Tuesday, 19 July 2011

10 Tips for 2011 Tax time

by Rob d'Apice
As is likely no surprise to you, income taxation is fundamental to making our Australian society work. In fact, 43% of the Government's expected revenue in the 2011-12 financial year is derived from it.

Total government revenue 2011-12.  Source


Paying income tax is the responsibility of all Australians such that we can get welfare to the less fortunate, public hospitals, free or low-cost education, critical infrastructure and really expensive, faulty, unused, unnecessary, Australian-made submarines.

It's important to know, though, that the government has designed a series of complex rules regarding the quantum of tax you should be liable to pay.  An oversimplification of these rules might suggest that they come from two different sources:
  1. The broad principle that any expenses incurred in the course of earning taxable income should be tax deductible; and
  2. A variety of tax incentives/penalties designed to encourage/discourage certain behaviour (eg charitable donations, private health cover for the rich, having lots of babies, etc.).
It's important that you understand these rules, at least to the extent that they impact you. Ignoring them can lead to two unfortunate results:
  1. You don't pay enough tax. The tax office has powers to review your tax return many years after its submission, meaning that you can still be liable for mistakes you have made many years in the past (they won't simply forgive the amount owing - you'll need to pay it all back).
  2. You pay too much tax. Ignoring the rules might mean you are paying tax on income that the government decided you shouldn't have to pay tax on (and your fellow taxpayers aren't paying tax on).  Finding $1,000 worth of deductions to which you are entitled could mean reducing your tax liability by several hundred dollars.
So, on that note, here's our 10 Tips for 2011 Tax Time!

Disclosure: we are not tax accountants or tax lawyers.  We can't guarantee the accuracy of this information.  When in doubt, consult a tax lawyer or the ATO.


1. Understand the Basics

Gross income.  Your whole income before any deductions and before any tax is applied (this amount will be bigger than your 'take-home' cash, that already has tax withheld from it).  Gross income includes regular PAYG income, bank interest, investment returns, government welfare, and services you may have charged for as a contractor (if you have your own ABN).  See Tip 3 for more.

Deductions.  Expenses you have incurred that are 'tax deductible'.  This means that the whole amount of the expense is deducted from your Gross income before tax is applied.  Conceptually, think of it as netting our the gains of your employment (Gross income) with the costs associated with your employment (deductions) to work out the net amount that you 'really' earned from your employment, in other words your...

...Taxable income. Gross income less deductions.

Medicare Levy. A levy charged to all Australians (1.5% of taxable income), unless you qualify for reduction or exemption.  You can qualify if you have a low income, are in medical hardship, are residing overseas or you are a temporary resident in Australia and are not entitled to Medicare.  E-tax will calculate your eligibility for exemption.

Medicare Levy Surcharge.  An additional 1% levy payable if your taxable income is greater than $77,000 (or $154,000 for couples/families) AND you do not have an adequate level of private health insurance.

Gross tax payable. The total amount of income tax (including medicare levy and surcharge) based on your taxable income.

Offsets. An entitlement that reduces your Gross tax payable by a specified amount.  For example, the (unnecessarily complicated) Low Income Tax Offset (best explained here, but you don't really need to know the details - E-tax does the grunt work for you).

Tax Refund / Tax Debt.  Your Gross Tax Payable, less Offsets, less total Taxes Withheld (the tax your employer has already paid for you).  If this number is negative, you've overpaid tax and the ATO will send you your money.  If it's positive, you owe more tax than you've paid and you have to send it to the ATO.

2. Get E-tax

If you've ever done your tax before, you've used it.  E-tax 2011 is an application built by ATO that helps you lodge your tax return. The interface is questionnaire-based, and there's plenty of (perhaps overly) detailed help along the way, so if your situation isn't too complicated it's the best way to DIY your taxes.

It's Windows only, though, friends.  You (we?) mac-lovers will have to head to your parents house to get it running. (The upside? The costs associated with your journey are tax-deductible! Yep, any costs associated with lodging your tax return are tax deductible.)

3. Declare all your income

If you're working, your employer(s) should give you a PAYG statement that will list your 'Gross Payments' (the total amount of money you earnt, inclusive of tax) and your 'Total Tax Withheld' (a portion of your Gross Payments that your employer didn't pay you, and instead forwarded to the ATO as a tax payment on your behalf).

