In 2021 Tax Tips

Beginners Guide to Income Tax

Tax time can be confusing and overwhelming, especially if you’re a beginner. But don’t worry, we’re here to help! 

In this guide, we’ll walk you through everything you need to know about income tax, including what it is, who has to pay it, and how to file your return. So whether you’re a first-time tax filer or just looking for a refresher, read on for all the information you need!

Are you new to filing income taxes? If so, you’re in for a treat! This guide will take you through everything you need to know to file your taxes correctly. 

In addition, we’ll cover topics such as what tax forms to use and what deductions and credits are available to you. So whether you’re just starting or you could use a little refresher, read on for our beginner’s guide to income taxes!

Are you new to Australia and wondering how your income is taxed? Or maybe you’re a long-term resident but have never filed taxes before. In either case, this guide is for you! 

We’ll go over everything from what tax rates apply to you to which forms you need to submit to declare your taxable income. So whether you’re a student working part-time jobs during the year, or a business owner with numerous sources of income, read on for all the info you need to file your taxes in Australia.

Are you confused about income tax? Are you unsure of what to do when it comes time to file your taxes? This guide is for beginners and will teach you everything you need to know about income tax. 

We’ll cover topics such as how to report your income, how to file a return, common deductions and credits, and more. So whether you’re a first-time filer or want to brush up on your knowledge, please keep reading for our beginner’s guide to income tax!

If you’re like most people, the idea of doing your income tax can be pretty daunting. But don’t worry – this beginners guide will walk you through everything you need to know to get your taxes done right. 

We’ll cover taxable income, how to report it, and some tips on minimising your tax bill. So whether you’re a first-time filer or just looking to brush up on the basics, read on for all the information you need to get started.

Missing tax return deadline? You’re not alone. According to the IRS, about one-third of all taxpayers file their returns after the deadline. But don’t worry, there’s still time to get your taxes done and filed on time – even if you’re a beginner. 

In this guide, we’ll walk you through everything you need to know about income taxes, from filling out your tax forms to filing your return. We’ll also share tips for reducing your taxable income and maximising your tax deductions. So whether you’re a first-time filer or just feeling behind on your taxes, read on for all the information you need to file on time.

Do you have to file an income tax return this year? Are you unsure about what tax bracket you fall in or which deductions and credits are available to you? Don’t worry; we’re here to help. 

This beginners guide to income tax will explain everything you need to know about filing your taxes, so you can be confident that you’re doing it the right way. 

We’ll cover topics such as how to determine your taxable income, what deductions and credits are available, when to file your return and more. So whether you’re a first-time filer or just looking for a refresher course, read on for everything you need to know about income taxes.

Let’s get started!

What Is Income Tax?

Income tax is a reality of life for anyone earning money in Australia – and for most people, the process of putting in a tax return has become a relatively straightforward annual habit. But what if you’re new to the tax system?  

Maybe you’re starting your first after school job, or you’ve just finished school or uni and heading into your first job, or you’re a newly arrived migrant. Whatever the reason, it’s understandable that you might not fully grasp the income tax system in Australia just yet.

Income tax is paid on all forms of income, including wages from your job, profits from your business and returns from investments such as bank interest and dividends. It can also be payable if you sell or give away a valuable asset such as a house or shares.

Each individual is allowed to have an income of up to $18,200 each year without paying income tax, and this is called the tax-free threshold. However, if your income is more than $18,200, you will probably have to pay tax.

Australia has what is called is a ‘progressive tax system’. That means the higher your income, the higher the rate of tax you need to pay. 

Our lowest tax rate is 19%, which 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, and most people pay somewhere in between.

You usually have to pay tax when you earn money from employment, pensions, government payments, investments, and foreign income.

The amount you pay depends on:

  • how much you earn, and
  • any deductions or offsets you can claim

If you’re an employee, your employer will deduct tax from each pay and send it to the Australian Taxation Office (ATO) on your behalf.

You need to set aside and pay the money yourself if you’re self-employed.

At the end of each financial year, most people need to lodge a tax return with the ATO. You can do it yourself through ATO online services, accessed via your myGov account, or with the help of an accountant or tax agent.

Types Of Taxable Income

Income can be earned in a variety of ways, including:

  • Employment income (such as salary and wages, allowances, bonuses, tips, fringe benefits, lump-sum payments and super contributions)
  • Centrelink and other government payments (such as the age pension, disability support pension, Austudy, Abstudy, Jobseeker, Newstart, youth allowance or carer payments)  
  • Investment income (including bank interest)
  • Business income

Personal income tax (PIT) rates

A resident individual is subject to Australian income tax worldwide, i.e. income from Australian and foreign sources (except for certain foreign income and gains of temporary residents; see Capital gains under the Income determination section for more information).

A non-resident individual is liable to Australian income tax only on income (other than interest, royalties, and dividends, which are generally subject to withholding tax [WHT]) derived from sources in Australia and certain statutory income that is taxable on a basis other than source (e.g. certain capital gains).

