Taxation Welcome back to another Millennial Money article where we demystify key concepts in personal finance affecting university students. Today we talk about tax. This is something that anyone who has a job or is thinking about getting a job should understand at least at a basic level and is something we hope to get across today. While you may already know what tax is we want to focus on how tax affects you and how to avoid paying too much tax. The Marginal Tax System
To give a brief overview, the marginal tax system means that individuals are charged different rates for additional income based on how much income they are already earning. It is progressive, meaning that as one continues to climb through the income thresholds, they face a higher marginal tax rate. The thresholds themselves are adjusted for inflation every year. For more details on the thresholds and tax rates, and to see where you fit in, see this website. Also, do not get marginal tax confused with average tax (which will always be lower due to the progressive tax system). What is a Tax File Number (TFN)?
A tax file number is a unique identifier for an individual’s tax and superannuation record, so it is essential that you keep this secure, like you would a passport or birth certificate. It is important for an individual in a job to get a tax file number, otherwise, by assumption, the government will charge the highest marginal tax rate (45%) to any income earned, which can dramatically reduce your take home pay. Even for those who aren’t in a job, it is important to be proactive and apply for one now before losing that money (which is only recovered at the end of the tax year). It also makes it easier to fill out a tax return, which we will discuss in more detail below. For more information on applying for a TFN see this website. What is a Tax Return?
A tax return occurs at the end of the financial year (June 30) and is used by an individual to ensure they are paying the right amount of tax, or more specifically that they are not being overtaxed as they go. It is important to know how much you should be taxed, based on your income, and if there are any tax-deductible expenses which you can claim. If you have a complicated tax situation, we recommend speaking to a tax advisor. One reason which you might be overtaxed is because of the PAYG tax system. Without going into too much detail, this means that tax is taken out of your weekly or fortnightly pay, rather than at the end of the year, to prevent people from spending it. How much you are taxed is calculated based on a pro rata salary. So, for example, if you earn $500 one week you will be taxed based on an annual income of $26000. Therefore, if you have weeks earning above average income (e.g., with public holiday pay), then you may have been overtaxed based on your actual annual income. Therefore, it’s important to file a tax return. In terms of filing a return, the process has become much easier and can now be done electronically within the space of 15 minutes, for people with straightforward returns. However, if you do need assistance, we recommend seeking a tax advisor, and possibly looking into pro bono resources which may include friends and family. Conclusion
We hope you have taken something out of this article and interested in finding out more about tax and how it affects you. Next week we will be talking about Credit Cards and Buy Now Pay Later Schemes
The Finance Student's Association is not a financial adviser, the views expressed within this article are those of the authors and do not represent the views of the Finance Student's Association. All images and references in this article are for fair and educational purposes only. The content in this article is not intended as legal, financial or investment advice and should not be construed or relied on as such.