Accountant reveals how to never be shocked by a tax bill again

Back in the day, the vast majority of people had one employer who deducted their tax from every paycheck for them and at the end of the financial year, if they were lucky, they would get some money back in the form of a tax return, writes Gerry Incollingo, managing partner at LCI Partners.

However these days, millennials especially are choosing to contract over taking on a full-time job. Some people have multiple jobs, some have a side hustle or two and others, of course, run their own businesses. This can make lodging a tax return a little tricky.

How to avoid a surprise tax bill

While this may be a more exciting and flexible way of working, you may find that at the end of the financial year, you have a surprise tax bill.

Here are some tips for keeping on top of that.

Scenario 1 – You have multiple jobs, or you have a job as well as contracting

In the case of having multiple jobs where you have multiple employers paying you and deducting tax, the likely reason you may get stung with an additional tax bill is due to the tax free threshold.

In Australia, $18,200 of income per financial year is tax-free. If both employers claim that for you, then you can see yourself up for tax on that extra $18,200.

Additionally, if the two jobs put you over a certain tax threshold, then you may find yourself in a different tax bracket for some of your income.

The best way to reduce this risk is to ask one of your employers not to claim the tax free threshold for you.

Also, get your employers to take out a higher amount of tax from your salary (there are usually a few tax options when you sign onto a company). That way you are more likely to get a return rather than a bill at the end of the financial year. Make sure you keep your receipts!

Scenario 2 – You are a contractor who takes care of their own tax

If you are a contractor who takes care of their own tax, try to work out how much tax you would owe on your own and put that amount aside every time you get paid.

I would suggest getting a bank account that is separate to your spending account to store it in, and ideally make sure that account is earning some interest so you can make some money off the top of it.

In Australia, the tax thresholds for 2022 are as follows to give you an idea of how much to save:

taxable income up to $18,200 – nil;
$18,201 to $45,000 – 19% of excess over $18,200;
$45,001 to $120,000 – $5,092 plus 32.5% of excess over $45,000;
$120,001 to $180,000 – $29,467 plus 37% of excess over $120,000;
taxable income of more than $180,001 – $51,667 plus 45% of excess over $180,000.

As an example, if you have made over $18,201 for the year, put aside 19 per cent of every pay until you have earned $37,001. Then put aside 32.5 per cent until you reach $90,000.

Scenario 3 – You own a business

Many businesses don’t get taxed too much when they are starting out as they have many expenses that they can write off. But as soon as you start making money, despite the fact that you are paying BAS quarterly and it feels like you are always paying tax, you are likely to get lumped with a tax bill at the end of the financial year.

The full company tax rate for a business is a flat 30 per cent once you have enough income to be taxed. However, there are a number of lower tax rates available. Eligibility for the lower company tax rate depends on whether you are a:

base rate entity from the 2017–18 income year and onwards
small business entity for the 2015–16 and 2016–17 income years.

If you are a ‘base rate entity’, your company tax rate is:

27.5% from the 2017–18 to 2019–20 income years
26% for the 2020–21 income year
25% from the 2021–22 income year onwards.

For your company to be a ‘base rate entity’, it needs to meet the following eligibility criteria:

aggregated turnover of less than $25 million for the 2017–18 income year or $50 million from the 2018–19 income year onwards, and
if your company earns passive income, it cannot exceed 80% of the company’s assessable income, which can include:
- corporate distributions and franking credits on these distributions
- royalties and rent
- interest income
- gains on qualifying securities
- a net capital gain.

If you run a business, I would suggest putting yourself on a salary, first and foremost. Then you can pay your salary tax when you pay your employees’ tax quarterly. That will also make it easier to get loans in your name, which will become relevant if you want to purchase a home to live in, for example.

With the business, when you have an overflow of money, put it aside in another business account. Of course, it is still business money that you can spend, but at the end of the year, if you have a healthy amount of money in that account, odds are your tax bill will already be saved and you may even have additional money there to pay out to yourself as a dividend.

It always pays to have a few months of expenses put away.

Want more? Get our newsletter delivered straight to your inbox! Follow Kochie’s Business Builders on Facebook, Twitter, Instagram, and LinkedIn