What Happens With PAYG?

As a taxpayer, you may have encountered the term pay-as-you-go (PAYG).

PAYG is generally a good thing, but there can be confusion between PAYG withholding and PAYG instalments, particularly if you’re an individual who is eligible for both. Both are amounts by which your tax bill can be offset at the end of the financial year.

So there’s no need to worry – the ATO is not stealing your money. Here’s how to distinguish between the two types of PAYG you may have encountered as a taxpayer.

PAYG Withholding

As an employer, you have a role in helping your payees meet their end-of-year tax liabilities. You do this by collecting pay-as-you-go (PAYG) withholding amounts from payments you make to:

  • your employees
  • other workers, such as contractors that you have voluntary agreements with
  • businesses that don’t quote their Australian business number (ABN).

This is to assist in minimising the impact of your employee’s tax bill at the end of the financial year. If you’re an employee, there’s no need to worry about this amount – it is what is used to work out how much tax you may owe or be owed by the Australian Taxation Office at the end of the year.

Payments other than income from employment may also need tax withheld, including:

  • investment income to someone who does not provide their TFN
  • dividends, interest and royalties paid to non-residents of Australia
  • payments to certain foreign residents for activities related to gaming, entertainment and sports, and construction
  • payments to Australian residents working overseas
  • super income streams and annuities
  • payments made to beneficiaries of closely held trusts.

PAYG Instalments

Pay-as-you-go (PAYG) instalments are regular tax prepayments on your business and investment income.

They’re a way to offset your tax bill by paying regular instalments at the end of the financial year. This way, you should not have a large tax bill when you lodge your tax returns.

If your financial situation has changed, your expected tax may also change. This means your current PAYG instalments may add up to more or less than your tax at the end of the year.

When Do You Have To Pay PAYG Instalments? 

If you are an individual (including a sole trader) or trust, you will automatically enter the PAYG instalments system if you have all of the following:

  • instalment income from your latest tax return of $4,000 or more
  • tax payable on your latest notice of assessment of $1,000 or more, and
  • an estimated (notional) tax of $500 or more.

A company or super fund will automatically enter the PAYG instalments system if any of the following apply:

  • it has instalment income from its latest tax return of $2 million or more
  • it has an estimated (notional) tax of $500 or more, or
  • it is the head company of a consolidated group.

PAYG Varying Instalments

You can vary your PAYG instalments if you think your current payments will result in you paying too much or too little tax for the income year. Variations must be made on or before the payment due date (28 days after the end of each quarter, generally).

You do not have to vary your PAYG instalments at all. It will not change how much income tax you pay for the year.

After you lodge your tax return, if your instalments were:

  • too high, the excess is refunded to you
  • too low, you pay the shortfall.

Your varied amount will apply for all your remaining instalments unless you make another variation before the end of the income year.

You might need to vary your PAYG instalments if any disasters over the past financial year have impacted you.

If you cannot pay your instalment amount, you should still lodge your instalment notice and discuss a payment arrangement with the ATO. You may wish to obtain advice from a tax agent on whether you should vary your instalments.

Understanding The Medicare Levy On Your Return

The Medicare levy is an amount you pay in addition to the tax you pay on your taxable income.

The Medicare levy is used to help fund some of the costs of Australia’s public health system (Medicare).

Generally, the pay-as-you-go amount your employer withholds from your salary or wages includes an amount to cover the Medicare levy. This is usually calculated at 2% of your taxable income.

Why Would I Also Have To Pay The Medicare Levy Surcharge? 

If you have to pay the Medicare levy, you may have to pay the Medicare levy surcharge (MLS) if both:

  • you, your spouse and your dependent children do not have an appropriate level of private patient hospital cover
  • you earn above a certain income.

The MLS is an amount you pay on top of the Medicare levy.

If you want to avoid paying for the Medicare levy surcharge in the future, you can take out the appropriate level of private patient hospital cover for yourself, your spouse and all your dependents.

Medicare Levy Reductions

The amount of Medicare levy you pay is reduced if your taxable income is below a certain threshold. In some cases, you may not have to pay the levy at all.

For example, in 2021–22, you do not have to pay the Medicare levy if your taxable income is equal to or less than $23,365 ($36,925 for seniors and pensioners entitled to the seniors and pensioners tax offset (SAPTO)).

The 2022-23 threshold is yet to be released, but the ATO will work out the reduction for you when your tax return is lodged.

