We might be The Broke Generation, but often we’re The Clueless Generation. And look, it’s not always our fault. Our grandparents have always said ‘didn’t they teach you this at school’ while they harp on about currencies-gone-by (big up the word thrupence). But what they don’t seem to realise is no they fucking well did not teach us this at school. We don’t learn how to do our taxes, we don’t learn how to pay down our student loans, we don’t learn what redraw is or how much a 3% interest rate on your mortgage actually works out to be.
What we do learn is algebra, Greek mythology, a very brief overview of one of the World Wars – in my case it depended on which side of the timetable you were on as to which you learned in depth.
So what’s left of school day adventures – aside from a deep appreciation for potato wedges and doughnuts as a result of finally being let out of the school grounds at lunch time – is a generation of young people who don’t understand what a tax bracket is, or what taxable income really means.
I’m secretly a little numbers dork. I thought about studying accounting at Uni at one point, and at times I wish I had. For some reason I’m just kinda good with them, and for an even stranger reason, I kinda like them. I mean look I don’t mean ‘like’ them the way I ‘like’ a night in binging on episodes of Younger while punching Uber Eats orders into my smashed iPhone 6 screen, no. But I actually enjoy calculations and spreadsheets and writing things out.
Anyway, when I moved to Australia, I took it upon myself to learn the tax system, because, well, I had no fucking clue. Understandably.
The thing is, I thought other people knew this stuff, but through a number of conversations I’ve had, it turns out they don’t. People don’t know why they had to pay more tax than they thought; people don’t know why they always get a tax refund when they’re younger and when they’re older it goes away; people don’t know why their salary increase left them with less money.
And look, I’m not trying to sound like a total piece of crap but YOU REALLY SHOULD KNOW THIS. And you know you should know this! But for some reason – like your Mum’s an accountant or something – you’ve got away with it all these years.
Buckle up, here comes a very basic overview of how taxes work.
What is tax?
Tax is defined as ‘a compulsory contribution to state revenue’. You pay a variable amount depending on how much you earn.
How is it calculated?
Okay, here’s where it gets juicy.
Tax is calculated in brackets, and income from each bracket is taxed at a different rate.
The brackets for the 2019/2020 tax year in Australia are:
$0-$18,200 = nil
$18,201 – $37,000 = 19%
$37,001 – $90,000 = 32.5%
$90,001 – $180,000 = 37%
$180,001 and over = 45%
OMG I EARN $45,000 DOES THAT MEAN ALL MY MONEY IS TAXED AT 32.5%?
No. It does not.
If you earn $45,000, you’ll be taxed like this:
On the first $18,200, you’re taxed nothing. Nada. Rien.
On the next $18,800, you’re taxed 19% ($3,572)
On the remaining $8,000, you’re taxed 32.5% ($2,600)
So your tax for the year is $6,172.
You also pay Medicare levy. A lot of people think they don’t pay this if they’re under 30, but you always pay 2%, unless you’re a low income earner. The shit storm that happens after your 30 (besides the sagging tits, crow’s feet and loss of metabolism control) is that your liability increases with age, unless you offset it with health insurance.
The Medicare levy is 2% of your total earnings – so in this case, it’s 2% of $45,000. That’s $900.
This brings the total tax due on a $45,000 salary to $6,307. In other words, you could have several MEGA trips to Bali if tax didn’t exist but hey I’m not here to break your heart. Luckily there are tax offsets –low income tax offset, and the low and middle income tax offset. Tax offsets are actually amounts taken off your tax owed, so for the 19/20 tax year, a $45,000 income earner is entitled to the full $1180 low and middle income tax offset.
So, $6,172, plus your $900 Medicare levy, less your $1,180 offset. That brings your total tax for the year to $5,892.
This might seem fairly standard, and it is really, because as an employee of a business, you don’t really have to worry about any of it. Your employer withholds your tax for you, and 99 times out of 100, they do it correctly.
The one time they don’t, is when it’s really handy to know the info in this guide. Some people get ‘ripped off’ when it comes to tax time, and blame their employer. “My boss wasn’t taxing me properly, now I owe $2,000”.
First of all, yes, this is your boss’ fault. Second of all, it’s now your problem, not theirs. You are responsible for your own taxes, and if you’ve earned money, you owe tax on it. So, if you’d understood your taxes and realised that you were being paid too much and being taxed too little, you could’ve flagged it earlier.
Let’s just touch on those tax offsets again. These changed last year, and now means more people are entitled to the offset.
The Low Income Offset applies to those earning less than $37,000.
If you earn under $37,000, you’ll get the full LIO of $455. This amount reduces by 1.5c per dollar over $37,000 for those earning between $37,001 and $66,667.
The Low and Middle Income Offset applies to those earning more than $37,000 but less than $126,000.
If you earn under $37,000, you also get an additional offset of $255.
If you earn between $37,001 and $48,000, you’ll get the $255 plus 7.5% on the excess over $37,000, to a max. offset of $1080.
