This blog is in hiatus
March 31st, 2008You may have noticed I haven’t posted much here for a while.
Why?
I have taken a new position and talking about taxation issues on this blog could be deemed a conflict of interest. [Note I say could, not is, but it’s always better to err on the side of safety.] Hence for the term of my contract I am no longer posting articles here.
I will leave the original articles for reference. Please note though, that taxation laws change, so check the year in which the article was posted, and double check with your tax preparer or accountant to see if the information is still valid.
Regards
Calder
Salary packaging with a HELP debt and/or no private health
September 22nd, 2007Salary packaging is where your employer pays for some items—a car, a computer, even in some cases your mortgage repayments—out of your pre-taxed earnings.
Let’s look at an example. Tax rates are based on the 2007 tax year. They will change next year.
Suppose your annual salary is $44,000. On $44,000 you pay tax of $8,550, plus the 1.5% Medicare levy.
Value |
Tax |
| Annual salary of $44,000 | $8,550 |
| 1.5% Medicare levy on $44,000 | $660 |
|
|
|
Let’s assume your company lets you salary package $9,000.
Value |
Tax |
| Annual salary of $44,000 | |
| Salary package $9,000. The company pays tax on this (FBT). | 0 |
| You pay tax on remaining amount. $44,000 - $9,000 = $35,000. You pay tax on $35,000. |
$5,850 |
| 1.5% Medicare levy on $35,000 | $525 |
| Low income rebate | -$200 |
|
|
|
Note the low income rebate. Because you drop below $40,000 you also qualify for a percentage of the low income tax rebate. That puts another $200 into your pocket.
As you can see, in this case salary packaging has put $3,035 extra into your pocket.
That’s a nice saving.
And it’s fine. Everyone wins—provided that you have private health insurance, and that you do not have a HELP debt.
However, if you have a HELP debt, or if you you have no private health insurance, you need to be aware that because of the way these two things are calculated, you could end up owing the tax office money?
Why? Because the thresholds for these two items are calculated including the reportable fringe benefit (RFB), and this is an 80%+ loading on the amount you salary package.
Let’s assume that you do have a HELP debt, and that you do not have private health insurance.
With private insurance you think you’re fine. The limit before you need to pay the extra 1% Medicare surcharge is $50,000. Even at $44,000 you’re still under the threshold.
Repaying your HELP debt kicks in $38,150. Again, you think you don’t have to pay it, because your taxable income is $35,000.
But … there’s the RFB loading to take into account.
Value |
Taxable amount considered for |
| Annual salary of $44,000 less $9,000 salary packaged | $35,000 |
| Value of RFB on $9,000 = 9,000 x 1.8692 | $16,823 |
|
|
|
No. You are not seeing things. The calculation used for the reportable fringe benefits (RFB) is 1.8692. You don’t get the money, but this is what they use to calculate your HELP debt, and to calculate the Medicare surcharge.
Here’s the final table
Value |
Tax |
| Annual salary of $44,000 | |
| Salary package $9,000. The company pays tax on this (FBT). | 0 |
| You pay tax on remaining amount. $44,000 - $9,000 = $35,000. You pay tax on $35,000. |
$5,850 |
| 1.5% Medicare levy on $35,000 | $525 |
| 1% Medicare surcharge on $51,823 | $518 |
| HELP debt at $51,823 is 5.5% | $2850 |
| Low income rebate | -$200 |
|
|
$9,543 |
|
|
$6,375 |
|
|
$3,168 |
That’s right. Suddenly you owe the tax office over three thousand dollars.
At first glance it looks as if you are better off not to salary sacrifice at all. After all, you would then be paying $9,210, rather than $9,543. But it’s not as bad as it sounds. It’s only if you have HELP debt and/or no private health insurance.
If you have private health insurance and no HELP debt, salary package by all means. You are winning all the way.
If your company has been taxing you correctly, you should be okay, but I have only seen this happen once in the last three years and that was last week. Maybe the companies are getting wiser because of all the complaints from their employees.
