Question about taxes and savings

[JJCRU23R]

One question my tax guy asked me was "do u have any savings worth mentioning?" I said no, since I saved about .11c in interest over the last yr. My question is how does money you save effect your tax refund?

[DJKOR]

It can affect it quite a bit depending on how much interest you get. Obviously a small amount isn't really going to do anything, but a large amount will. My mate saves a lot of money into his high interest ING account. He lost about 70% of the interest he earnt to tax. It was in the hundreds of dollars.

[byw]

Interest earned via savings/investment accounts form part of your taxable income together with your wages etc. and taxed at your marginal rate. Financial institutions will withhold some of the interest earned at the highest marginal rate if you do not provide them with a Tax File Number (TFN), however, if you have provided them with a TFN, the Financial Institutions should not deduct any withholding tax and assume you would declare your interest earnings at the end of the financial year when you do your tax.

Remember to declare all your interest income as Financial Institutions provide the ATO with info for data matching to check whether you have failed to declare any interest in your tax returns.

[SuperDave]

Yep, savings is classed as income. It's a way for the government to tax you twice. Pay tax on salary, put in bank, earn interest, pay tax again.

[dyslexik]

It all depends on whether the total amount of income savings earnt by you pushes you over the next tax bracket.

For instance, if you earn $36,500pa and you have no other income on top of that to declare, then your tax rate is 15 cents to every dollar you earn.

Therefore, the amount of tax payable to the ATO would be as follows:

($36,500 - $6,000)*0.15 = $4,575 required for Tax.

Note: The first $6,000 amount is tax free. Hence, the deduction from your total earnings.

Furthermore, the more tax deductions you have would also bring your total earnings lower. Sometimes even push you to the next lowest tax rate bracket.

If your interest savings ends up bumping your income over $37,001 then the tax rate that would now apply to you is 30% (30 cents to every dollar earned). Thats when you would start to cry. Also, if you have a HECS debt, then that would come into play as well if your income has reached/exceeded the threshold amount. Thus, requiring you to make a payment to the ATO at a later date.

That's why tradies are pretty wealthy, because they are able to claim vehicle expenses, interest fees from personal loans for their vehicles, tools, clothes, etc, as they use the stuff for work purposes. Eg. If they earn $90,000 (taxed at 37%) and they manage to reduce their total earnings with say $15,000 worth of tax deductions for repairs, maintenance, fuel expenses of his/her vehicle, then his tax claims would reduce his total earnings to $75,000. Thus, he will be taxed 30% instead of 37%. (incorrect)

His tax rate will remain at 37%, but be taxed on $75K instead of $90K.

The above is just a guide and I would highly recommend in consulting a registered tax accountant in regards to the above info, as this was my understanding of how tax accounting works in my Uni days.

Also to take note is that sometimes increases in pay may not be a good thing for you if it ends up pushing you just over the next tax bracket....even if its 1 cent. So do your own calculations every year and check the new tax rate brackets on the ATO website. At least you can have a fair idea of the amount that you will need to pay to the ATO or receive back as a tax credit from the ATO.

Edited August 13, 2010 by dyslexik

[dyslexik]

Obviously a small amount isn't really going to do anything, but a large amount will.

Actually it can affect him a lot. If he is sitting on $37,000 (after all claims+$6,000 tax free amount) and has earnt 11 cents as income from interest savings, that would push him up to the next tax bracket of 30% from 15%.

$37,000*0.15 = $5550 payable to the ATO

$37,001.11*0.30 = $11,100.33 payable to the ATO

If he has tax deducted everytime he is paid through out the financial year, then the $5550 would have already been set aside for the ATO. Therefore, another $5550.33 ($11,100.33-$5550) is required to be paid to the ATO.

Edited August 13, 2010 by dyslexik

[tru-star]

Everything that makes money for you through Electronically classified as taxable. Therefore, CASH CASH Cash on hand is all u need, no worries well yes sort of.

[dyslexik]

trung is correct. You ever wonder how the asian restaurant owners on Victoria street in richmond live?

Well, all I can say is that they don't buy houses to live in Toorak, etc, BUT most of them live in the Government Commission flats in the area.

