Each year, you are required to lodge your tax return with the ATO either by yourself or through your accountant, but do you understand your tax return?
A tax return is a form that tells the ATO how much money you have earned for the year and the associated tax deductions (expenses paid in relation to earning that income). The ATO uses this information to determine whether you have paid enough tax throughout the year. This includes compulsory Medicare Levy and surcharge (where income exceeds the thresholds) and any applicable tax offsets.
When you receive the completed tax return from your accountant, the first page is your estimated income tax position for the financial year just completed, that is, the amount of tax payable or tax refundable. The second page contains your personal information such as date of birth, bank account details (for tax refund purposes) and your addresses. Always make sure your bank details on this page are correct, especially if you are expecting a tax refund!
The next page is the income part of the tax return. Your income such as wages, bank interest, dividend income, other investment income, business income and rental property income will be included here. If you have sold shares or an investment property, the gain or loss you make on these is a capital gain or loss. The capital gains will be included in your taxable income, while a capital loss will be carried forward to offset against any capital gains in future years. The total income is the sum of all your income earned during the year.
The next part of your tax return is the deductions. Examples of deductions you may be able to claim include:
- Accounting fees
- Work-related car expenses
- Work-related travel expenses
- Work-related self-education expenses
- Professional memberships and subscriptions
- Personal superannuation contribution
- Interest charged by the ATO, and
- Income protection insurance.
After your total deductions have been applied against your total income, the net income is your taxable income. It’s on this amount that your tax will be calculated and payable.
Your private health insurance details will then be included, and a 2% Medicare Levy (compulsory) will be charged on your taxable income. If you do not have private health insurance and earn above the income threshold, you will also have to pay a Medicare Levy Surcharge of 1% of your taxable income.
Your eligibility for several tax offsets and benefits, which can reduce the amount of tax you pay, is determined by several income tests. These tests may be different for different offsets.
You are also required to declare your spouse’s details and their income in your personal tax return as the ATO uses your family income to determine whether you are entitled to a rebate for your private health insurance, payment of Medicare Levy surcharge and eligibility for the Child Care Subsidy.
Total income minus total deductions is your taxable income, and gross tax is calculated on your taxable income. Tax offsets (e.g., the low and middle-income tax offset) and the tax you have already paid during the year, will reduce your gross tax bill. However, the Medicare Levy (and potentially Medicare surcharge) are added to derive your total tax payable or refundable for the year.
If you have any questions or require assistance with preparing your tax returns, contact your local William Buck advisor.