If you have a HELP debt be positive. You are paying off the debt earlier. That has to help you in the long term.
nb. A person in the same situation who has no HELP debt but does not pay private health insurance would be up for $518.23.
Adsense and Australian Tax: How do you pay it, what do you pay?
August 22nd, 2007Suppose you live and work in Australia, blog part-time (or even full time) and earn money from Adsense. How does it work from a tax point of view?
If you live and work in Australia, and just get a few extra dollars from Adsense—which would be the case for most part-time bloggers—you are what the U.S. tax service (IRS) deems a non-US business with no U.S. activities. Google defines the various tax types on their Adsense Tax Information page.
In this case, when you fill in you tax information on the Adsense site, Google will record you as being a Foreign Publisher with no U.S. Activities, and will not withold any tax from your Adsense money.
You must declare this as foreign income on your Australian tax return.
To give you an example.
- Suppose you earn $A40,000 for the year
- On this amount, you pay $6,300 tax
- But, you also earned $A5,000 from Adsense (note that this is in Australian dollars, foreign income must always be converted to Australian dollars, but that’s fine with Adsense, because they do that for you)
| Income source | Income | Tax paid | |
| Salaried job | $A40,000 | $6300+medicare | |
| Adsense earnings (foreign income) | $A5,000 | $A0 | |
| Total | $A45,000 | $7800+medicare |
You have under paid your tax by $1,500.
You must declare the money. Adsense have a record of paying it, the banks have a record of it going into your account. If you do not declare it you’re likely to find the ATO knocking on your door one day, wanting to audit you.
However, you did expend money to earn that $5,000. You may have had to create a blog site, pay hosting fees and pay for your domain name, not to mention the PC you use to create the blogs. This is where the value of a good tax agent comes in. They will know what to claim, and when it is reasonable and valid to do so. (If your Adsense income is $5 for the whole year, you’re not going to be able to claim much.)
If you are a U.S. business, or an non-U.S. business with U.S. activities the whole thing changes, because there is U.S. tax to take into account, and that is beyond the scope of this blog. See a specialist tax preparer or accountant in this case.
Is it always best to ask for the most experienced tax preparer?
July 5th, 2007In my last blog I talked about the best times to visit the tax agent, and by now you know all about how you may get tax preparer who has 30 years experience or is a total newcomer. You might think from what I said then that you should always go for the most experienced person in the office. Should you?
Not necessarily.
Let’s look at some of the pros and cons of using an experienced tax preparer versus using a lesser experienced one.
Newbie
For:
- Because they are new the returns these people submit will be scrutinised very carefully by the accountant at the branch office. All returns are double-checked before they are submitted to the ATO, but these particular returns are checked very thoroughly
- The senior preparer working with them in the office will keep an ear on what the newbie is doing and will stop any problems before they start
- The preparers have a checklist to follow to ensure they cover everything. Because they are new, they will go through every item in this checklist
- It is generally easier to get an appointment with the newbie
Against:
- They are inexperienced
- They follow those checklists slavishly. Sometimes too slavishly. It can be really annoying, for example, if you have already told them you are single and they persist in asking about spouse rebates
- They don’t pick up on things you might say in passing that might lead to extra deductions
- Will take longer to do a simple return.
Experienced
For:
- Won’t take as long to do
- You are likely to get more deductions, because these people really know tax
- They know what questions to skip. If you’re single, they won’t ask about spouse rebates
- They follow up on things you might say in passing that lead to extra deductions
- Can answer general tax-related questions without having to refer to someone else for the answer
Against:
- In the first month or two they will also be keeping an eye on the newbie, so you don’t have their whole attention, just most of it
- There is pressure on these people to do more returns
- It is often harder to get an appointment with them, as prior year clients specifically request them.
Even so it still appears, on evidence, that you are better off getting an experienced tax agent to do your return; and in general that is true.
There is one other factor you should consider however, and that is the tax preparer’s personal experience.
If you own shares or real estate investments, you are far likely to get a better return if it is done by a tax preparer who also owns shares or real estate investments than you are with someone who does not. Likewise, if your tax preparer has children they are far more likely to really know rebates and offsets and tax deductions for child care than someone who doesn’t have children.