They are able to afford to buy expensive cars, brand name stuff and investment properties, as their living expenses is very low. The commission flat rent is only $100 a month!!! Utility expense is limited to electricity and gas they use. Water is free!

[Kenshin X]

Everything that makes money for you through Electronically classified as taxable. Therefore, CASH CASH Cash on hand is all u need, no worries well yes sort of.

this is true but u need to remember that every one needs to live and to live requires = a roof, food, water, gas, electricity... and so on. so even if u are earning cash, u are required to declare "a minimum" to the ATO to convince them "yes, this person is legit". everyones "minimum expenses to survive" is different... therefore u need to pay close attention and record every dollar and cent u spend on the following:

mortgage, insurance, rego, fuel and service, gas, electricity, water, phone, food, drink, entertainment (unless u dont have a life), clothes + anything u used that is linked to a bank account, interets earned on savings.

i'm dreading my paper work atm......................................... gah

[byw]

Actually it can affect him a lot. If he is sitting on $37,000 (after all claims) and has earnt 11 cents as income from interest savings, that would push him up to the next tax bracket of 30% from 15%.

$37,000*0.15 = $5550 payable to the ATO

$37,011*0.30 = $11103.30 payable to the ATO

If he has tax deducted everytime he is paid through out the financial year, then the $5550 would have already been set aside for the ATO. Therefore, another $5553.30 ($11103.30-$5550) is required to be paid to the ATO.

This is not quite true, using your example, he would still pay 15% tax on the amount between $6,001 to $37,000, however, anything above $37,000 and below $80,001, ie. the $11 will be taxed at 30%.

Below is a table of the marginal rates from the ATO website:

Tax rates 2010–11

Taxable income Tax on this income

0 – $6,000 Nil

$6,001 – $37,000 15c for each $1 over $6,000

$37,001 – $80,000 $4,650 plus 30c for each $1 over $37,000

$80,001 – $180,000 $17,550 plus 37c for each $1 over $80,000

$180,001 and over $54,550 plus 45c for each $1 over $180,000

[dyslexik]

Like i said, i'm not a tax accoutant, as my major is in Economics and Finance. I specialise in the Investments & Securities industry and not in taxation accounting.

If he made $37,001.11, he would then be taxed at 30% for the amount of $31,001.11

If he has tax claim deductions say of $5,000, then the following would occur purely for illustration purposes.

{[($37,001.11-$6,000)-$5,000]*0.30}+$4,650 = $12,450.33 payable to the ATO.

The deductions does not bring him down to the next lowest tax bracket (15%) even if his taxable income is reduced below $37,001 after his tax claims. His tax rate will effectively remain at 30%.

Therefore, I was a bit incorrect in regards to this as well as me forgetting to add the $4,650 on top of the 30% in my previous post to this.

The 11 cents and not $11 would have effectively pushed him into the next highest tax rate bracket.

My previous post is merely a guide to gain a simple understanding on how even the smallest amount of declared earnings of interest would have an adverse affect on his tax return.

In conclusion, he should consult a tax accountant who is the specialist in this type of accounting field.

Edited August 13, 2010 by dyslexik

[byw]

Please do not take this the wrong way, but based on your figures of $37,011 as income with $5,000 worth of work related deductions, the tax payable is:

Taxable Income is $37,011 - $5,000 = $31,011

Using the ATO Tax Scales for 2010 - 2011, he falls into the 2nd tier ($6,001 – $37,000 15c for each $1 over $6,000):

Tax Payable is: $31,011 - $6,000 = $25,011 * 0.15 = $3,751.65

The 11 cents and not $11 would have effectively pushed him into the next highest tax rate bracket.

I thought the 11 cents was a typo as you stated an amount of $37,011 not $37,000.11 - anyway, the ATO only deals in whole dollars and the 11 cents would effectively be "tax free".

In conclusion, he should consult a tax accountant who is the specialist in this type of accounting field.

I agree! As I am not an accountant either, however, I just don't want any TOCAU members to get the wrong idea that earning an extra 11 cents or $11 will penalise you thousands of dollars in extra tax! :D

[dyslexik]

oh your right... sorry my mistake again.. *sigh* its friday and my brain just wants to relax lol. now i gotta go edit my previous posts to $37,001.11.

