fringe benefits tax

Understanding tax implications of fringe benefits

30 Nov, 2016

What are fringe benefits?

If you, your spouse or your children receive benefits because of your employment, these are classed as fringe benefits.

These might include:

  • car parking
  • cars
  • expense payments
  • housing
  • loans
  • meals and entertainment
  • property

Some fringe benefits are subject to fringe benefit tax (FBT). Your employer is responsible for paying this – you only pay tax on your remaining salary – but your employer may reduce your salary as part of a salary sacrifice agreement to cover the cost of FBT.

Some items are exempt from FBT, but these items are limited to one per year per person, unless being replaced:

  • briefcase
  • computer software
  • portable electronic device (from 2016 there is no limit per person for small businesses)
  • protective clothing
  • tools of the trade

Certain not-for-profit organizations are eligible for sizeable FBT concessions. The FBT cap on exempt benefits provided by public and not-for-profit hospitals and public ambulances is $17,667. For public benevolent institutions (except hospitals) and health promotion charities, it increases to $31,177.

 

Other tax implications of fringe benefits

Certain fringe benefits above $2,000, known as ‘reportable fringe benefits’, are included in your payment summary and listed in your tax return, but not included in your assessable income. They are, however, included in the calculations for a various income tests for certain government benefits including:

  • Medicare levy surcharge
  • deductions for personal super contributions
  • super co-contributions
  • spouse super contributions
  • HELP and Financial Supplement repayments
  • child support obligations

 

Fringe benefit tax on cars

If your employer provides you with a car as a fringe benefit, your usage of the car will be taxed. There are two possible ways to calculate the amount of FBT due for cars:

  • Logbook —actual car usage is recorded in a logbook over a 12-week period and FBT is calculated as a percentage of the operating costs of the vehicle over the year. The lower the amount of private usage on the car, the lower the tax rate will be. The logbook must be completed once every five years.
  • Statutory method — FBT is calculated as a percentage of the cost of the car provided. For cars acquired after 1 April 2014 this is a flat rate of 20%. For years prior to that, the percentage decreases as mileage increases:

 

Car fringe benefits statutory formula rates (2015–16)

Statutory fraction of car base value Date contract entered into
Travel (kms) Before 11/5/11 11/5/11 – 31/3/12 1/4/12 – 31/3/13 1/4/13 – 31/3/14 After 1/4/14
0–14 999 26% 20% 20% 20% 20%
15 000–24 999 20% 20% 20% 20% 20%
25 000–40 000 11% 14% 17% 20% 20%
40 001 and over 7% 10% 13% 17% 20%

Source: © Australian Taxation Office for the Commonwealth of Australia.

 

Ways to reduce FBT on cars

Ways to reduce FBT may include the following:

  • Keep a logbook to see if this method will result in a lower tax amount
  • For cars acquired before 10 May 2011, travel more to get your mileage into a lower tax bracket
  • Consider getting a commercial vehicle – these are exempt
  • If you go away for an extended period without the car, for example on holiday, return the car and keys to your employer
  • Make an employee contribution towards the cost of the benefit

To show how making an employee contribution can help reduce tax when it comes to salary sacrificing, let’s look at the example of Josh. He earns $74,000 a year and has a car which cost $40,000 and has running expenses of $15,000 per year. He acquired the car in 2015, so regardless of how many kilometres he travels, the FBT will be $8,000 per year ($40,000 x 20%).

He will have to sacrifice either:

  • $22 094 without any employee contributions
  • $7000 if employee contributions of $8000 are made

The following table shows Josh’s options in this scenario:

 

Salary sacrifice example

1 Salary only (no packaging) 2 Salary + car (without employee contributions) 3 Salary + car (with employee contributions)
Annual remuneration $74 000 $74 000 $74 000
Less salary sacrifice Nil $22 094 $7000
Taxable income $74 000 $51 906 $67 000
Less income tax $15 597 $8416 $13 322
Less Medicare levy $1480 $1038 $1340
Income after tax/salary sacrifice $56 923 $42 452 $52 338
Less employee contribution Nil Nil $8000
Less car expenses $15 000 Nil Nil
Net disposable income $41 923 $42 452 $44 358
Reportable fringe benefits amount (taxable value × 1.8868) Nil $15 094 Nil

Source: © Australian Taxation Office for the Commonwealth of Australia

 

You can see that by making the employee contribution, he ends up better off and doesn’t have any reportable fringe benefits that may affect his other income sources.