I am not saying that you will necessarily get a bad deal with the other tax preparers. You will get standard deductions, but there’s really no substitute for experience.
Take myself, for example. I own shares and investment properties, so I am a good person to talk to if you have investments. However, I do not have children so all I know about child care rebates and tax offsets for dependents is from the tax rules. Therefore if you have no investments, but you do have children, you are better off going for one of the newer people in the office who does have children, because they have their personal experience to draw on here.
When is the best time to visit your tax agent?
July 1st, 2007You decide to get your tax done by a tax agent. Is there a best time to make an appointment?
The best time is obviously the time that suits you best. If you have a big return coming or you need the money, for example, it’s better that money gets into your pocket sooner rather than later. If you don’t have these sort of constraints, however, and you understand how a tax agent’s office works, you can see that there are certain times in the season which are more ideal.
First up, I am talking tax agents here, those companies who specialise in tax and open sub-offices during the tax period. I do not mean the small accounting firms you would go to for general accounting as well as tax, although some of what I have to say about busy periods will be applicable.
Some things to note about these tax agencies:
- Their busiest period is from July to to October each year
- They bring on extra staff to cope with the load
- They open extra offices to cope with demand. These offices are closed for the other nine months of the year
- Some of these staff have had 30 years experience doing tax. For others it’s their first time
- The average office will have one experienced senior consultant running it, as many experienced staff as they can get who are available, and one or more newbies
- There will always be newbies. How many people can afford to work only four months of the year? Not many. Hence there are always new people being trained up.
A typical tax season will work something like the following.
The first two weeks of July
The ATO does not start processing returns until the 10 July. Employers haven’t yet handed out their payment summaries, bank interest and other statements are still being mailed out.
At the tax agent’s office it’s pretty quiet. Experienced office staff are familiarising themselves with system changes that were implemented since they last worked. The senior tax consultant is training the newbies. It’s a steep learning curve. These people have been learning about tax since February, but it’s all theory so far and banking and end-of-day procedures and things like that were mentioned only briefly. Not only that, they have to face clients for the first time. That’s a whole lot different to practising.
People ring to make appointments, but they haven’t got the paperwork yet, so they make it for later in the month.
Mid-July to end of August
It’s all hands to the pump here.
This is hectic. By now most of the paperwork has come through and lots of people what their tax done. The office is open nights, and as many staff as there are desks are rostered on.
The busiest times are nights and weekends. They book out first.
The newbie staff have confidence doing simple returns by now, and have the procedures down well. It’s sink or swim for them, really. If they can’t cope they’ll be rostered on less and less.
September
This is a good time to get your tax done. It’s not so busy, and new staff are not as green. If you have any questions about general tax, staff can take the time to answer.
Unfortunately, because it is quieter, the office is not open so many nights, so if you can’t make it in office hours you still need to book early.
October
Another rush as those people who put off doing their tax realise they don’t have long to go. This is a bad time to have a tricky return.
November-May
Many people do not realise that if they went through an accredited agent last year they can ask that lodging their return be deferred until May of the following year. This is good if you run out of time, but the one big thing to be aware of here is that you don’t get to choose where to do your return. All the sub-agencies have closed. You must go to the branch office to lodge it.
So we have established that September is probably a good month to visit your tax agent, but what day of the week and what time of day should you go? What else do you need to consider?
Different offices have different peak times but in general:
- Weekends and nights are busier than regular Monday to Friday office hours
- Inexperienced tax preparers do not, generally, work alone. This means they work at the busiest times, with a senior consultant on hand to oversee what they are doing. At quieter times a single person mans the office, and they are generally second years, or more.
So if you wish to visit a tax consultant early in the season, book early and go during office hours if you can. September is a better month all round; and if you think you are going to have a difficult tax return, don’t leave it until October.
Superannuation changes on 1 July. Get this year’s super affairs in order now
June 25th, 2007The government’s superannuation changes are big news at the moment, and you have until 30 June to put lots (and lots and lots) of money into your super fund for taxation benefits in future years.