You may qualify for a Medicare levy reduction based on your family’s taxable income if both:

  • your taxable income was more than $29,206 ($46,156 for seniors and pensioners entitled to the seniors and pensioners tax offset (SAPTO)) in 2021–22
  • you either
    • had a spouse (married or de facto)
    • had a spouse that died during the year, and you did not have another spouse before the end of the year
    • are entitled to an invalid and invalid carer tax offset in respect of your child
    • had sole care of one or more dependent children.

If you have a spouse, you may not get SAPTO even if you meet all the eligibility conditions.

This is because the tax offset amount is based on your individual rebate income, not your combined rebate income. Even if you are eligible for SAPTO but do not get the offset, it doesn’t entitle you to a Medicare levy reduction.

Again, the ATO will work out the reduction that you may be eligible for (if you are eligible).

Medicare Levy Exemptions

You may claim an exemption for the Medicare levy if you fall under one of the following categories and meet their eligibility conditions.

  • Medical Exemption
  • Foreign Residents Medical Levy Exemption
  • Dependents For Medicare Levy Exemption
  • Not Entitled To The Benefits

If you are unsure whether you may be eligible for an exemption, you can start a discussion with us. We’re here to help.

What Penalties Might Be Incurred During Tax Return Season To Watch Out For?

It’s getting closer to the time of year when your tax return may be on your mind. You may have even started looking into what is required to lodge your income tax return to get ahead on the task.

Making sure that your details are correct and that any information regarding your earned income from the year is lodged is the responsibility of you as a taxpayer and of your tax agent.

If, during the lodgement of your tax return, you fail to meet and comply with the tax obligations expected of you as a taxpayer, the Australian Taxation Office has severe penalties that they can enforce.

Taxation laws within Australia authorise the ATO the ability to impose administrative penalties on taxpayers for failing to comply with their obligations.

As an example, taxpayers may be liable to penalties for making false or misleading statements, failing to lodge tax returns or taking a tax position that is not reasonably arguable. False or misleading statements have different consequences if the statement given results in a shortfall amount or not.

In both cases, the penalty will not be imposed if the taxpayer took reasonable care in making the statement (though they may still be subject to another penalty provision) or the statement of the taxpayer is in accordance with the ATO’s advice, published statements or general administrative practices in relation to tax law.

The penalty base rate for statements that resulted in a shortfall amount is calculated as a percentage of the tax shortfall, or in the case of no shortfall amount, as a multiple of a penalty unit. This percentage is determined by the behaviour that led to the shortfall amount or as a multiple of a penalty unit, which are as follows:

  • Failure to take reasonable care – 25% of the shortfall amount or 20 penalty units
    • Reasonable care is not taken if the taxpayer failed to do what a reasonable person in the same situation would have done.
  • Recklessness – 50% of the shortfall amount or 40 penalty units
    • Recklessness is determined as disregarding or showing indifference to a real risk of a shortfall amount arising that a reasonable person would have been aware of.
  • Intentional Disregard – 75% of the shortfall amount or 60 penalty units
    • Intentionally disregarding the law occurs if there is full awareness of a clear tax obligation, and the obligation is disregarded with the intention of bringing about certain results (underpaying tax or over-claiming an entitlement).

If a statement fails to be lodged at the appropriate time, you may be liable for a penalty of 75% of the tax-related liability if:

  • A document that is necessary to establish tax-related liability fails to be lodged
  • In the absence of that document, the ATO determines the tax-related liability.

To ensure that the statements, returns and lodgements are done this coming tax season correctly, and avoid the risk of potential penalties, speak with a trusted tax professional.

Missing Your TFN Before Tax Time? Here’s What You Can Do

Your tax file number (TFN) is a critical piece of information in your possession and should be a constant companion throughout your life. However, there are times when a TFN is misplaced or forgotten. What are you supposed to do?

If you forget your TFN or lose it, this can be a significant issue.

A TFN can be used for opening bank accounts, tracking super savings, applying for government benefits, and giving to higher education providers. If a TFN is stolen, it can be used to create these accounts in your name, increasing the chances of identity theft.

It’s also required if you begin new employment, as you have 28 days to provide your new employer with your TFN before they start withholding tax from your pay at the maximum rate.

What Can You Do?

Your first avenue of inquiry, if you use the services of a tax agent or accountant, will be to ask them for your tax file number, as you will have previously provided it to them. If not, however, you can call the Australian Taxation Office (ATO) to find out what you can do to get your TFN.