All your PAYG should obviously be entered into E-tax.  However, there are a few other key sources of income that young people should be aware of:

  • Youth Allowance / Newstart Allowance (or other centerlink payments).  Centrelink should send you a statement with your total payments, including any amounts of tax withheld. (Item 5)
  • Bank account interest. You should include any interest you earned from online savings accounts, transaction accounts or managed fund investments. Often net-banking interfaces will have a section for showing you this exact information. (Item 10)
  • Personal Services Income. If you have an ABN, and have used it to invoice a business as an independent contractor, you need to declare the amounts you were paid. (Item 14)

4. Deductions: know when you need written evidence

If your total work-related tax deductions are less than $300, you do not need to keep written evidence for these deductions (but you do need to be able to show how you worked it out, if requested).  

If you are claiming more than $300 in total work-related expenses, you'll need to keep written evidence.  It won't be submitted to the ATO, but the ATO can request for up to 7 years.

IMPORTANT: Written Evidence doesn't have to be receipts. Written evidence can include bank or credit card statements, email receipts or BPay receipts. All of this stuff is easily stored online, should the ATO request it. Additionally, many receipts, like internet and phone services, can be emailed to you instead of sent by paper.  This is not only good for the planet, it's great come tax time.

To qualify as Written Evidence, a document must have:
  • The name of the supplier
  • Amount of the expense
  • Nature of the goods or services (if not shown, you may write this on the document before you lodge your tax return)
  • Date the expense was incurred, and
  • Date of the document
A credit card or bank statement showing the relevant transactions can cover of all of these points.

Note that special 'written evidence' rules apply for car expenses, meal allowance, award transport payments allowance, and travel allowance expenses. E-tax will give you the details when you get to these questions.

5. Deductions: do you use your mobile phone or internet connection for work?

If you make calls on your mobile phone, or use your home internet connection for work, you can claim the expense as a tax deduction.  Your mobile phone statements, or your creditcard statements, can count as 'written evidence'.  Put this under Item D5 - Other Work-related expenses.

If you use a mobile phone or internet connection for both personal and work purposes, you need to attribute a percentage of the total cost to work-related expenses.  The written evidence required for this is an analysis of 4 weeks of usage - dividing up how much usage was work-related and how much was personal. The % split can then be used for the whole year's worth of expenses. The ATO suggests looking through a phone bill and working out the % of calls that were work-related vs personal, but it's somewhat ambiguous now that mobile phone plans include add-on services like data, SMS, etc - just make sure whatever approach you take is defensible if the ATO requests your documentation.

6. Deductions: Use computer hardware/software for work? Welcome to the whacky world of depreciation.

If you use your home laptop or desktop computer and peripherals for work, you can claim the cost of these goods as a tax deduction.  While depreciation is scary on the surface, this is a good example of something that is actually fairly simple being presented in a crazily complex way.

Firstly, you need to be able to divide the expenses based on personal/work usage.  This can be done using the sample 4 week sample ratio methodology as above. The ATO's website suggests keeping a diary of usage for 4 weeks then calculating the ratio based on time. Again, just make sure you could defend your approach.

If the total cost if less than $300, you can claim the total expense immediately as a full deduction in this financial year. Answer 'yes' for Item D5 - Other work-related expenses, and put the item in table at the top of the next page. No depreciation needed. Easy.

If the cost is greater than $300, you need to depreciate the expense over-time.  In simple terms, if you buy a $1,500 computer that will last 3 years, you can claim $500 this financial year AND $500 in the next two financial years.

E-tax will handle the calculation for you, but it's not as easy as the above example suggests.  Go to Item D5 - Other work-related expenses, then click the 'Decline in value' button under the table.  This opens up a worksheet that needs to be completed for each item that you are depreciating. Here's a run through of the key information you need to fill out (let me say again: it seems much more complex than it really is):
  • Description of the asset
  • Personal use percentage. As per the methods described above.
  • Date acquired
  • Cost
  • Asset type. Pick from the drop down list. Computer devices are 'Other than motor vehicles'.
  • Depreciation rate and method. You can choose whether to use Prime cost (aka Straight line) or Diminishing Value depreciation.  Diminishing Value will give you a bigger deduction in the year of purchase, but the deduction will decline over time.  Prime cost will give you the same deduction in each year.  We've generally chosen Diminishing Value to see a big deduction in the first year, but if you know that you're likely to have a much larger tax exposure in later years, it may make sense to choose Prime Cost.
  • Effective life in years.  You can make your own estimate of effective life of the asset (for computers, 3 or 4 years is good).  The commissioner has made a bunch of recommendations, too.
  • Have you self-assess the effective life for this asset?  Yes. Yes you have.
The remaining fields should be calculated for you. If you have more assets you want to list, click 'Create new worksheet' on the left.  Otherwise, click 'next'.