Don’t leave it until the last day.
As you can imagine, the superannuation companies are very busy right now.
Not only do they have a lot of extra work due to people putting in extra money, but they have to get ready for a whole lot of changes that come into effect on 1 July.
Not only that, 30 June is a Saturday. A lot of processing stops on Friday afternoon.
If you want to be sure that your money goes into your account this year, do it now. Don’t wait until the end of the month.
Low income tax offsets
June 24th, 2007There are a lot of tax offsets increasing their thresholds from 1 July 2007. Must be an election coming up soon.
A tax offset is a money the government gives back to you to help reduce your tax debt if you are a low income earner. Please not, this is not money back, it just reduces your tax liability. It will not go below zero (with a couple of exceptions and these have been mentioned in an earlier blog).
There were changes from July 1, 2006. There are more coming up from 1 July 2007. In brief, they are:
- Low income offset: Increase from $600 to $750 per year.
- Senior Australians tax offset: Pay no tax up to $25,867, up from $24,867 for singles. For couples, $43,360 up from $41,360.
- Dependent spouse rebate: Increase from $1,655 to $2,100 per year.
- Medicare low income threshold: Increases to $16,740 for individuals and $28,247 for families. Additional amount for each dependent child will increase to $2,594.
- Pensions below pension age will increase to $21,637.
It may not mean much now, but you will notice it come tax time next year.
New tax rates from July 2007
June 17th, 2007Great news for residents on low incomes. From July 1 2007, the 30% threshold will again increase. What does this mean?
For the tax year July 1 2006 to June 30 2007, the rates were as follows.
$0 to $6000 tax rate = nil
$6001 to $25,000 tax rate = .15c (15%)
$25,001 to $75,000 tax rate = .30 (30%)
$75,000 to $150,000 tax rate = .40 (40%)
Over $150,000 tax rate = .45 (45%)
For non-residents, the tax rate for $0 to $25,000 = .29 (29%), then follows as for residents.
From July 1 2007, the 30% threshold changes yet again. All others remain the same until 2008.
The new threshold from $6001 to $30,000 will be .15 (15%)
The 30% threshold begins at $30,001 instead of $25,001. An additional 15% on $5,000 is $750. Not counting medicare, HELP and other schooling debts, you should be getting an additional $14 approximately in your pay each week.
There will be further changes the following year—that is the 2007-2008 tax year.
Thresholds from July 1 2008 will be:
$0 to $6000 tax rate = nil
$6001 to $30,000 tax rate = .15c (15%)
$30,001 to $80,000 tax rate = .30 (30%)
$80,000 to $180,000 tax rate = .40 (40%)
Over $180,000 tax rate = .45 (45%)
For non-residents, the tax rate for $0 to $30,000 will be .29 (29%), and then follows as for residents.
I will let you do the sums yourself.
Superannuation co-contribution
June 5th, 2007Lucky you if you made an eligible contribution to super last year (2005-2006 tax year). That means you paid an additional amount into your super fund and met the criteria for the government co-contribution where they paid up $1.50 for every additional $1.00 to a maximum of $1,500.
If you did this before the end of June 2006, the the government is going to reward you by giving and additional one-off payment of the same amount. In other words, the government is going to double what they initially gave you.
Isn’t it a pity we can’t back-date and all do it. I would have liked and additional $3,000 paid into my super fund.
Remember though, you can still make a contribution before the end of June each year. The government will still give you the 150% co-contribution if you meet the criteria, which is nothing to sneeze at.
Can you claim your schooling-related expenses
May 18th, 2007The question as to whether you can claim self-education expenses as tax deductions comes up a lot. I have covered it before, but it’s worth covering again. It’s an issue that causes a lot of confusion.
Two common misconceptions are:
- People who are studying to get a better job believe they can claim schooling when they can’t
- People who are eligible for tax deductions for schooling don’t realise they can claim.
ATO has a basic tool that allows you to determine whether you are eligible to claim self-education expenses.
Once you have determined whether or not you are eligible, a good place to get further information is from the ATO’s Study Essentials page.
