to work from home (WFH) these last few months, the Australian government has released some new tax deduction rules related to WFH expenses.
For additional running expenses (eligible expenses here) you can now choose to use a “short cut method” to calculate your deductions for the period between 1st March 2020 and 30th June 2020. This method allows you to claim 80 cents for each hour you work from home during Covid-19. To be eligible for this, you must have a record of the number of hours you have worked from home on timesheets, your work diary, or rosters. If you choose to use this method, you cannot claim the actual expense of any of your items (more information on this method here).
If you do not wish to use this method, or if you have WFH expenses prior to the 1st of March, you can use the “fixed rate” method to claim:
52 cents per work hour for heating, cooling, lighting, cleaning and depreciation of office furniture
The work-related portion of your actual costs of phone and internet expenses, computer consumables (e.g. printer ink), and stationery
The work relation portion of depreciation for your computer, laptop or phone.
What’s the difference between a financial adviser and accountant or tax agent?
A tax agent specialises in the area of compliance and tax laws and will give you advice or help you file your taxes in an accurate manner. Similarly, an accountant is an expert in the area of tax, however, they are also strategists that will help you pay less tax within the constraints of the law. This may include helping you establish the most appropriate structures (e.g. trusts) to set up a business or family investments.
In contrast, financial advisers are concerned with your holistic financial plan to help you achieve your ideal lifestyle. We take into account all your short, medium and long term goals as well. Although our work is not centred around reducing your tax, a good financial planner will always ensure your strategy is tax-friendly and maximises your personal wealth. Remember, the fees you pay to your adviser and accountant are also tax deductible if they help you generate income (e.g. through investments)!
While we cannot help you file your taxes, your financial adviser can help you source investment statements and your superannuation/pension income statements to aid your tax return preparation.
Paperwork to have handy before filing your taxes
Before lodging your tax return this year, have the following information handy to ensure a smooth process:
- Copy of last year’s tax return
- Record of sales or purchases of any shares, business or property
- Spouse and children’s details
Income
- Payment summaries/business income
- Bank interest statements
- Pension or government payments
- Superannuation lump sum payments
- Employee share schemes/dividend statements
- Rental property income
- Foreign income
Expenses
- Work-related expenses (motor vehicle with logbook, travel, uniform, professional development, home office costs, running expenses)
- Income protection
- Investment expenses (bank fees, financial adviser fees, interest expense for geared investments)
- Rental property expenses (rates, body corporate fees, agent fees, interest on loans, repairs and maintenance, depreciation schedule)
- Charitable donations over $2
Please note that this is a general guide and not all information is relevant to you. If you work closely with an accountant throughout the year, they will have the majority of this information already prepared. Further information can be found here.
Is my tax return “free money”?!
As we previously explained at the start of this post, receiving a tax return means you have overpaid tax throughout the year. We know it can be tempting to treat this money as “free money” and spend it on a spontaneous holiday or shopping spree, but there may be more productive uses for this cash if you have some financial goals to achieve.
Think about it this way – instead of having this money in your pocket to save and invest throughout the year, it has gone to the ATO and not earned any interest or potentially benefited from market exposure. If your goal is it to buy a home or start a family, then setting aside your tax return to get you closer to these goals will feel much more worthwhile than buying the latest iPhone.
If you’re not sure what to do with your extra tax return money, contact your adviser for some guidance and don’t fall into the trap of spending it all short-sightedly!