 

Let’s recap:

  • Fringe benefits are any benefits that you, your spouse or your children receive from your employment
  • Some benefits are tax-free but others are subject to fringe benefit tax (FBT). Your employer has to pay FBT but may well pass the cost on to you via a salary reduction
  • Certain not-for-profits receive generous FBT concessions
  • Having reportable fringe benefits may not affect your income tax amount but can affect your eligibility for other benefits since the value of the fringe benefit will be taken into account during some means tests
  • If you have a car as a fringe benefit, you can either pay a fixed percentage of the cost of the car in FBT or you can keep a logbook to record your actual usage and calculate the tax based on that
  • Making an employee contribution towards your car can reduce the overall amount of tax you pay and avoid reportable fringe benefits

 

tax deduction on legal expenses

Claiming a tax deduction on legal expenses for an investment property

28 Nov, 2016

The rules for claiming a tax deduction on legal expenses related to a property you rent out are similar to those for claiming borrowing expenses, in that many are considered private or capital in nature and are therefore not tax deductible.

 

Which legal costs are eligible?

Costs associated specifically with the rental of the property, such as preparing a lease agreement with your tenant or evicting a non-paying tenant, can be claimed as income tax deductions.

There is, generally speaking, no allowed tax deduction on legal expenses associated with your ownership of the property. These include costs:

  • for the preparation of loan documents (although these can be claimed as borrowing expenses)
  • for the purchase (or sale) of your property
  • associated with resisting land resumption
  • associated with defending your title to the property

Non-deductible legal expenses that are capital in nature may be used to form the cost base of your property for CGT purposes.

 

Claiming a tax deduction on legal expenses correctly

Let’s look at how this would work in real life. Say Cathy purchases a rental property for $425,000. She incurs the following expenses which she can claim as a deduction on her next tax return:

  • $350 solicitor’s fee for preparation of the lease
  • $950 solicitor’s fee for preparation of loan documents
  • $850 stamp duty on the mortgage

The $350 solicitor’s fee for preparation of the lease is a legal expense so can be claimed as a lump sum. The other two costs are classed as borrowing expenses and, since they come to more than $100, must be claimed over five years, or the term of the loan, whichever is shorter.

In addition, Cathy incurs the following legal expenses which she can’t claim as a tax deduction:

  • $1,125 solicitor’s fee for purchase of the property
  • $13,450 stamp duty on the transfer of the property
  • $60 title search fees

These costs can still be used to form part of the cost base of the property for CGT purposes.

 

tax deductible self-development courses

Identifying tax deductible self-development courses for your job

25 Nov, 2016

There is such a thing as tax deductible self-development courses. But to claim a deduction, they must be relevant to your work.

In recent years there has been a big increase in the different topics you can study via self-development courses, and these are accessible in a wide variety of ways. From learning tantric yoga via Skype with someone in India, to honing your leadership skills in an intensive 2-day seminar, the opportunities are seemingly endless.

Unfortunately, most of these self-development courses and related expenses are not tax deductible. The ATO will only let you claim a deduction for expenses relating courses that have a clear connection to your current employment or income-producing activities.

 

How do I know if my course is eligible?

The ATO has guidelines to help you identify which tax deductible self-development courses are allowed for your job. To be eligible for a deduction for expenses you incur it must have a sufficient connection to your current employment and either:

  • maintain or improve the specific skills/knowledge you require in your current employment

or

  • result in, or be likely to result in, an increase in your income from your current employment

If the course is likely to over-qualify you for your current position, meaning you then move on to a bigger and better job, it doesn’t count under the second criteria above.