As for the the $6,000 tax free amount. I thought it does not bring your taxable income total down to the next lowest tax bracket from 30% to 15% (if applicable), $37,001.11 to $31,001.11.

What the $6,000 does is the following:

($35,000-$6,000)*0.15 = $4350 payable to tax. Instead of 15% tax being deducted from the $35K, it ultimately gets deducted on $29K only. I could be wrong here, but thats why tax accountants exists in society.

You are correct for saying the ATO only deals in dollar amounts and not cents. This was just purely for illustration purposes. But, if his taxable income based on wages were already at $37,000.90 and he earned the 11 cents from interest, then that would effectively push him upto the next tax rate bracket of 30% ($37,001.01).

Why would they take the above info as the solid truth and with 100% correctness, when i already stated that they should consult a tax accountant?

[byw]

oh your right... sorry my mistake again.. *sigh* its friday and my brain just wants to relax lol. now i gotta go edit my previous posts to $37,001.11.

As for the the $6,000 tax free amount. I thought it does not bring your taxable income total down to the next lowest tax bracket from 30% to 15% (if applicable), $37,001.11 to $31,001.11.

and you are correct for saying the ATO only deals in dolalr amounts and not cents. This was just purely for illustration purposes.

Why would they take the above info as the solid truth and 100% correctness, when i already stated that they should consult a tax accountant?

No worries - we're all here to try to help out the TOCAU Members

[dyslexik]

yah we try lol. Thanks for picking up my typo mistakes! you got a good eye for detail.

Cheers Bud!

@JJCRU23R - I hope all the above info helps you better understand how taxation accounting works.

** now maybe i should go pickup a trade outside business hours, so I can claim future mods, running and maintenance expenses to my white snail as tax deductions **

[tru-star]

CASH CASH = CROWN CASINO?? TAX FREE?? then this would be legit. But best to avoid.

[dyslexik]

I reckon it shouldn't be, because the risk you take for gambling your money away should be sufficient enough to warrant winnings to be tax free.

if you won $$$ from gambling and received it in cash with no paperwork atatched or electronic trail, then wouldn't that just be the same as working cas in hand? same same (viet saying).... same s**t, different smell.

ATO regards all income earned to be declared as earnings, including cash gifts, etc.

- lame.

I received a settlement cheque of thousands of dollars, but I was told it is tax free when i declare it on my tax return as it will be classified as a disgracia gift.

I think winnings from Big brother was not tax free.

[DJKOR]

HOOOOOLLLLLLLYYYYYY SSSSSHHHHHHEEEEEEEEEEEEEEEEEEETTTTTTTTTTTTTT!!!

I stopped about halfway up because damn this is getting really confusing. Man I hate Tax.

[xoom]

guys to clarify u work ur way up the tax brackets ...... u dont get lumped into a particular bracket and get wacked @ that rate .....

Tax rates 2010–11

Taxable income Tax on this income

1) 0 – $6,000 Nil

2) $6,001 – $37,000 15c for each $1 over $6,000

3) $37,001 – $80,000 $4,650 plus 30c for each $1 over $37,000

4) $80,001 – $180,000 $17,550 plus 37c for each $1 over $80,000

5) $180,001 and over $54,550 plus 45c for each $1 over $180,000

so based on the above if u earn't $85,000 in the 10/11 financial year then u will fall into bracket number 4 and assuming no deductions or any other funny business u will be taxed $17550 + (5000*0.37) = 17550+1850 = 19400

Making ur gross pay 85000, tax of 19400 and net pay 65600.

To show that u work ur way up the brackets break the 85000 down to each bracket

0 to 6000 = 0 tax

6001 to 37000 = (37000 - 6000) * 0.15 = 4650

37001 to 80000 = (80000 - 37000) * 0.3 = 12900

80001 to 85000 = (85000 - 80000) * 0.37 = 1850

Add it all up and u get $19400 ........ hey what do you know the totals match ;-)

Hopefully that proves that u work ur way through each threshold rather than being dumped into the threshold where ur gross income lands.

