We all have to pay tax, yet many of us don’t understand it. How much we pay depends on how much we earn and what tax bracket we are in.
What is a Tax Bracket?
Tax brackets are used to determine how much income tax we pay. Below are the 2021 tax brackets according to the Australian Taxation Office (ATO):
| Taxable Income | Tax on this Income |
| 0-$18,200 | Nil |
| $18,201-$45,000 | 19 cents for each $1 over $18,200 |
| $45,001-$120,000 | $5,092 plus 32.5 cents for each $1 over $45,000 |
| $120,001-$180,000 | $29,467 plus 37 cents for each $1 over $120,000 |
| $180,001 and over | $51,667 plus 45 cents for each $1 over $180,000 |
Why You Want to be Paying More Tax!
Paying tax is good! It means that you are earning more money. Sure, you do have to give some more to the government, however the more you pay, the more money that is in your pocket as well. You may have heard people say how they are avoiding going up to the next tax bracket, which if you actually know how they work you would know that is crazy talk! If you go to the next tax bracket, it doesn’t mean all of your money is now taxed at a higher rate, it is only the money over that bracket that gets taxed higher.
For example, if you earn $50,000 a year:
- $18,200 of your income would be tax free
- $26,799 ($18,201-$45,000) of your income would be taxed at 19c per dollar
- $4,999 ($45,001-$50,000) would be taxed at 32.5c per dollar
If you income doubles the next year and you earn $100,000 a year:
- $18,200 of your income would be tax free
- $26,800 ($18,201-$45,001) of your income would be taxed at 19c per dollar
- $54,999 ($45,001-$100,000) of your income would be taxed at 32.5c per dollar
Therefore, going up a tax bracket isn’t going to affect all of your income, just the dollars that go over into the next bracket. So if you are trying to avoid going up into the next tax bracket- don’t, as it is only going to cost you 4.5c extra per dollar over (if you are in the 45k-120k tax bracket) and the rest is yours!
What Income You Need to Declare
You need to declare all income to the ATO, this includes:
- Income from any job
- Share investment income (capital gains and dividends)
- Property investment income (rent)
- Bank interest
- Any other additional income
How to Decrease Your Tax Bill (Legally)
While it is good to be paying more tax, it is also nice if you can cut down on that tax by claiming tax deductions. It is important that these are done legally and correctly, because if you get audited and you have declared things you shouldn’t have you could end up owing more than what it’s worth.
My suggestion would always be to see an accountant at tax time. They obviously work professionally in the area so know exactly what you can and can’t claim, making it a simple and easy process while also getting the most tax back. The appointment is also tax deductible for the following year!
How does a Tax Deduction Work?
Tax deductions increase your tax refund by decreasing your overall taxable income.
For example:
If you earn $80,000 for the year, the tax you will pay is $16,467.
If you have $2000 in expenses that you can claim, these will reduce your taxable income to $78,000. This means instead you would only pay $15,817 in tax, saving you $650 for the year. A tax deduction does not mean you will be totally reimbursed for those costs, so it is important to not just buy things to save on tax as it will still cost you!
Work- Related Expenses
To claim a deduction for a work related expense:
- You must have spent the money yourself and wasn’t reimbursed.
- The expenses must directly relate to you earning an income.
- You must have a record to prove it (usually a receipt).
If the expense is for both work and private use, you can only claim the work related part. For example, if you have a mobile that you use mainly for personal use but occasionally for work, you could claim a percentage of your plan as a tax deduction.
Other Expenses
You may also be able to claim deductions on a variety of other expenses, including:
- Gifts and donations
- Cost of managing taxes (accounting fees)
- Personal super contributions
- Interest, dividend and other investment income (franking credits, etc)
As I said earlier, seeing a tax accountant is the best way to make the most of your tax return while also knowing that you are doing it right! If there is anything you think you may be able to claim it is also important to keep any of those receipts in case you get audited by the ATO. Get started now so you are ready to go at tax time!
Mind Over Money 