If you’re a yoga teacher, you might be in luck with that tantric yoga course. If you’re an accountant, you’ll have trouble proving that you need it for work purposes.

The ATO also excludes ‘success seminars’ and the like, on the basis that sitting in a packed auditorium for 2 days listening to someone speak is hardly comparable to the kind of work required from a TAFE or uni student. Additionally, the material covered in these kinds of seminars is usually considered too general.

Other topics which may be classed as too general in scope, despite being useful for your job, are things like communication skills, teamwork and decision-making. Life coaching programs also tend to be excluded because they are considered essentially personal in nature and don’t provide a clear link to your employment.

Other allowances are available for self-education expenses, which you can read about here.

 

Generally acceptable topics for tax deductible self-development courses

If a course contains modules or elements that can be directly linked to your current income-earning activities, you may be able to be able to claim a tax deduction on part, if not all, of the course. Some examples of topics considered sufficiently specific to be classed as income-related include:

  • leadership
  • leading change
  • mentoring staff
  • project management

You may be able to get away with claiming for personal or executive coaching if there is a strong focus on income-related topics during a series of regular discussions between the participant and coach. If the program is more aimed at the participant identifying their goals and finding a direction in life, it can’t be linked directly to their work so can’t be claimed as a tax deduction.

If part of your course covers income-related matters then you can claim a tax deduction on the portion of the costs that relate to that topic.

Say, for example, Fiona is a manager who signs up for a self-development course consisting of the following five modules:

  • communication
  • working as a team
  • managing change
  • leadership
  • conflict resolution

Only the section on leadership would be classed as income-related because the other modules are private or too general. Assuming all five modules have equal value and cost, Fiona would be able to claim a deduction for 20% of her expenses related to the course.

 

To recap:

  • The ATO generally will not offer a tax deduction on expenses related to self-development courses
  • If you can clearly show the connection between the course and your current employment, and if the course will enhance the skills you need or lead to greater income production in your current job, you may be able to claim the expenses
  • If the topic is deemed too broad or too general to be specific to your employment, no tax deduction claim is allowed
  • If your course consists of several modules, one or more of which are eligible, you may apportion the expenses and claim for the portion related to the eligible module(s)

 

employee share schemes

Understanding tax on employee share schemes

23 Nov, 2016

Companies may give their employees the opportunity to participate in employee share schemes (ESSs). Under an ESS, employees are offered interests such as shares, rights or options at a discount. ESS interests may be subject to tax under the ESS rules as well as then having capital gains tax (CGT) applied.

 

Documenting your interests in employee share schemes

If you participate in any employee share schemes you must keep records of the following for tax purposes:

  • the dates, amounts and number of ESS interests that were acquired, exercised or sold
  • the amount of the discount you received on the date of acquisition
  • the ESS rules
  • details of elections made to include discounts in the year of acquisition for interests acquired before 1 July 2009

Your employer should issue you with an ESS statement which covers this information.

If your spouse acquires ESS interests you must include the discount in your own tax return. Any liability for CGT from subsequent disposal of the interests will fall upon your spouse.

 

Taxing ESS interests

There are two ways in which an employee share scheme may be taxed:

  1. Taxed upfront
    • You will be taxed on any discount you receive in the same financial year that you acquire the ESS interests
    • If your taxable income after adjustments is less than $180,000 and you don’t hold or control more than 5 per cent of the company you will be eligible for a $1,000 tax deduction
    • When calculating CGT, the market value of the interest on the day it was originally acquired is used to form the cost base
  2. Tax deferred
    • If you acquire less than $5000 of shares via salary sacrifice, or if there is a real risk of forfeiture, the tax on any discount will be deferred until the ‘deferred taxing point’. This is usually seven years after you acquire the share/right or when you cease employment
    • The market value of the ESS interests at the deferred taxing point minus the cost base will be the amount assessed for tax
    • If you dispose of an ESS interest within 30 days after a deferred taxing point occurs, under the ’30-day rule’ the deferred taxing point will be moved to the date of that disposal
    • In order to calculate eligibility for the 50% capital gains discount, the interest is taken to have been reacquired immediately after the deferred taxing point