Bonus Tip: you can easily roll-over this information for next financial year, and E-tax will remember how much to depreciate in future years.  Just make sure you keep you .TAX file so you can import it (or 'roll-over') next year.

7. Deductions: Find your donation receipts

Given money to a charity? Have friends hit you up with their Movember/Dry July/Oxfam work campaigns?  Search through your inbox to find your donation receipts, as all these donations are tax deductible.  Chuck them into Item D9 - Gifts or donations.

8. Deductions: Work-related books, magazines or equipment?

You can claim the cost of work-related books, work-related journals and/or work-related magazine/newspaper subscriptions.

Do you have a work brief-case or workbag? Tools that you bought yourself for work? A travel suitcase you use for work? These can also be claimed (but remember you need to depreciate any equipment whose total cost is greater than $300, see Tip  6).

All of these expenses go in Item D5 - Other work-related expenses.

Work things you can't claim: 
  • Travel to and from work is generally not deductible - travel expenses are only claimable if it is incurred in the course of your employment, to move between two different jobs, OR if you need to use it to carry bulky tools or equipment that you can't leave at work. 
  • No, your work clothes (and laundry) aren't deductible! You can only claim a deduction for clothes and their laundry if they are 
    • compulsory work uniforms that are unique (designed and made only for the employer) or distinctive (the clothing has a logo on it and isn't available to the public), OR
    • occupation-specific clothing that is not 'everyday' in nature and would allow the public to easily recognise your occupation (eg chef's checked pants), OR
    • protective clothing, ie clothing you wear to protect yourself from the risk of illness or injury posed by your income-earning activities (using an expensive suit to protect yourself from humiliation does not count, sorry).

9. Deductions: Getting Austudy, ABSTUDY, or Youth Allowance?

If you are receiving Austudy, ABSTUDY or Youth Allowance to study, you can claim the cost of textbooks, stationery, student union and course fees, and the decline in value of the computer equipment you use for study. This is brand new policy as a result of a High Court challenge last year.

Put this stuff in Item D4 - Self-education expenses.

10. Complex situation?  Get help. 

Tax accountants do this for a living.  If you've got a complex situation (eg kids, investment properties, sole trader businesses...) then it's prudent to see a tax accountant. Not only can they generally pay for themselves in claiming deductions you didn't know you were entitled to, their fees (and all expenses incurred in engaging them) are a tax deduction.

You can also consult the ATO's fairly clumsy website. The help documents embedded in the E-tax software package are also quite useful for the nitty gritty issues that might pertain to you.

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Need more info on some of the things we've talked about in this post? Got some tips you think we've missed? Please let us know in the comments below!!

5 comments:

  1. If I didnt provide the bank with my TFN number. Do I still need to declare interest income? If so, will I get a tax credit as most probably tax withheld by bank is higher then it suppose to.

    ReplyDelete
  2. Firstly: yes - you are legally required to declare all interest income, irrelevant of whether or not you have supplied your TFN to the bank.

    The good news is that the bank probably withheld tax at the highest tax rate of 45%. Unless you're earning >$180, declaring this income will increase your tax return.

    You should be able to access a tax statement using your online banking - you will need how much interest you earnt and how much tax was withheld when you are filling out your taxes.

    Hope that helps - let me know if you have any other questions!

    ReplyDelete
  3. Hey, this blog is so helpful! Thank you!!

    You mentioned that any costs associated with lodging your tax return are tax deductible. I too am a Mac user, and recently purchased a netbook so I can use E-tax. Can I claim the cost of the netbook?

    Thanks again! :)

    ReplyDelete
    Replies
    1. Hi Sumi!

      Thanks for your comment, glad the article was useful for you.

      I'm not a tax professional, so I can't give you a definitive answer on your question. If you use your netbook solely to complete your taxes, I can see how it might be a deduction - but if you're using it for other purposes then it's unlikely you'd be able to claim it. You should consult a tax professional to get a definite answer, though!

      Cheers,
      Rob

      Delete