If you earn between $48,001 and $90,000, you’ll get the full LMICO of $1080.
If you earn over $90,001 but less than $126,000, you’ll get $1080 minus 3% for every dollar over $90,000.
Remember, tax offsets are deducted from your tax owed after all expenses and other deductions. Hurrah!
If you’ve got more than one job
This is when it can get a little hairy.
There’s a common misconception among young people that if you have two jobs you pay more tax. It’s not exactly true.
When you sign a new employment contract, there’s that little box that says “do you want to claim the tax free threshold from this employer”.
If you claim the tax free threshold from more than one employer, you won’t pay enough tax. That’s because both employers will assume you’re getting $18,200 of your wage tax free.
So, you need to tick no. And it will feel like you’re paying LOADS of tax on the money from that job, but what you need to remember is that all your income is equal. If you’ve overpaid, you will get it back at tax time.
Whether or not you do will entirely depend on how much you earn, when you begin working there, and how much you earn at your other job(s).
If you earn $10,000 at one job and $10,000 at another job, you’ll pay a heap of tax on the second job’s earnings, but you’ll get a tax refund in the end. That’s because if you’ve earned $20,000 in total, you only need to pay 19% on the portion over $18,200.
It’s always better to overpay than underpay, because as wanky as the tax office can be, they do actually give you your money back if you’ve paid too much.
If you earn extra income elsewhere
Shit storm numero dos incoming.
If you earn income from a job where your employer withholds PAYG tax for you and you earn other income on the side that is not taxed, you need to get clued up. If you are in this position, chances are you’ll already be familiar with this stuff – or at least, you should be.
This may be useful, though, for if you’re thinking about setting up a little – wait for it, here it comes, I’m saying it – “side hustle”.
Side hustle – one of the single worst phrases to evolve from the Millennial generation.
Anyway, we are the innovation generation, so while side income used to be a hallmark of little dweeby kids who were destined for University Challenge or Junior Apprentice, it’s more common than ever.
But, all income is equal.
So if you earn that $45,000 at your full time job and you make and sell hair scrunchies on Instagram, that income is taxable too. The shitter here is that you must declare it yourself. And before you ask, yes you do have to. It’s not worth lying about it.
Note: you need an ABN to self-declare income. Luckily I’ve written a handy guide for ya.
So say you make $3,000 a year selling your scrunchies on the side.
As you’ve already paid your taxes for your $45,000 salary, the extra $3,000 is taxed separately on top.
Which means it’s taxed at the higher marginal rate, as it’s added on to your total.
Your total income from that year would be your $45,000 from work, plus your $3,000 from the scrunchies.
Looking back to the tax brackets, that $3,000 is subject to the 32.5% tax rate, which means $975 of your scrunchie dollar is going straight in the tax man’s pocket. Oh, and don’t forget the Medicare levy – you owe that too. 2% of your $3,000 scrunchie dollar is $60, meaning you’ll be forking out an extra $1,035 a year because of your side gig.
You know when seedy businessmen are sat around a table in a flashy restaurant, and you see them throwing their credit card around like a hot potato, shouting ‘pop it on there, I’ll get it all back at tax time’?
What they mean is, they’re deducting the cost of the meal as a business expense to reduce their taxable income. Doesn’t sound quite so fancy though, so I see why they do it their way.
So, what are tax deductions?
Tax deductions are costs you incur either for your job or for your business. For employees, the allowable deductions are much stricter, but if you run a business – scrunchies or otherwise – you can deduct relevant costs associated with that business.
What you can actually deduct is a topic for another article, so stay tuned. But the main focus here is understanding what deductions actually are.
When I say ‘deductions’, you are deducting the cost of certain things from your taxable income. Not from the amount of tax you pay.
The misconception goes back to those businessmen in the bar. They won’t ‘get it all back at tax time’. It doesn’t work that way. You will get back a percentage of what you spent, depending on how much you earn.
So, back to the scrunchie example.
If you earn $45,000 at your job and have no allowable deductions – many people don’t – you just need to look at your scrunchies.
To make that $3,000, you might have spend money on fabric, thread, sewing supplies, software or training. You can deduct those costs from the $3,000 you made in profit, and then calculate what tax you pay from there.
So, with no deductions, we worked out that the payable tax + Medicare levy on the scrunchies was $1,035.
If you calculate that you had to spend $500 to make that $3,000 profit, your taxable income on that portion would only be $2,500. So, that’s 32.5% of $2,500 PLUS 2% of $2,500.
= $812.50 in tax, and $50.00 in Medicare levy.
So by spending $500, you’ve reduced your taxable income from $1,035 to $862.50.
Sadly no, you’re not getting all of that back at tax time, but when you understand taxes, you can make decisions on how to strategically schedule your outgoings to reduce your tax bill.
As you were, back to your Netflix and chill, or avo on toast, or other miscellaneous millennial task.