[dyslexik]

guys to clarify u work ur way up the tax brackets ...... u dont get lumped into a particular bracket and get wacked @ that rate .....

Tax rates 2010–11

Taxable income Tax on this income

1) 0 – $6,000 Nil

2) $6,001 – $37,000 15c for each $1 over $6,000

3) $37,001 – $80,000 $4,650 plus 30c for each $1 over $37,000

4) $80,001 – $180,000 $17,550 plus 37c for each $1 over $80,000

5) $180,001 and over $54,550 plus 45c for each $1 over $180,000

so based on the above if u earn't $85,000 in the 10/11 financial year then u will fall into bracket number 4 and assuming no deductions or any other funny business u will be taxed $17550 + (5000*0.37) = 17550+1850 = 19400

Making ur gross pay 85000, tax of 19400 and net pay 65600.

To show that u work ur way up the brackets break the 85000 down to each bracket

0 to 6000 = 0 tax

6001 to 37000 = (37000 - 6000) * 0.15 = 4650

37001 to 80000 = (80000 - 37000) * 0.3 = 12900

80001 to 85000 = (85000 - 80000) * 0.37 = 1850

Add it all up and u get $19400 ........ hey what do you know the totals match ;-)

Hopefully that proves that u work ur way through each threshold rather than being dumped into the threshold where ur gross income lands.

that is more correct. Confirmed by a mate who is a tax accountant.

[dyslexik]

HOOOOOLLLLLLLYYYYYY SSSSSHHHHHHEEEEEEEEEEEEEEEEEEETTTTTTTTTTTTTT!!!

I stopped about halfway up because damn this is getting really confusing. Man I hate Tax.

damn right, thats why i didn't major in accounting lol.

[Kenshin X]

guys to clarify u work ur way up the tax brackets ...... u dont get lumped into a particular bracket and get wacked @ that rate .....

Tax rates 2010–11

Taxable income Tax on this income

1) 0 – $6,000 Nil

2) $6,001 – $37,000 15c for each $1 over $6,000

3) $37,001 – $80,000 $4,650 plus 30c for each $1 over $37,000

4) $80,001 – $180,000 $17,550 plus 37c for each $1 over $80,000

5) $180,001 and over $54,550 plus 45c for each $1 over $180,000

so based on the above if u earn't $85,000 in the 10/11 financial year then u will fall into bracket number 4 and assuming no deductions or any other funny business u will be taxed $17550 + (5000*0.37) = 17550+1850 = 19400

Making ur gross pay 85000, tax of 19400 and net pay 65600.

To show that u work ur way up the brackets break the 85000 down to each bracket

0 to 6000 = 0 tax

6001 to 37000 = (37000 - 6000) * 0.15 = 4650

37001 to 80000 = (80000 - 37000) * 0.3 = 12900

80001 to 85000 = (85000 - 80000) * 0.37 = 1850

Add it all up and u get $19400 ........ hey what do you know the totals match ;-)

Hopefully that proves that u work ur way through each threshold rather than being dumped into the threshold where ur gross income lands.

that is more correct. Confirmed by a mate who is a tax accountant.

+2. although i do want to point out that winnings from any legal gambling (crown casino/tatslotto etc) are all tax free.

this is how i work out my earnings and tax as well. its quite long winded but at least i save some coin on the accountant and i know how much is taxed as well. i do my own book keeping and add up my totals and the accountant just puts the figures in the form and sends them off to the ATO for me. charges me 80 bucks as opposed to 300 dollars :P

right now i'm just clicking over, which means i don't pay as much tax as the people who earn more than me.

the process isn't that hard but just know the basics and u should be ok most of the time.

FYI: one of my family members accidently didn't declare 50 bucks earned in interest and the ATO came back 7 years later, said that they own 50 bucks plus the interest earned + fines over the 7 years! turned out to be hundreds of dollars! "they (ATO) want their money... no matter where u run, you can't hide from 'em" -_-

[JJCRU23R]

ok...

holy crap

didnt expect to see such an in depth response to my little query! Thanks a heap guys! Feels like TOCAU.org should have its own accountancy thread so I know what to claim and how to avoid paying extra in the long run! Light globes lighting up anywhere, mods???