The ATO will need to make certain you are who you say you are and that you’re the correct person to discuss your tax affairs with (identity theft can and does occur) – so be ready to answer a few identifying questions.

You may also (if you haven’t done so already) be invited to record a short “voiceprint”, which is another security layer that can identify you the next time you call. Another option is to fill in a form provided by the ATO to apply for or inquire about a TFN. But as the ATO will only process the paperwork it provides taxpayers, you will need to order an actual paper form.

Check The Document Trail

Before you grab the phone to track down your lost TFN, you should check other places it may have been entered into. You might want to rifle through your paperwork and check the following, as your TFN should be on them:

  • your income tax “notice of assessment” for a previous year
  • any correspondence sent to you from the ATO
  • a payment summary from your employer
  • an account statement from your superannuation fund.

If you have a physical folder or file that you keep your important information in, make sure to check it as well.

What If Your Tax File Number Was Stolen?

If your TFN has been stolen or accessed by an unauthorised third party, inform the ATO as soon as possible. Your TFN can be used for identification purposes and may be used to steal your identity. The ATO’s Client Identity Support Centres can give you further information, advice and assistance to re-establish your identity. They may also apply security measures to monitor any suspicious activity on your account.

You can speak with your registered tax agent (like us) as we may have it on file and be able to assist you with locating it.

Dispelling The Myths Around Cryptocurrency & Tax

The popularity of the digital currency known as crypto often leads to many questions when it comes to tax time. However, it’s encouraged that you speak with your accountant about your obligations as soon as possible to be prepared for what you are expected to do.

Cryptocurrency isn’t a foreign currency, despite the name. That’s a myth that the ATO has spent considerable time dispelling, as taxpayers fail to understand the taxable consequences. The ATO classifies cryptocurrencies as property, specifically as capital gains assets.

This means that it is taxed under Capital Gains Tax provisions, where a taxpayer makes a capital gain from the disposal of cryptocurrency if the proceeds/profit exceeds what the cryptocurrency initially cost the taxpayer. It must be reported in their assessable income.

If the taxpayer does not make a profit and receives a loss for the sale, they will need to report that in their assessable income. There is a commonly held belief that the gains from cryptocurrency if the costs for acquiring the asset were less than $10,000 are tax-free. This is not the case.

In very limited circumstances, a cryptocurrency gain of less than $10,000 may be classified as a personal-use asset rather than a capital gains asset. This exemption is usually determined by the Australian Taxation Office’s private rulings according to strict criteria.

Any income derived from the sale or purchase of Bitcoin as an exchange service must be included in the assessable income reported in the tax return lodged at the end of the financial year.

Record-Keeping

The best way to ensure that all potential assessable income results from the return is to maintain immaculate records. You will need to ensure that a record is kept of:

  • The date of each transaction
  • The amount in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange)
  • Details of the transaction
  • Any associated expenses, like fees and commissions, and
  • Details of the other party (the bitcoin public address is enough).

If you have been involved in the acquisition or selling of bitcoin, and want to be sure that you’re prepared for next year’s tax return, start a conversation with us about your obligations and potential tax liabilities sooner rather than later.

If the circumstances around your tax liability change, it will put us in a better position to assist you.

No More Shortcuts For Work From Home Deductions

With a new norm surrounding how Australians work (hybrid, remote or office-based), there has been a change in how work-related expenses will be claimed this year during tax season.

Where once the expenses and claims that needed to be made during tax return season could be more clearly defined in terms of business or pleasure, work-related expenses or personal expenditure, remote working and work-from-home employees need to keep careful records of what they can and cannot claim as “home office expenses”.

Previously, this could be claimed through the COVID-simplified 80 cents per hour, work-from-home method (known as the shortcut method and no longer available for the 2022-23 financial year), the ‘fixed method’ (previously 52 cents per hour, now 67 cents per hour) and the ‘actual method’.

With new changes to the methods in place from 1 July 2022, it’s essential that work tax deductions are correctly calculated and claimed and the process is duly followed.

Shortcut Method Is No Longer Available

The shortcut method introduced to simplify the process of claiming work-from-home expenses during the pandemic is no longer available.

Through this method, individuals could claim a fixed rate of $0.80 per hour worked from home, with the aforementioned shortcut method covering expenses such as phone, internet, and depreciation on furniture & equipment. If this shortcut method was employed, no other costs could be claimed for working from home.

