Do You Know How the Tax System Works?
As Australians, we begin our life-long association with the taxation system as soon as we get our first jobs. For some of us, that is as young as fifteen or sixteen. But this early interaction does not match up with the level of understanding and awareness of what goes into working out how much tax you pay on your income.
In fact, it is fairly common to come across people who have been working for years or even decades with incorrect assumptions about how taxation works. This is usually because taxation can be complicated, and people are prone to simply repeating information they have heard somewhere.
With that in mind, here are the basics of understanding how you get taxed, and why.
Income tax is the most common form of taxation, and is the reason why we do our annual tax returns each year. It is paid on the money you receive. For most people, the vast majority of income is made up of salary and wages from a job.
Other amounts that must be included as income includes rental income from properties, dividend income from shares, interest from money held in bank accounts, and Government payments, like Centrelink benefits. Other forms of income include the money you make from selling investment properties (but not your family home) and profits you make from selling shares.
Deductions are amounts that you can take away (or deduct) from your taxable income. This has the effect of lowering the total amount that taxation applies to, and as a result, means you pay less tax.
Deductions can be complicated, and different rules apply to different professions, which is why a taxation professional is a valuable asset to have around tax time.
For businesses, the rules are even more complex, with different Government incentives and strategies further complicating the picture.
The basic rule for deductions is that you must have spent the money yourself (so you cannot claim a deduction for something your employer has paid for for you). The second basic rule is that the deduction must be directly related to your job.
For example, the fuel cost of driving to work is not allowed to be deducted, because it is incurred before you begin work. On the other hand, the cost of a taxi fare between two different offices during a business day can be deducted, because it occurs in the course of your work day and your job.
Offsets and Rebates
Offsets and rebates are applicable in certain instances depending on your personal circumstances. They have the effect of directly reducing your tax payable. Offsets exist for many reasons including superannuation, low income earners, medical expenses, senior Australians and pensioners.
Again the rules can be complicated, and vary depending on the individual.
Although the taxation system is complex, with the guidance of a professional, you can make sure that you pay the right amount, and also avoid making any mistakes that could cost you time or money down the track.
So if you live in Sydney’s west, especially in the Bankstown, Moorebank, Prestons, Edmondson Park, Liverpool and Ingleburn regions, and want some professional, personalised advice about your income tax, ATP Tax Consultants welcome your call on 1300 829 484, or email us anytime!