Australia has no surtaxes, alternative, or other income taxes on personal income.

The Australian government has implemented a seven-year Personal Income Tax Plan to provide tax relief to individual taxpayers through lower PIT rates, Low and Middle-Income Tax Offsets, and an increase to the top threshold. The 32.5% marginal tax increases rate applies. 

The next phase of the tax cuts will eventually remove the 32.5% and 37% marginal tax rates, which will result in around 94% of Australian taxpayers facing a marginal tax rate of 30% or less in 2024/25 and later income years.

Working holidaymakers

Special income tax rates apply to a working holidaymaker who typically holds a temporary working holiday visa or a work and holiday visa in Australia. 

The first AUD 45,000 of a working holiday makers’ income (broadly, the assessable income derived from sources in Australia, less related deductions) is taxed at 15%, with the balance taxed at ordinary rates.

How Do I Pay Income Tax?

If you work for an employer, income tax will be automatically deducted from your wage or salary and paid directly to the Australian Taxation Office (ATO), which means the amount you receive in your bank account every payday is the amount after tax.  

You have to account for income tax yourself with other forms of income, such as business profits or bank interest.

Every year, most taxpayers need to complete an income tax return, which is a document that records all your income for the year and allows you to work out your tax liability. Sometimes, your employer will already have paid enough tax on your behalf during the year so that you won’t owe any tax to the taxman. 

Often, you’ll have paid a little bit too much tax, and you’ll be eligible for a refund. However, if you earn other income outside your job, or if none of your income is from a paid job, it’s most likely you’ll have to pay tax based on the liability you calculate in your tax return.

Who Has To Lodge A Tax Return?

Taxpayers who must submit a tax return include:

  • Most resident individuals whose total income exceeds the $18,200 tax-free threshold for the income year
  • Every individual carrying on a business or profession regardless of income or loss
  • Any resident taxpayer earning less than $18,200 who has had tax withheld from that income through their job

When Do I Need To Do My Tax Return?

You need to lodge your tax return as soon as possible after 30 June and no later than 31 October (the deadline) each year.  

If you lodge your tax return through a tax agent, then you will normally be granted an extension of this deadline beyond 31 October, but only if you are listed with the ATO as a client of the tax agent by that date.

And What About Deductions?

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As well as recording your income, you can also use your tax return to claim deductions for certain expenses incurred by your work activities during the year. These deductions reduce your taxable income and are often why many people get a tax refund when they lodge their tax returns.

The most common deductions are those related to money spent as part of your work. For example, suppose you have spent money on something to do your job (such as purchasing uniforms, paying for travelling or ongoing education expenses). In that case, you may be entitled to claim that cost as a tax deduction.

Examples of some of the deductions you may be able to claim include:

  • Vehicle and travel expenses
  • Clothing, laundry and dry-cleaning expenses
  • Home office expenses
  • Self-education expenses
  • Tools, equipment and other assets
  • ATO interest – calculating and reporting
  • Cost of managing tax affairs
  • Gifts and donations
  • Interest charged by the ATO
  • Interest, dividend and other investment income deductions
  • Personal super contributions
  • Undeducted purchase price of a foreign pension or annuity

But it’s a good idea to double-check anything you are looking to claim with your tax agent first to ensure it’s eligible, and it’s important to have receipts and documentation to support every claim. Remember only to claim what you are entitled to. 

You cannot claim private expenses or things that your employer has reimbursed. If you are unsure, you can always ask one of the tax professionals by popping into your nearest office.

Medicare Levy And Surcharge

Most people pay a Medicare levy, 2% of their taxable income. The levy is charged as part of your yearly income tax assessment.

If you’re on a low income, your levy may be reduced, or you may not have to pay it at all. If you’re on a higher income, you may also have to pay a Medicare levy surcharge of between 1.0 and 1.5% of your taxable income. It depends on the level of private health insurance and how much you earn.

Is Income Tax Complicated?

It can be, and that’s why so many people choose to use a tax agent to prepare their tax returns. Getting professional help takes the stress out of the process and ensures your return is correct and lodged on time. Best of all, tax agents will often be able to highlight deductions you didn’t know you could claim!

FAQs

1. Can I claim the costs of seminars as an education tax deduction?

The costs associated with seminars are tax-deductible, provided they relate to your current income-producing activities.

2. I want to contribute extra money to my superannuation account. Are there superannuation contribution limits?

There is a limit to the amount of money you can voluntarily contribute to your super fund on a concessional basis. This is because superannuation contribution limits operate to limit each year’s tax benefits.

Making contributions over the limits results in additional tax payable, and excess concessional contributions are counted towards the non-concessional cap. 

Concessional contributions are essentially those contributions that are tax-deductible and include employer contributions and personal contributions claimed by the self-employed. 

The current concessional contributions cap is $27,500 per annum regardless of age. 