Remember that for the 2022-23 financial year, you must claim any work expenses through the fixed rate or actual methods, not the shortcut method.

Revised Fixed Rate Method

The fixed method will increase from 52 cents per hour to 67 cents per hour. The ‘actual method’ can also still be used. You no longer need a dedicated workspace at home, but you must have a representative four-week diary of the hours worked from home between 1 July 2022 to 28 February 2023.

Many taxpayers will already have kept records, but if you haven’t, one way to do this would be to look back over your diaries for the past four weeks.

You may also be able to use other similar records you already have as evidence as long as they represent the hours they worked from home during those eight months.

From 1 March 2023, the record-keeping requirement has changed again, and you will be required to record all your hours worked from home in a diary or some other format as they occur. This can be in the form of timesheets, diaries, time recording apps, or any other similar document, provided it is kept as they occur.

How Does The Fixed Rate Method Work? 

To use the revised fixed rate method, you must:

  • incur additional running expenses as a result of working from home
  • have a record of the total number of hours you work from home and the expenses you incur while working at home
  • have records for expenses the fixed rate per work hour doesn’t cover and show the work-related portion of those expenses.

You can claim 67 cents per hour you work from home during the relevant income year. The rate includes the additional running expenses you incur for:

  • home and mobile internet or data expenses
  • mobile and home phone usage expenses
  • electricity and gas (energy expenses) for heating, cooling and lighting
  • stationery and computer consumables, such as printer ink and paper.

The rate per work hour (67 cents) includes the total deductible expenses for the above additional running expenses. You can’t claim an additional separate deduction for these expenses using this method.

Australians must know their entitlements and tax deductions when working from home/remotely.

Speak with us to ensure you comply with your tax return obligations when claiming or for assistance with your tax return this financial year.

Side Hustle Income And Your Tax Return

If you or someone you know began a side business (or “side hustle”) during the last financial year, you would have to meet the tax obligations that come with that business, along with the tax obligations of your primary business.

All income earned through a side business is taxable income. That means every sale you make will count towards your taxable turnover (the total business income from your sales) and must be declared on your income tax return. Additionally, suppose your turnover exceeds or looks like it will exceed $75,000. In that case, you must register for GST and incur the 10% tax added to your taxable sales, payable to the ATO every quarter.

If you have to spend money on purchases or expenses related to the side business, that spending can be deducted from your profits. You only need to pay tax on the difference between your income and deductions. Here are a few things to remember when claiming a deduction for your business.

  • The expense you are claiming must have been incurred by the business.
  • The expense must relate to the business and can’t be something like your weekly groceries (domestic or private in nature expenses are generally not eligible for claiming).
  • If an expense has been incurred that is partly private/domestic and partly for business, that expense will need to be appropriately divided. This is especially useful if you run your business from home and claim home office costs.
  • Always ensure that your records are being kept and that there is evidence that the business spent the money. An invoice or a receipt is sufficient evidence in this case, but a bank or credit card statement may also be used.

Other deductible expenses can happen during the initial startup and structuring of the business. These deductions can include costs incurred when seeking professional advice on structuring the business, researching the business’s viability or when developing a business plan.

A few items you might be eligible to claim for your side business include:

  • If the business is being run from home, the business portions of bills like utility, phone or internet can be claimed.
  • Skilling up for the business or reskilling may be tax-deductible for the cost of courses, training, seminars or conferences (as long as it links to business income).
  • Any prep work that occurred during the business startup before the business’ official start can be claimed by the business.

Always ensure that you claim all expenses that could apply to your business.

Good record-keeping will help track all income and potential deductions that come through via the side business, and employing a bookkeeper could ensure that this happens correctly.

Remember that accountants are always here to help you during tax return time, so start a conversation today about how we could assist you.

Foreign Service & Income Declaration

Have you been employed by someone outside of Australia? If you have, you’ll likely need to lodge a tax return to declare any foreign earnings from foreign service.

Foreign service is the service Australian residents provide in a foreign country as an employee or an office holder.

Your foreign earnings include income you earn, such as:

  • salary and wages
  • commissions or bonuses
  • allowances
  • the income you receive under the employee share scheme provisions.

You must include any foreign income from working overseas subject to tax as assessable income in your tax return in the year you earn it.

You may be able to claim a foreign income tax offset for amounts of foreign tax you pay when you lodge your tax return.

