“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:
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.
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.
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:
If any of the following sound familiar:
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.
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.
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:
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.
For more detail and tips on calculating these costs refer to the ATO website.
For more information on deductions, refer to the Australian Taxation Office website here.
In addition to work-related deductions, there are a number of other deductions and methods to reduce the tax you pay. These include:
For more information on other deductions and methods to reduce your tax, head to the ATO website.
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!
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!
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
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:
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:
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!
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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.