Over the last few weeks, I’ve had the pleasure of chatting to a few of my daughters’ friends. It’s so great to watch these people who you knew as “kids” turn into responsible, thoughtful and amazing young adults. Just where did the time go? But it did get me thinking that although they’re intelligent and educated adults, there’s a lot about tax and finance that we “oldies” have learned over the years and that we take for granted as something everyone knows. So for the next couple of weeks, I’m going to focus on tax and finance for young people. Today I bring you my top 4 things I think every young adult should know about tax.
Do I need to lodge a tax return?
If you earn more than $18,200 then yes you need to lodge a tax return. If you earn less than that amount, you may still want to lodge a tax return if you have had PAYG withholding taken out of your wages (you might be due a refund!). If you don’t intend lodging a tax return, you need to let the Australian Taxation Office (ATO) that you aren’t required to lodge a tax return. You can do this through your myGov account.
I have more than one employer. Will I pay more tax?
Many young adults are working multiple jobs over the year. This means that you are having tax taken out by all those employers. Something to watch though is usually you should not claim the tax free threshold from both employers. If you do, it could mean that you will have a tax bill at the end of the financial year. When you are filling out your tax file number declaration for an employer, choose to claim the tax free threshold with the employer with whom you expect to earn the most. For the other employer, advise them that you do not want to claim the tax free threshold. This will mean you are taxed from your first dollar, so it might seem like you are being overtaxed. But, it all comes right at tax time and if your employer is calculating the tax correctly, you won’t have a nasty surprise at the end of the year. If circumstances change, you can change how much tax an employer is taking out at any time simply by advising them.
How do I pay tax on my income from the gig economy?
This is one area where anyone can get themselves into trouble. Here we’re not just talking about income from Airtasker, Airbnb, Uber driving etc. We’re also talking about the situation where an employer asks you to work as a contractor. What this means is that the person engaging your services is not withholding any tax. Instead, you are responsible for declaring the income in your tax return and paying the tax yourself after the end of the financial year, which can end up a nasty surprise. What I recommend is that you stash some tax money away in a separate bank account which can’t be touched. The amount to stash away will depends on how much you earn from contracting and your other employment situation.
The other key thing to remember is that you must declare all income – even if it’s from the gig economy. Don’t assume that the ATO won’t find out. They will and they regularly request information from Uber and Airbnb and cross check to tax returns. It’s not worth the risk.
Why do people “keep receipts for tax purposes”?
This is one of my favourite questions (thanks Emma!) – such a simple question and it sounds so grown up! and yet the answer is far from simple. Firstly you need to understand the basics of claiming a deduction. If you spend money on something that is necessary to do your job, then you can claim a tax deduction (I know, simple!). BUT you can’t claim a deduction if it’s personal in nature even if you can’t do your job without it. For example, in many situations you can’t work unless you physically travel to your place of employment. Necessary? Yes definitely. Claimable as a tax deduction? No way! It’s considered private.
Another example. You are asked to visit a client in Melbourne and fly to get there. Still travel, but now it’s claimable.
Here’s where the receipt comes in – you need to keep some evidence that you incurred the plane fare and how much the fare cost (eg a receipt from the airline) – hence the fascination with keeping a receipt. It doesn’t matter how much you spent on work related deductions, if you haven’t kept the receipt, you can’t claim the deduction. And yes the ATO do audits all the time to make sure. Around June/July every year, you will hear the ATO making lots of noise about people who claim things they shouldn’t.
One of the things that is important to note is that if you have spent $100 on work related deductions, you don’t get $100 back from the ATO. You only get back whatever your marginal tax rate is. So if your employer genuinely needs you to incur expenditure to do your job, you are always better off getting the employer to reimburse you the cost instead of claiming a tax deduction. You can’t claim a deduction if your employer has reimbursed the amount.
If you’re a young (or a less than young) adult, I’m more than happy to chat with you about your tax and offer a FREE 30 minute initial consultation. You can easily book online here and I look forward to helping you sort your taxes!