Foreign earnings don’t include:

  • continuing pensions, annuities or superannuation payments
  • foreign termination payments
  • the tax-free amount of a genuine redundancy payment or an early retirement scheme payment
  • payments made as an advance loan, restraint of trade payments or payments for personal injury
  • transfers between superannuation funds.

A payment can still qualify as foreign earnings even if it is paid in Australia or not derived when you worked overseas. However, the payment must be attributable to a period of foreign service.

Income from certain types of foreign employment and approved overseas projects may be exempt from tax.

You may need to submit an income tax return for the country from which you have earned income. If you require assistance, start a conversation with your adviser today.

Business Tax Losses: What Can You Claim?

Before you claim a tax loss for your business, you must ensure that you have correctly claimed the expenses to which you are entitled. If you overclaim expenses, your business can be put into an incorrect tax loss situation, which can make things complicated.

Generally, a business can make a tax loss when the amount spent on expenses outweighs the income.

If you make a tax loss, you may be able to:

  • Claim it in the current year,
  • Carry it forward or
  • Carry it back

Before you claim a tax loss, check that you’ve correctly:

  • Accounted for all of your business income
  • Claimed expenses, such as cost of goods sold, motor vehicle and ‘all other’ expenses
  • Apportioned expenses that have been a mix of business and private use
  • Applied your loss to the right year

You also do not want to forget that:

  • A capital loss is different to a tax loss – it can only be offset against future capital gains but not income
  • If you’re claiming a tax loss from a previous year and your business is a company, you may need to meet requirements such as the ‘similar business test’
  • Accurate and up to date records will help you better calculate your income and expenses.It can also help you to avoid incorrectly carrying back a tax loss or carrying forward tax losses to deduct in future years.

If you are a sole trader or an individual partner in a partnership (who meets certain conditions), you may be able to offset current-year losses

If you’re an eligible corporate entity (company, corporate limited partnership or public trading trust), you may be able to claim the loss carry-back tax offset. You can check your eligibility for this tax offset using the ATO’s loss carry-back offset tool, or by consulting with us.

Remember, registered tax and BAS agents like us are equipped to help you with your tax concerns as we approach the best time of year to start planning the next year for your business.

New Year’s Tax Resolutions In 2023

Get a gym membership, start a diet, drink less, and travel more. Every year we make plenty of new year’s resolutions that we try valiantly to uphold.

Why not make one about keeping on top of your tax obligations in 2023?

Are You In Business? 

Know if you’re in business or not! Are you earning an increasing income from a hobby? You might already be in business for tax purposes. To work out if you’re in a business, identify all relevant, related activities you may be conducting already.

Examples of these can include:

  • keeping records
  • obtaining and maintaining licences and permits
  • if you rent out premises or goods, everything you do to rent out those premises or goods
  • if your activity is providing goods or services, everything you do in providing them.

Then, determine whether or not the activities are considered a business by answering the following questions.

The more of the following questions you answer yes to, the more likely it is your activities are a business:

  • Do you intend to be in business?
  • Do you intend and have a prospect of making a profit from your activities?
  • Is the size or scale of your activity enough to make a profit?
  • Are the activities repeated and continuous?
  • Are your activities planned, organised and carried out in a business-like manner? For example, do you:
    • keep business records and have a separate business bank account?
    • advertise and sell your goods and services to the public, rather than just to family or friends?
    • operate from business premises?
    • maintain required licences or qualifications?
    • have a formal business plan or budget?
    • have a business name or an ABN?

Keep Business Details & Registrations Up To Date

If you’re the director of an Aussie company, you need to apply for a director ID. Keep your ABN details up to date as emergency services and government agencies use this information to support businesses during disasters. Also, if you’re going to earn over $75,000 this financial year, you’ll need to register for GST.

Keep Accurate And Complete Records

Good record-keeping helps you manage your business and its cash flow.

Do Personal Services Income (PSI) Rules Apply To You? 

PSI is income produced mainly (more than half) from your skills or efforts as an individual. If you’re earning PSI, you’ll need to work out if you’re a personal services business to determine whether the PSI rules apply to your income. The rules affect how you report your income and the deductions you can claim.

Take Care Of You AND Your Business

The last few years have thrown some curve balls at small businesses, so it’s good to be prepared. Consult with your advisers, take heed of the advice given and if necessary, look into grants and programs that can assist your endeavours.

We wish you all the best and hope you’re on track to thrive in 2023. When the fireworks have faded, know that we’re always available to support businesses just like yours.