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Death and taxes - you can only survive one!

Jason Nguyen

“In this world nothing can be said to be certain, except death and taxes”. It’s a pretty grim quote from our mate Benjamin Franklin, and not entirely inspiring for those of us looking to do our taxes!
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Taxes - your subscription service to life

“In this world nothing can be said to be certain, except death and taxes”. 

It’s a pretty grim quote from our mate Benjamin Franklin, and not entirely inspiring for those of us looking to do our taxes!

Tax time isn’t always fun, but it doesn’t have to be as daunting as the grim reaper.

Call taxes a ‘subscription fee’ for being able to enjoy the benefits that we are afforded in our country, funding government initiatives and programs like education, public utilities, infrastructure, hospitals and social security. 

Even though you never asked for this subscription service, it doesn’t mean you don’t benefit from it and certainly doesn’t mean you can’t make the most of it!

In this topic, we’ll cover:

  • The basics of how your tax is calculated
  • When to go it alone or get the help of a tax agent
  • Deductions and other methods to reduce your tax (including your COVID-19 home office claims!)
  • A typical checklist for your tax documentation
  • Considerations for using a tax agent

Back to basics

It’s time to refresh your tax basics - hopefully these formulas don’t give you PTSD from your uni days.
 

Tax Payable = Tax Rate (%) x Taxable Income (TI) 

TI = Assessable Income (AI) - Allowable Deductions (AD)
 

Taxable, ‘net’ income is the sum of all ‘assessable income’ you earn each year, minus the sum of ‘allowable deductions’ you have paid during that same year. Tax is a ‘self-assessment’ system, meaning you have to declare all of your income yourself, as well as personally make a claim for all amounts you are entitled to deduct.

Without going into the nitty gritty of progressive tax rates (which increase as your TI increases), Medicare levy and tax-free thresholds, the most important thing to be mindful of are the two buckets: income, and deductions. If you feel you have a good grip on these, then completing your tax return yourself will be a cinch.

Should you go solo or hire an agent?

The decision to complete your tax return yourself or pay a professional to do it is an individual one. This ultimately depends on your tax circumstances, available time, financial situation and individual preference.

However, there are some broad scenarios where it makes sense to either go it solo or outsource the dirty work to the experts. We’ve broken down these considerations below.

Going Solo

If you’re just starting working life and not yet a fully-fledged-property-empire-owning-don, then chances are you’re best off completing your tax return yourself.

There are a few things to consider whether this scenario applies to you:

  • You have a single source of income and basic ‘allowable deductions’ (more detail below)
  • You are willing and available to spend the time completing and lodging your tax return
  • Every dollar counts and you don’t want to spend your hard-earned income on a tax agent
  • Your financial and tax situation is straightforward and doesn’t take a rocket-tax-scientist to figure out

Hiring an Agent

If any of the following sound familiar:

  • The rules and guidance start to feel too complicated, and it’s all piling up
  • You want convenience and the peace of mind that it’s done correctly the first go
  • Time is money and this is not something you want to spend effort on
  • You are considering or have multiple avenues of income (including assets that generate you extra income e.g. investment property)
  • Your financial situation is complex and the answers in your tax return aren’t straightforward (e.g. you’ve spent time earning income in another country this financial year or your finances are split with another party)

Then it may make sense to have a professionally licensed tax agent advise and manage your activities, to prepare and lodge your tax return for you. We’ll cover this in a bit more detail further below.

Going it alone - the breakdown

A Basic Example

Let’s take an engineer who is often on the road, making site visits to inspect phone towers her employer erects and maintains.

Each month, she is paid $5,000. In a year, that’s $60,000 of ‘allowable income’ (AI). She pays out of pocket for her own equipment (that she uses solely for her job) and some professional fees for engineering associations. All up in that year, she determines she spent $5,000 of ‘allowable deductions’ (AD).

Her ‘taxable income’ (TI) is calculated as $60,000 – $5,000 = $55,000, and that falls within the progressive tax bracket of 32.5% (for the 30 June 2020 tax year).

For someone who has a sole source of income and basic deductible costs, it would be manageable to stay on top of all amounts that fall within the AI and AD buckets - and therefore to lodge a tax return themselves. 

Deductions - An Overview

So - what can or can’t you include in your ‘allowable deductions’ bucket?

Broadly a deduction will be ‘allowable’ to reduce your taxable income if there is a close link to you earning that income. To claim a work-related 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

If the expense was for both work and private purposes, you can only claim a deduction for the work-related portion. 

