The tax code can often be complicated, and with a whole bunch of myths fogging the landscape, it can become even more perplexing.
With the right support behind you, business bookkeeping and tax needn’t be a nightmare.
Nevertheless, many people dread the yearly time to declare their income and pay their taxes.
To shed some light on common misconceptions about taxes, we look at five common tax myths. Read on before it’s time to lodge your tax return!
Myth 1: I'm applying for an extension this year, so I don’t have to pay anything
While a tax extension will give you more time to submit your actual return, it won't grant you any leeway when it comes to paying what you owe.
If you owe a certain amount and request an extension, you will need to pay regardless of the new lodging deadline. Otherwise, interests and penalties may accumulate.
If you owe money but don't have your paperwork ready in time for the deadline, requesting an extension definitely makes sense – especially because if you don't lodge a return, you may be hit with a penalty.
But even if you do file that extension, your best bet is to start paying whatever portion of your tax bill you can manage immediately. The longer you carry that tax debt, the more it may end up costing you.
Better yet, let Maximum Business Solutions’ bookkeeping services in Melbourne ensure your lodgements are submitted on time!
Myth 2: All work-related costs are tax deductible
Careful: did you know that travel to and from work is NOT tax deductible?
You can calculate work-related deductions if you travel between locations during work (e.g. driving from one office to another twice per week). Computer and mobile phone related expenses can also be fully or partially deducted.
Myth 3: I was paid in cash; I don’t have to record it
You should always report income, regardless of whether it is cash, tips, bonuses or dividends.
Regardless if you are regularly paid in cash or it was a temporary move, you must always declare the cash as income on your tax return.
Employers please note that even when you pay employees in cash (“cash-in-hand”) you still still provide them with a pay slip showing:
b) Tax taken out
Employees: is your employer making super contributions on your behalf?
Do you receive tips?
While tipping is not as big a practice in Australia than in, say, the US, tips – regardless if they came from employers or directly from customers – still count as income.
Every shift you work, make a note of any tips received. At the end of each month, total this amount. This is a simple and trouble-free way to ensure you meet tax regulations.
Myth 4: I'm too young to have to pay taxes
Your age doesn’t have too much to do with whether or not you pay tax. It’s based more on how much money you earn.
Have a teenager who has just scored their first job? The first thing they must do is apply for a Tax File Number (TFN).
Australia has a tax-free threshold which means you are not taxed on the first $18,200 you earn in a financial year. This correlates to the myth mainly due to the fact that a 16- or 17-year-old would likely be a student, and therefore simply cannot work enough hours a week to push them above this wage bracket.
You may not have to file a tax return if:
You are under the age of 18 on June 30 of the 2016-17 financial year
Your income was from salary / wages only
Your income was less than $18,200
You did not have any tax withheld during the 2016-17 financial year
Visit the ATO “Do you need to lodge a tax return?” tool here.
Even dependents who are high school students must file a tax return if they are working... but this myth is partially true: working students who only earn a certain amount in the tax year should be taxed.
If they earn less than this amount, then they may not have to file a return. Read this ATO article to learn more about income for those aged under 18.
Myth 5: Income earned online or abroad is not taxable as it didn’t happen in Australia
The key word is "income", which means that it is subject to tax.
The ATO requires taxpayers to report all income, even if it was obtained abroad or in the virtual world.
Regardless of the medium, if you sell a product or service and end up making more than $400, you’re required to declare that income on your tax returns.
If you earn money while working overseas and pay foreign tax, you can add that tax back to your net income to determine the assessable amount in Australia. Note you are required to lodge an Australian tax return even if you are working overseas so long as you remain an Australian resident.
Myth 6: Small businesses that make more than $50,000 per year must register for GST
A few years ago, you would have been correct! However this threshold was raised to $75,000 in 2007. Non-profits have a threshold of $150,000, while taxi drivers - no matter their turnover - must register, too.
If your turnover is less than $50,000, GST registration is optional.