If you are older than 67, you will need to meet a work test to contribute to super in most cases. You need to work for at least 40 hours during 30 consecutive days at any time during this financial year to make tax-deductible and non-deductible contributions to super.

Non-concessional contributions are those made from after-tax income. There is no contributions tax applied when they are contributed to the super fund. However, the normal fund tax rates apply to earnings once in the fund.

The non-concessional contributions cap is $110,000. It follows that  $330,000 can be contributed over the three-year fixed period under the ‘bring forward rule’.

If you have a total superannuation balance of close to $1.6 million, you can only access the bring-forward rule for the number of years that would bring your balance to $1.6 million. 

Once you trigger the bring-forward rule and your balance reaches $1.7 million, you can’t make any further non-concessional contributions even if you still effectively have not fully used up the remaining of the bring-forward cap triggered.

If you triggered the bring-forward rule before 2016/17, but the full $540,000 was not contributed, you will be limited to a transitional bring forward cap.

If you are over 65, you cannot utilise the ‘bring forward’ rule, even if you meet the work test.

3. I have been thinking about salary sacrificing money into my superannuation account? Is there a limit to how much I can salary package?

Your employer pays amounts paid into superannuation to meet the Superannuation Guarantee obligations, and amounts paid under a salary sacrifice arrangement are called concessional contributions.

Salary sacrificing into super involves asking your employer to redirect a portion of your pre-tax pay into your super fund. These contributions are taxed at a rate of 15% in the super fund. This is a lower tax rate for most than their marginal tax rate.

The concessional contributions cap per annum, per individual, is $27,500. If the total of your employer super guarantee contributions and salary sacrifice contributions go over this cap, you may have to pay extra tax.

Check your employment agreement or speak with your employer before arranging salary sacrifice into super. 

4. I am over 60 years of age and retired. Will my superannuation pension be tax-free in future?

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People who have reached 60 no longer pay tax on superannuation income streams (pensions or annuities) paid from a taxed fund. A taxed fund is one where contributions tax was paid on the contributions made by your employer into your super fund on your behalf.

Contributions tax would also have been paid for contributions made under a salary sacrifice arrangement. Most funds are taxed funds. However, taxpayers who belong to an untaxed super fund will still have to pay tax on their superannuation income stream, irrespective of their age.

Taxpayers over 60 years of age (for the full financial year) and receiving a superannuation income stream from a taxed fund no longer receive a PAYG Payment summary.

5. I have heard that salary sacrificed superannuation contributions will now be reported on my PAYG Payment Summary. What implication will there be for me?

If you have salary sacrificed into super, the amount contributed is included in the reportable employer superannuation contributions amount shown on your PAYG payment summary. 

Also included are any superannuation contributions for which a tax deduction has been claimed. This means that any entitlement you have to any benefits from Centrelink or the Family Assistance Office that are subject to an income test will consider those amounts.

It also contributes to calculating any Child Support payments and is used to determine your liability to such things as the Medicare levy surcharge or repayments of HECS-HELP debts. They may also impact any tax offsets you can claim on your tax return.

6. I pay extra contributions to my superannuation fund. Can I claim this on my tax return?

Even if your employer must contribute to your super, you are now eligible to contribute and claim a tax deduction.

Before 1 July 2017, you needed to be self-employed to claim a tax deduction for personal contributions.

Contributions that you claim as a tax deduction counts towards the $27,500 concessional contributions cap, along with any contributions your employer pays. If this cap is breached, you may have to pay excess tax. 

However, from the 2019 year, if you have not used your concessional contributions cap for the year, the excess may be carried forward and used in a future year (within five years).

If you claim a tax deduction for a contribution you have made, you are not eligible for the super co-contribution for the amount you claim.

You must receive an acknowledgement from your super fund that a valid notice of intent has been received BEFORE you claim the tax deduction.

If you make a personal contribution to super, you don’t have to claim a tax deduction. It will be treated as a non-concessional contribution and won’t be taxed in the fund. You may be eligible for a co-contribution for amounts not claimed as a tax deduction. 

7. Why am I asking my superannuation fund what my tax file number (TFN) is?

Suppose you do not tell your superannuation fund what your TFN is. In that case, the fund will be required to pay additional tax on any contributions made by your employer (including salary sacrifice amounts).

Without having your TFN recorded, your fund will not accept any personal contributions that you make, and the government co-contribution you may be entitled to cannot be paid into your account.

8. When are payers (employers) legally required to issue PAYG Payment Summaries?

Generally, payers are required to supply a payment summary within 14 days of the end of the financial year – i.e. 14 July. 

If an employee ceases employment part-way through the year, one must be supplied within 14 days of receiving a written request from the former employee, and the request must not be made any later than 21 days before the end of the financial year. 

If a former employee has been receiving reportable fringe benefits (RFB) and leaves before the end of March, then the 14-day limit may need to be extended.

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