It is important to assess the link between an allowable deduction, and the income you earn. To take the previous example, our engineer needs high-visibility clothing because her job requires it. She pays for it out of pocket, and it directly relates to her earning her income. This cost is an allowable deduction in this example. She also buys some books that she reads in her spare time. She can’t take a deduction for this, as it is for her personal leisure, is of a private nature and doesn’t have any direct relation to her salary. That cost is not an allowable deduction. We’ve provided some key examples for deductions directly related to your work below.

  • Vehicle and travel expenses: This includes travel expenses in the course of performing your work duties, such as travel between your office and a client or work site or between different workplaces (if you have two jobs). But before you start hoarding those train and bus receipts, note that generally you can’t claim for normal trips between home and work - this is considered private travel.
     
  • Clothing, laundry and dry-cleaning expenses: These expenses relate to the cost of buying and cleaning occupation-specific clothing, protective clothing and unique, distinctive uniforms. Your banging casual Friday outfit unfortunately doesn’t fit this bill!  Written evidence for this deduction may be required (evidence you purchased the clothing and diary records of cleaning costs) if the amount you claim is greater than $150 and/or your total claim for work-related expenses exceeds $300.
     
  • Home office expenses (COVID-19 or temporary basis): With COVID-19 creating a global army of work-from-homers, this category is more relevant than ever! If you’re working from home on a temporary basis due to an event such as COVID-19, bushfire or drought, you can make a claim for the additional running costs you incur. These include: 
    • Electricity expenses (heating, cooling, lighting)
    • Cleaning expenses for your work area
    • Phone and internet expenses
    • Computer consumables (e.g. printer paper and ink) and stationery
    • Home office equipment (computers, printers, phones, furniture etc.) - you can claim either the full cost of items up to $300 or the decline in value for items over $300 (meaning you claim the cost, divided over a number of years)

For more detail and tips on calculating these costs refer to the ATO website.

  • Home office expenses (permanent basis): If your home is your principal workplace with a dedicated work area (and not a temporary circumstance) you can also claim occupancy expenses such as rent, mortgage interest, property insurance, land taxes and rates. More information can be found here.
     
  • Self-education expenses: Deductions for self-education that relates to your current work activities as an employee. Courses are eligible if they maintain or improve the specific skills and knowledge required in your work activities and result in, or likely result in, an increase in your income.
     
  • Tools, equipment and other assets: Tools that cost $300 or less can be claimed as an immediate deduction, while for items over $300 you can claim a deduction for their decline in value. Note if you use tools for both work and private purposes you need to apportion the amount you claim.
     
  • Other work-related deductions: In addition to all of these, there are a bunch more deductions you can potentially claim provided the criteria above of a work-related expense. This can include books, phone expenses, overtime meals, seminars and conferences and union or association fees. Be sure to check out the full detail on the ATO website to see what could be relevant to you. 

For more information on deductions, refer to the Australian Taxation Office website here

Other Ways to Reduce Your Tax

In addition to work-related deductions, there are a number of other deductions and methods to reduce the tax you pay. These include:

  • Cost of managing tax affairs: You can claim a deduction for the expenses you incur managing your own tax affairs. This includes a number potential expenses,  including lodging your tax return through a registered tax agent. One of the perks of hiring a tax agent!
     
  • Gifts and donations: If you’re a great human being and have been or are planning to donate to charitable organisations, you may be in luck - these donations are often tax deductible! However keep in mind that the organisation you’re donating to must be a ‘deductible gift recipient’ (DGR) to claim a tax deduction. You can check out an organisations’ DGR status here. The ATO website outlines the conditions for a gift or donation to be deductible.
     
  • Personal super contributions: If you make a personal superannuation contribution (outside the compulsory contributions your employer makes to your super fund) you may be able to claim a deduction for these contributions. If you’re keen to contribute to your retirement then this is a good way to reduce your taxable income!
     
  • Salary sacrificing: This is an arrangement between an employer and an employee, where the employee agrees to forgo part of their future salary or wages in return for the employer providing them with benefits of a similar value. For example, people often salary sacrifice their payments for a company car. This reduces your taxable income for an expense or benefit you were likely to spend money on anyway! These arrangements depend on your employer - refer to the ATO website for more details.
     
  • Private health insurance: In Australia, the Medicare levy on your income (calculated when you lodge your tax return) helps fund our public health care system. If you’re earning below $90,000 a year, this levy will be 2% of your taxable income. However, once you start earning above this threshold, you’ll have to pay a Medicare Levy Surcharge (MLS) that can be anywhere from 1-1.5%, depending on how much you’re earning. That’s a minimum of $900 extra that you’ll be paying each year. If you have private hospital cover, you won’t have to pay the surcharge come tax time (and if you take out private hospital cover part way through the financial year, the surcharge will be calculated on a pro rata basis). There are plenty of basic hospital policies that cost less than $900, which means that taking out basic cover can actually save you money if you’re earning over $90,000! 

