The beginners guide to income tax

Most of us have to pay it and most of us do it through gritted teeth but if you’re new to the tax system – perhaps fresh out of school or uni and heading into your first job, or maybe a newly arrived migrant – you might not have got your head around income tax.

Here’s a beginners guide to help you on your way:

What is income tax?

Income tax is paid on all forms of income, including wages from your job, profits from your business and returns from your investments such as bank interest and dividends. It can also be payable if you sell or give away a valuable asset like a house or some shares.

You are allowed to have income of up to $18,200 each year without paying income tax. This is called the tax-free threshold. If your income is more than $18,200, you will probably have to pay tax.

Also read: Six ways to tone down your tax bill

We have what is called is a progressive tax system. That means that the higher your income, the higher the rate of tax you have to pay. Our lowest tax rate is 19% and this kicks-in on the first dollar you earn over the tax-free threshold. Our highest tax rate is 47% but this is only charged on income over $180,000. Most people pay somewhere in-between.

How do I pay income tax?

If you work for an employer, income tax will be automatically deducted from your wage or salary. The amount you receive in your bank account every payday is the amount after tax. Your employer pays this straight to the Australian Taxation Office (ATO).

With other forms of income, such as business profits or bank interest, you have to account for income tax yourself.

Also read: Tax cuts will boost economy: business

Every year, most taxpayers need to complete an income tax return. This records all your income and works out your tax liability. Sometimes, your employer will already have paid enough tax on your behalf during the year, so you won’t owe any tax to the taxman. Often, in fact, you’ll have overpaid tax and you’ll be due a refund. If you earn other income outside your job, or if none of your income is from a paid job, the chances are that you’ll have to pay tax based on the liability you calculate in your tax return.

Who has to lodge a tax return?

Taxpayers who must submit a tax return include:

• most resident individuals whose total income exceeds the $18,200 tax-free threshold for the income year

• every individual carrying on a business or profession regardless of income or loss

• any resident taxpayer earning less than $18,200 who has had tax withheld from that income through their job

When do I need to do my tax return?

You need to lodge your tax return as soon as possible after 30 June and no later than 31 October (the deadline) each year.

Most people lodge through a tax agent, like H&R Block, who are normally granted extensions of time beyond 31 October for taxpayers who are listed with the ATO as their clients by that date.

And deductions?

As well as recording your income, you can also use your tax return to claim deductions for certain expenses which you incurred in the year. These deductions reduce your taxable income and are often the reason why people get a tax refund when they lodge.

Also read: A third of private firms pay no tax: ATO

The most common deductions are those which relate to money you spent as part of your work. If you have spent money on something in order to do your job, such as purchasing uniforms, and paying for travelling or ongoing education expenses, you may be entitled to claim that cost as a tax deduction.

Remember to only claim what you are entitled to. You cannot claim private expenses or things that have been reimbursed by your employer. If you are unsure, you can always ask one of H&R Block’s tax professionals by popping into your nearest office.

Is income tax complicated?

It can be, and that’s why so many people choose to use a tax agent like H&R Block to prepare their tax return. Getting professional help takes the stress out of the process and ensures that your return is correct and lodged on time. Best of all, tax agents will often be able to highlight deductions you didn’t know you could claim!