Tax time has almost reached it’s deadline, so whether you’ve already submitted your tax return or are in the process of doing so, today we are answering all of the basic but fundamental questions to make sure you are doing it right. To help us out, we paid a visit to Kevin Duong, an accountant in the Business Advisory division at Pilot Partners Chartered Accountants Brisbane.
The Basics of the Income Tax System
The ATO (Australian Taxation Office) collects tax in two main streams, firstly at the corporation level (companies) and at the individual level (people earning a salary, i.e. you).
What is usually the case is that your employer will deduct tax from each pay and send it to the ATO on your behalf. This is known as Pay As You Go (PAYG) withholding, it’s basically a prepayment of your own tax bill. This is done so that at the end of the financial year you don't have one big tax bill. You should be able to see the amount of tax that has been taken out by your employer on your pay slips.
So when it comes to completing your tax return, the total PAYG withholding amount your employer has taken out throughout the year is compared to the ATO’s calculation of the amount of income tax that you need to pay. From this, the ATO determines if you have a tax refund (you get money back) or a tax payable (you need to pay a bill because the withholding wasn’t enough to cover your taxable income).
Submitting your Tax Return
Submitting your tax return is something you may have done before and will be doing for years to come. So how does this process work? You basically have two options:
1.Submit your return yourself, or
2. Go to an accountant (Kevin Duong to name one).
Let’s start with Option 1- Submit your return yourself :
A lot of young people choose to lodge their return themselves online. It is made fairly easy by the ATO using mytax. The ATO pre-fills a lot of information and automatically calculates your tax for the year. In order to lodge this way, you require a myGov account linked to the ATO. You have approximately 4 months to get your return together, from June until the 31st of October. What many people choose to do is if you think you will be receiving a tax refund, you might fill in your tax return straight away to get that money back, however if you think you will be required to pay money back often people choose to delay it to plan for that.
Option 2- Using an Accountant:
Many people may decide to use a tax advisor to complete their tax return for a variety of reasons. Firstly, if you have a very complicated tax return, an accountant can save you a lot of time. For instance if you have investments in shares, dividends, investment property, rental properties etc., it may be hard to manage it yourself particularly if you were to sell something which takes into account capital gains tax. The deadline for tax returns when going through an accounting agent is also a lot longer, being May 31st of the following year compared to October 31st of the current year.
In terms of costs of an accountant, generally a mix of a fixed fee and an hourly rate is charged. You are provided a quote based on a fixed amount, however depending how complicated it is for example if you require specific advise, there may also be an hourly rates. As we will explain in the next section, these fees can actually be claimed on your tax return.
We all have heard different stories about what you can and can’t claim on tax (some too good to be true) ... So what are the boundaries for claiming? Generally, the ATO allows you to claim anything that is in connection of you earning your assessable income. Evidently, this is a fairly broad statement, and ATO guidance for claiming can be found here. Kevin gave us the example that if you are required to drive to different clients for work, you would be able to claim your car expenses between those places however not between your home and work and also given the fact that you aren’t already reimbursed by your employer. Further work related expense claims might include attending work-related seminars, mobile phone expenses, and dry cleaning depending on your profession (have a look at deductions for specific industries). Aside from this, there is also the possibility to claim for the cost of managing tax affairs. This simply means that on your tax return you can claim the fees of hiring an accountant who did your tax return, quite an incentive.
BUT let's not forget the rules involved with claiming. To claim a deduction:
you must have spent the money yourself and weren't reimbursed
it must directly relate to earning your income
you must have a record to prove it.
Kevin reiterates the third point of keeping receipts and invoices as if you can’t prove you spent it, you cannot claim it. In fact, the ATO recommends keeping a record of 5 years. Now it seems a bit ridiculous to hold on to receipts for that long which is why it’s the best idea to set up a folder on an online drive (e.g. dropbox, onedrive, icloud) and scan all of your receipts straight onto there with a folder for each year. That way you can easily retrieve any receipts if you were required to. On top of this, the ATO actually has a myDeduction app, to keep track of your records and tax in one place.
Do I get the whole amount back when I claim?
Myth: Yes, you get everything back that you claimed for.
Reality: No, tax deductions can reduce your ‘taxable income’, meaning you don’t get taxed as much and get part of the cost back for deductible items.
Final Tax Tips
To wrap up our chat on Tax, here are some final tips to take away:
Don’t claim expenses that aren’t work related or including income that’s assessible (the ATO is fairly smart and will catch you out)
Make sure you keep records of all expenses digitally
Check out this Tax Ready Reckoner from Pilot Partners
Remember to lodge your tax return by the required date ( you don’t want the tax office chasing you)
Refer to the ATO website for guidance on submitting your return and claiming