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Is your employer withholding enough tax from your wages?

There is nothing worse than going to complete your tax return, expecting a refund, only to find out you have a bill and a large one at that!  And through no fault of your own, well…. you think.

There are actually a number of reasons why you may end up with a tax liability, and while you may think your employer is at fault (and in some instances they may be), there are a number of things you can do to avoid this happening.  Let’s explore some of these now. 

  1. Complete your TFN declaration correctly

The most common reason we see a customer receive a tax bill is because, when they completed their TFN declaration with their employer, they didn’t fill out the form correctly. 

Have you got more than one job?  If you have more than one employer in any given year, when you complete your second and subsequent TFN declaration, you should choose “No” to claiming the tax-free threshold.  If you have selected “Yes”, then your employer will not know they need to withhold extra tax from your wages due to your second job.  This also applies if you are no longer working for the first employer and have picked up multiple short term employment roles throughout the year.

While the first $18,200 of your total income is not taxable, this tax free threshold is already factored into the rates of PAYG withholding that your employer withholds from your wages.  If your first employer is already claiming this threshold for you, then you should not be claiming it again with your subsequent employers.

  1.  You are required to make a compulsory HECS-Help / SSL / TSL / Financial Supplement debt repayment

Did you ever go to uni or TAFE and incur a HECS-Help, Student Support loan (SSL), Trade Support loan (TSL) or Financial Supplement debt?  Maybe you didn’t finish the degree, but you originally enrolled to a couple of subjects.  Or maybe you did complete the degree but you’re no longer working in that field. 

Whatever the case may be, if you have incurred that debt, and your taxable income levels have reached the compulsory repayment threshold ($55,874 for the 2018 financial year), the ATO will automatically reduce your tax refund by the compulsory repayment amount.  For some people, this may even result in them having a tax bill. 

To avoid this occurring, it is important that you advise your employer if you have one of these debts.  To do this, you need to ensure you are answering “Yes” to the relevant question on the TFN declaration that you complete when you commence your employment.  If you answer “No” to this question, then your employer will not know to withhold extra to cover your compulsory debt repayment at the end of the year.  If you have been working for your employer for some time, you can advise them of this change by completing an updated TFN declaration.

  1. You are NOT an Australian resident for tax purposes

Did you originally come to Australia for the purposes of a working holiday?  Do you move around to a new employer every few months as per the terms of your visa?  If so, you may not meet the residency requirements for the purposes of tax. 

For a number of years, many employers assisted their employees with filling out the TFN declarations with a “she’ll be right mate” kind of attitude and selecting “Yes” to the “Are you an Australian resident for tax purposes” question.  Most probably because they didn’t understand the ramifications. 

Australian residents are entitled to a tax-free threshold.  That means that the first $18,200 of their income is tax free, after which they pay tax in incremental amounts as they step up through a number of different tax brackets. 

Foreign residents however, are not entitled to a tax-free threshold, and pay 32.5% tax right from the very first dollar they earn in Australia, up to the first tax bracket of $87,000 (2017-2018 tax rates).   

If you have not selected the correct residency type on your TFN declaration, then your employer will not have withheld enough tax from your wages during the year, and you may end up with a tax liability. 

In some instances, you may stay with the one employer and “put down roots” so to speak, with the eventual intention of remaining in Australia.  If this is the case, and come tax time, you complete the residency tool on the ATO website and it is determined that you are considered to be an Australian resident for tax purposes, then there is every possibility that you may receive a much bigger tax refund than you had anticipated. 

However, bear in mind that just because you satisfy the residency rules one year, it does not automatically mean you will satisfy them the following year.

  1. You are required to pay Medicare Levy Surcharge

If you have high levels of taxable income and you do not have appropriate Private Hospital cover, you may be required to pay the Medicare Levy Surcharge.

For the 2018 financial year the MLS threshold is $90,000 for singles and $180,000 for families. 

The rate of Medicare Levy Surcharge that you will be required to pay is dependent on what tier your income level falls into and can vary between an extra 1 and 1.5% on top of your normal Medicare Levy amounts.

If you are have a large taxable income, this amount could grow into thousands of extra tax to pay.  The Medicare Levy Surcharge is not factored into PAYG withholding amounts calculated by the ATO and your employer.

  1. You have large amounts of investment income

Do you have one or more savings accounts that you earn interest on?  Or do you own any shares or other investments (ie managed funds, rental properties etc)? 

You will pay tax on any earnings from your investments at the rate of whichever bracket your taxable income falls into. 

Obviously your employer will not know about this income and is not required to factor it into the PAYG withheld from your wages.  You can choose to advise your bank or whoever your investment is with to deduct TFN withholding amounts and they will remit these to the ATO on your behalf.  This is similar to what an employer does when they withhold tax from your wages.

However, there may be instances where you cannot do this and you just need to be aware that you will need to pay tax on this income at the end of the year. 

If you are concerned that you have not allowed for any of the above situations and may end up with an unexpected tax liability, please contact us today to book an appointment with one of our Tax & Bbusiness Advisory Accountants to review your income and put an action plan in place!

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