Financial literacy is about taking ownership of your personal finances and making good decisions about money for your unique situation. It’s also about having a good relationship with money, through positive skills, attitude, and knowledge.
In fact, financial literacy covers a multitude of money matters, but for this exercise we’re going to delve into one that can leave even the most experienced money mogul tearing out their hair.
Yep, we’re talking tax.
Let’s face it – have you ever heard anyone say anything good about doing their tax? But seriously, understanding how tax works is important. Why? Because it could be the difference between getting a tax bill or a tax refund, and we know which one we’d prefer!
What’s tax and why do we pay it?
Tax is money that is collected (levied) from individuals and businesses to pay to all three levels of government in Australia - federal, state or territory, and local. We need to pay tax to ensure these governments can provide essential public goods and services (think health, education and infrastructure such as roads) to the community.
Sure, on an individual level, it would be better for our bank accounts if we didn’t pay tax. But without tax, we wouldn’t be able to access schools, hospitals or even pensions and benefits from Centrelink.
The government may also use tax to influence the use of certain products or services. They may increase taxes to discourage the consumption of certain things (think cigarettes and alcohol) or lower tax on things they want us to use more of (like offering tax breaks on renewable energy or alternative fuel sources).
In most cases, tax is levied automatically from your income or purchases, so while it is great to be aware and knowledgeable, you aren’t expected to manage this yourself. You do, however, need to make sure that you have a tax file number (TFN).
Why do some people not pay tax?
Most forms of tax are dependent on income or profits. The government uses your level of wealth and income to determine who should pay tax and how much you should pay.
Because of this, there are some people who do not have to pay tax.
What’s up with the Australia Taxation Office (ATO)?
In brief terms, the ATO is the main revenue collector for the Australian Government. It’s the ATO’s job to manage the Australian Government’s tax and super legislation.
But your main interaction with the ATO is most likely when they levy tax from your income, and then when you lodge a tax return with them during tax time.
Does anyone visit the ATO’s website for fun? We don’t think so, but we do think it’s the best place to go for all your tax-related queries. You can check it out here.
What’s a tax return?
Your tax return will tell the ATO exactly how much tax you should have paid that year, depending on your income, deductions, offsets, and rebates. Then the ATO will either issue you a tax bill (meaning you haven’t yet paid enough tax for that year) or a tax refund (meaning you paid too much tax through that year and now you have some extra pocket money to spend on whatever you like).
To lodge a tax return, you need to have a TFN, bank details and, if you have been employed at all during the financial year, you will need to wait until your employer has issued your payment summary (you can check this for yourself on myGov). If you’re self-employed, you should keep your own records of your income and any tax instalments you paid.
Tax works based on self-assessment. This means that the ATO will take any information you provide in your tax return as accurate. However, the ATO may later confirm the information you provided against other sources of information. If you have not declared all your income, or if you make a claim for something you’re not entitled to, the ATO will make you pay the tax you owe and may even issue a financial penalty.
It is 100% your responsibility to make sure you lodge your tax return between 1 July and 31 October, and you are required to do so every year. You can do this yourself through myTax, or you can enlist the help of a registered tax agent. Most registered tax agents have a special lodgment program and can lodge returns for their clients after the usual 31 October deadline. The due date will also depend on your personal situation. Contact your tax agent for advice.
You might want to keep this at the top of your to-do list, because if you don’t lodge your tax return, you may incur penalties and interest.
How can I stay safe during tax time?
According to the Australian Cyber Security Centre, the number of scams targeting Australians skyrockets at tax time. Be wary of calls, texts and emails giving you the "good news" about a tax refund or threatening to arrest you over unpaid tax debts. If you think the claim may be legitimate, always call the tax office directly and never use the number or links provided within the message. Check out our blog 'Be 'Scam Alert' at tax time!' for more info on staying safe at tax time.
Looking for more info on how to make tax time less stressful? Click here. What are your best tips for keeping tax simple and stress-free?
The small, small print: Please note this information is general in nature and does not take into account your personal circumstances or objectives. You should consider this before acting on any of the information contained.