Five tax myths that make your accountant cringe
There are a number of tax “truths” that we all know, right? Well, not necessarily. Here are five frequently heard statements that are bound to make your tax accountant cringe!
You might as well make a donation – you get it all back in tax anyway
I’m not saying you shouldn’t donate to charities (so many do so much good work!) but please don’t do it under the impression that the tax office will reimburse you for 100% of your donation. Donations to charities that are Deductible Gift Recipients (yes, there’s a list) can be claimed as a deduction in your tax return, reducing the amount of income you pay tax on. So if you pay the top tax rate on your earnings, you’ll save 45% of the amount you donate (not including Medicare levy or offsets). But if you earn less than the tax free threshold (currently $18,200) it won’t save you any tax at all – though you’ll still get that warm fuzzy feeling from helping.
You can claim a deduction for all clothes you buy to wear to work
Many people can claim the purchase (and the laundering) of clothes bought to wear to work – but only if they meet certain conditions. Broadly, the clothing needs to be protective (for example steel-capped boots); occupation-specific (doctor’s scrubs or a chef’s hat); or a uniform that identifies you as an employee of an organisation (which usually means it has the company logo on it). Having to wear a white shirt or black pants that can be any style does not constitute a uniform – even though it’s a requirement for the job. The same goes for suits, so chances are your accountant isn’t getting to make a claim either! Before making a claim, check the ATO’s website to ensure you’re eligible – in general, if you can wear it to the local shop and people walking past can’t tell either your occupation or your employer, then it’s probably not claimable.
You pay more tax on your second job than you do on your first job
No, this isn’t a good reason to avoid getting a second job – because it’s not true. This myth has come around because when people take on a second job, their take-home pay is usually less than on their first job due to more tax being taken out. This is not because they are being taxed more on a second job, but because they are taxed at a higher rate due to making more money. It’s too complex to explain in one short paragraph, but I assure you that the person working one $60,000 job pays the same amount of tax as the person working two $30,000 jobs. And if the person working the one job is taking more home in their weekly pay packet, then the person working two jobs will have the bigger refund when they lodge their tax return (so it all evens out).
I claimed it last year and the ATO gave me my tax refund, so it must be OK to claim
Oh dear… This is the tax equivalent of telling your friends they can’t be fined for running a red light because you ran one last week and didn’t get in trouble for it. For the record it’s not OK, you just didn’t get caught. The ATO does not look at every deduction in every tax return (are you surprised?). The ATO systems will flag amounts that are high compared to your income and your job description (now you know one reason they ask for your occupation). Generally, if your deductions are within certain ranges, they won’t look into them in detail, unless something else brings you to their attention and they audit your tax return.
If the ATO audit you and find you’ve made claims you aren’t entitled to make, it isn’t just extra tax you’re up for. The ATO can also issue fines and charge interest (and if they think your false claims classify as ‘fraud’, they can go as far back through your prior tax returns as they like). Don’t just claim everything you think might be OK and hope the ATO will remove the claims that aren’t correct – check all claims are allowed and make sure you have what you need to justify them to the ATO if required.
If you end up with tax payable instead of a tax refund, you must have a lousy accountant
As much as I’d love to take all the credit every time a client received a huge tax refund, my skill is not the only factor in a refund or a payable being the end tax result. A good tax accountant will help you to structure your financial affairs in a tax-effective way and to claim all deductions and offsets that you are entitled to. However, other factors such as how much you’ve earned and how much tax you’ve had withheld are usually the biggest factors in an individual’s tax situation. Your accountant will help you reduce tax as much as you legally can and explain to you why your tax result differs to last year. And if your income situation is about to change substantially, checking in with your accountant first may help you avoid surprises at tax time.