Tax time is a minefield of theory, fact and myth.
Have you argued with your accountant because they can’t get you a refund, or because the refund they did get wasn’t big enough?
It’s that time of year again, when employees receive PAYG income statements and businesses get their expenses in order.
Even though tax is fairly straightforward — you pay once you pass a certain threshold — the dance of deductions can send taxpayers, and their accountants, down the virtual rabbit hole.
That’s because while there are lots of weird things that individuals and businesses can legitimately claim as deductions, while some simple things are off limits.
Take the office worker who can’t generally claim the costs of the suit/dress they wear to work or the travel costs associated with getting to the office. Look at that against the tradesman’s tools, the office X-Box or the sex workers’ toys”.
Business Insider asked Chris Sneddon, managing director, Maxim Accounting and Business Advisers — one of Newcastle’s biggest practices — to explain some of the most common tax myths that still persist.
Sneddon says the number one myth for individuals is that they’ll get a tax refund.
“Employee taxpayers don’t get a refund by magic or by having a great accountant,” he says. “They only get a refund if they’ve paid too much tax for the year.”
Here are four more myths Sneddon says needed debunking for both individuals and businesses:
1. Every dollar spent on deductible items is a dollar returned from the ATO
Sneddon says this isn’t the case.
“What actually occurs is that the balance of your deductions go against your total income,” he says. “That reduces total income and therefore the tax you pay on that taxable income.”
So it’s a dollar of deductions subtracted from income not tax. That’s a very different outcome to a dollar off your tax return.
Sneddon says it depends on your tax bracket: “While some people will be claiming against the highest marginal tax rate and so getting close to a 50% reduction from expenses most people are on lower tax rates and so could be saving as little as 19 cents in the dollar.”
2. There are exclusive loopholes to avoid tax
“That’s called fraud,” Sneddon says.
“There are tax minimising strategies through consultation with an experienced accountant that will allow you to tax plan.”
Think buying an investment property and negative gearing. That’s one of Australia’s favourite tax shelters.
But Sneddon says there are other ways that “allow you and your accountant to develop strategies which will legally assist in minimising the amount of tax you would pay.”
3. Driving to work is deductible work-related travel
Sneddon says that while travel to the office is not generally deductible there were instances where a claim for car travel could be made.
Here are the three specific criteria that can make your trip between home and work deductible:
- You used your car because you had to carry bulky tools or equipment that you used for work and could not leave at your workplace (for example, an extension ladder or cello)
- Your home was a base of employment (that is, you started your work at home and travelled to a workplace to continue your work for the same employer)
- You were shifting places of employment (that is, you regularly worked at more than one site each day before returning home)
4. Paying tax is a bad thing
This final one might be a little contentious.
If you are paying tax then you are earning an income. The more tax you pay the more income you must be earning.
“That doesn’t mean you shouldn’t tax plan,” Sneddon says. “It’s just a reflection that the tax system works.”