12 Nov Do I REALLY have to pay this much tax?
I don’t think I am exposing any elephant in the room when I say no one likes paying tax. Even worse are those unexpected tax bills which can be very confusing as to why they occur.
Depending on your situation i.e employee or business owner there are some important issues to understand about how the ATO calculates & collects tax on your behalf. Being aware of these can really save you some heartache & might mean more money in your pocket if managed correctly.
Tax Free Threshold
From 1 July 2012 the ATO increased the tax free threshold to $18,200 from $6,000. This meant you can earn up to $18,200 before you pay any tax which is great for those low income earners. However it means that if you have two jobs during the year you have to be really careful about ticking the box for your employer that says ‘Claim the tax free threshold’. If you ticked the box at both jobs & worked 6 months at each & earnt $20,000 at each job at the end of the year you will have earnt $40,000 & paid no tax on this resulting in a tax bill. If you are ever working a secondary job on top of another job please ensure your second employer is aware & taking out the correct tax.
These pesky instalments are the ATO asking you to prepay the tax for the current financial year you are in. The amount on the instalment is based on the last lodged tax return; the ATO then does some voodoo calculation to work out how much you need to pay. These are only relevant to income from investment or business sources i.e they don’t apply to employees. These are the issues we come across all the time:
- The last lodged return may have included business income that is not at the same level as current year. For eg you may have started the business up in March 2015 & so only traded for 3 months of the year & only paid around $2,000 in tax. In 2016 the ATO will ask you to prepay that $2,000 via quarterly instalments of $500. But when you lodge your return you will have earnt a whole years worth of income & these instalments will not be enough & you will have a large tax bill. This can also work in the reverse & you can pay too much in instalments & receive a refund at the end of the year. Anytime your situation is different to previous years we suggest you look at varying the instalment by using the calculation method. We at Grow Accounting can help you with this & means you won’t get caught out. If you vary these yourself please be aware that if you vary it by more than 10% of the actual result at the end of the year the ATO can issue you a large fine.
- Timing of lodgement. This is an issue especially for people who have a large tax bill for the first time. For e.g In the 2015 year you received a large distribution from some managed funds you have been investing in; this will result in a tax bill of around $5,000. Because of the large bill you as us to hold off lodging until the last possible date so we don’t lodge your 2015 return until 15th May 2016. At that time the $5,000 is due & payable immediately. However the ATO will then most likely issue you with a PAYG Instalment for the June Quarter for the full $5,000. This is because June is the last quarter of the year & they haven’t got money off you for the last 3 quarters so request it all at once. You will then have to pay this instalment by end of July.
Negatively Geared Properties
Typically in this scenario a rental property investor that is employed the person will lodge their tax return & after claiming the loss from their rental property will receive a tax refund – often this can be substantial.
Whilst no-one is complaining about a large refund there is a way to spread this evenly over the year via a PAYG Withholding Variation. This is an application to the ATO stating all expected income & expenses for the year so that the ATO can estimate your refund. The ATO will then write to your employer letting them know that they can reduce the amount of tax they take out of your pay each week resulting in more cash in your hand. If you have never done this before we do suggest that you ask Grow Accounting’s help as if you over estimate your expenses (a common error we see is clients writing down their principal loan repayment not just the interest) then you end up with a nasty tax bill at the end of the year.
Hopefully this has cleared up some of the issues surrounding unexpected tax issues & as always if we can help you with anything please don’t hesitate to contact us.