For more information on other deductions and methods to reduce your tax, head to the ATO website.

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What can private health insurance do for you during tax time?

What are some of the tax reasons for getting private health insurance? 

HCF shows you how you can save money on your health insurance and in your tax return by taking advantage of government incentives. 

Take a minute to check out their video below!
 

 

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What Information Will I Need?

To ready you for your tax return, we’ve provided a broad list of information you should be on top of for tax purposes below. Keep in mind that some of this information will be pre-populated against your personal tax file number through the ATO tax portal, if you give it some time!

Income:

  • PAYG Payment Summaries (your employer should provide this to you at the end of an income year)
  • Payment Summaries from Centrelink (if relevant)
  • Interest earned from bank accounts
  • Share dividend statements
  • Annual investment summaries (such as from managed investment trusts)

Expenses:

  • A list of work-related, allowable deduction expenses (including receipts)
  • Charitable donation receipts
  • Interest and fees on investment loans
  • Additional superannuation contributions
  • Income protection, personal, and private health insurances 

It adds-up - considering a tax agent

The benefits of a tax agent can range from simply being there to hold your hand and help you navigate the basics, to maximising opportunities and strategies once your investments get complicated.

Benefits of a Tax Agent

  • Save time and stress: Having an agent manage your tax affairs will free up valuable time for you to concentrate on your job or other things in life. Tax agents will oversee your annual compliance requirement, and as they know what to look for, they can give you a short, sharp and concise list of info you can quickly check off.
  • Extended deadline: Using a tax agent automatically grants you an extended lodgement deadline, giving you some breathing room to track down all the information you need. This information doesn’t need to be handed over to the ATO when you lodge the return, but if you are ever audited and need to provide it, having a tax agent who keeps you in line with your records is a good way to ensure you won’t fall afoul.
     
  • Expertise and resources: Income tax rules and regulations can change frequently, and sometimes in big ways. Tax agents are specialists in this area and can save you a lot of time and headache staying on top of this and making sure you get it right! Having the same tax agent year-on-year can benefit you over the long term as they will know your ordinary and out of the ordinary dealings. Agents also have access to more resources and all the information that is ‘pre-filled’ in the ATO’s records. As experts in this area, tax agents will ensure that you capture and assess all of your income (no less or more), while ensuring you make the most of clever tricks and avoid common pitfalls when it comes to your tax return.
     
  • Financial complexity: As your income and investments become more sophisticated (e.g. foreign income, interest and dividends, wills, property, shares and ETFs), having a tax agent who is across all of this can be a big advantage. Over time, a tax agent can become part of your financial ‘team’, ensuring the tax implications of your money-making decisions are sound and providing medium to long-term direction over your investments (such as navigating capital gains tax when selling your property).

Down to Brass Tacks - Choosing an Agent

If you decide that a tax agent is the right course for you, consult the Tax Practitioners Board (TPB) as tax agents need to be registered with the TPB. The TPB also provides general notes about the particulars that a tax agent can do (e.g. preparing and lodging a return, providing tax financial advice etc.) as well as useful information about a tax agent’s legal obligations to you.

Choosing an agent can be a daunting process, but ultimately the key components to keep in mind are:

  • The price you’re willing to pay (and quality trade-off as a result)
  • Your trust in and relationship with your selected tax agent
  • The agent’s understanding of your financial situation and ability to provide advice
  • Your individual circumstances and financial situation

Finding an agent that you have a good relationship with and can simply communicate tax advice is key! Making use of any referrals from family and friends is always helpful. However failing this, you can always explore the bigger tax agencies (such as H&R Block or Income Tax Professionals).

Don’t forget it’s important to discuss with a tax agent the specifics of what service they will (and are able to) provide to you. This includes:

  • Details of the work to be done, and timing
  • The cost of the work, and understanding how the tax agent’s pricing works (such as additional, ad-hoc advice)
  • Where your refund will be sent (if you are entitled to one after your return is lodged), and the timing
  • Whether there is a formal letter of engagement to document the service agreement.

Hope this hasn’t been too taxing!

So there’s your beginner’s guide to all things tax. Hopefully this topic hasn’t bored you to death. But then again, a wise bloke called Benjamin Franklin once taught us that death and taxes belong in the same category! Enjoy your newfound tax knowledge and hopefully you celebrate the end of financial year with a healthy tax return.

Stay tuned for upcoming topics or check out or other useful articles here. We’ve got plenty more gold to help you make the leap from top student to top professional!

Got feedback? We’d love to hear from you! Shoot us an email at contact@prosple.com

 

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Disclaimer: The information provided in this article is general in nature only and does not constitute personal financial advice. 
The information has been prepared without taking into account your personal objectives, financial situation or needs.