Many university students work part-time to fund their expenses. If you haven’t already, the time will soon come when you will be required to submit a tax return. While you may have heard about tax, deductions and the medicare levy, it will all become real when you submit your first tax return. Let’s go back to the basics and take a closer look at income tax.
What is income tax?
By law, if you’re a resident in Australia, you’re required to pay tax on all forms of income you receive. The tax is charged at a flat rate on your taxable income – that is, your assessable income minus your allowable tax deductions.
Assessable income is the income you earn from your salary, as well as any money you make from profitable investments, sold assets, tips, or commissions. But, income may not always come in the form of physical money; goods and services can also be treated as income in some circumstances.
Tax deductions reduce your assessable income and ultimately how much tax you pay. When you incur an expense that’s related to your job, you may be able to claim that cost in your return as a tax deduction. The list of allowable deductions you can claim is extensive, so you’ll need to keep detailed records and receipts of all your purchases.
This is made easier with the help of cloud-based accounting tools, such as QuickBooks Self-Employed, which have automatic receipt capture – a snap and store function that lets you organise your receipts on your phone – and easy expense and mileage tracking. It’s important to note that the Australian Taxation Office (ATO) strictly regulates which expenses you can claim, so you should only claim for what you’re entitled to. An accountant can help you correctly claim your deductions.
Taxable income is what’s left from your assessable income after you’ve deducted all expenses. To calculate your taxable income, add all the income you’ve received in the financial year and subtract all allowable deductions. The result is your taxable income and the amount you’ll need to pay tax on.
Income tax rates
Australia’s taxation system is progressive, which means that the more you earn, the higher the rate of tax you have to pay. Tax rates are divided into five income brackets with five corresponding tax rates. The lowest tax rate is 19% or $0.19 for every dollar you earn over $18,200, while the highest rate is 45% or $0.45 for every dollar you earn over $180,000. If you earn less than $18,200, the tax-free threshold applies, and you won’t pay any tax on that income, or you’ll receive a reimbursement in the form of a tax refund. Tax rates change from time to time, so make sure you keep up to date with any changes.
How to pay income tax
If you’re employed, it’s your employer’s responsibility to deduct income tax from your salary and pay it to the ATO in regular instalments. What you’re left with is your net income after tax. If your salary is your only income, then your employer will have paid tax on your behalf and it is likely that won’t owe anything at the end of the financial year. In fact, in most cases, allowable deductions reduce your taxable income and you may get a refund to make up for additional tax paid.
If you have other forms of income, either you’re self-employed or having a side hustle, you may have to report your earnings in your yearly tax return and pay any tax liabilities. This can be tricky – particularly if you haven’t done it before – so ask for help from a professional tax advisor.