 

Variations for start-ups

As of 1 July 2015, options issued to employees of start-up companies (companies less than 10 years old and with an annual turnover of less than $50 million) are taxed when they are converted to shares instead of when the option is initially received. Employees who exercise these options after a minimum of three years will also receive a 15% tax deduction (in cases where the minimum three-year holding period is impossible to meet due to circumstances outside the employees’ control, the Commissioner may exercise discretion).

It was proposed in the 2015-16 federal budget that where options are converted into shares and the resulting shares are sold within 12 months of exercise, the CGT discount concession will be available.

Let’s look at how this all works together in an example. Say Jasper acquires 500 shares in the company he works for through a taxed-upfront ESS on 29 July 2015. The total market value of the shares is $5,000, but Jasper is allowed a discount of $2,200 so pays just $2,800 for the shares.

Jasper’s adjusted taxable income (including the $2,200 discount) is $71,000, meaning he is eligible for the deduction of $1,000 in his 2015–16 tax return. His cost base when it comes to CGT is $5,000.

 

To summarise:

  • Employee share schemes (ESSs) give employees the chance to purchase interests such as shares, rights or options at a discounted rate
  • All the details relating to any ESS transactions should be kept for tax purposes
  • There are two ways that a ESS may be taxed; upfront or deferred
  • Slightly different rules apply to options issued by start-up companies

 

 

SFSS repayments

Making Student Financial Supplement Scheme (SFSS) Repayments

21 Nov, 2016

What is SFSS?

The Student Financial Supplement Scheme (SFSS) was a voluntary loan scheme to help tertiary students cover their expenses while studying. The loan hasn’t been available since 2003, but there are still over 90,000 Australians who hold SFSS debt. The ATO collects repayments on these debts through the tax system.

SFSS debts are treated in the same way as HELP debts, meaning a CPI adjustment is effectively applied on 1 June each year.

 

Repaying SFSS debt

Once you’re earning above a certain threshold, you must start making compulsory repayments, calculated as a percentage of your income. The repayment percentages, which are lower than those on the HELP scheme, are as follows:

SFSS repayment thresholds and rates (2015–16)

Repayment income (RI*) thresholds Repayment rate
Below $54 126 Nil
$54 126–$66 457 2%
$66 458–$94 332 3%
$94 333 and above 4%

*RI = Taxable income plus any total net investment loss (which includes net rental losses), total reportable fringe benefits amounts, reportable super contributions and exempt foreign employment income.

Source: © Australian Taxation Office for the Commonwealth of Australia.

 

SFSS repayments if you die

Fortunately, the taxman doesn’t have a heart of stone. If you die, your estate will need to lodge a final ‘date of death’ tax return and your SFSS repayments will be calculated normally for that tax year. Then, providing you were up to date with payments from previous years, your remaining debt will be written off, leaving one less thing for your family to worry about.

 

Deferring your loan repayments

If your compulsory HELP or SFSS repayments are becoming a financial burden, you may be able to defer them for up to one year if you can show that either:

  • making your repayment has caused, or would cause you, serious hardship

or

  • deferring your repayment is fair and reasonable for other special reasons.

To apply to defer your HELP or SFSS compulsory repayment you’ll need to complete the Deferring your compulsory HELP, HECS or Financial Supplement repayment application form (NAT 2471), which can be found on the ATO website.

 

To recap:

  • The SFSS loan was available as financial help to students up to 2003
  • Although interest-free, the amount of the loan increases each year according to the CPI
  • Once you start earning above a certain threshold, you must begin repaying your debt. The repayment amount is calculated as a percentage of your income which increases as you earn more
  • In the case of your death, your normal repayment for the year must be made and then your debt will be cancelled
  • Payments may be deferred for up to a year if they are causing you serious hardship or there is some other reasonable reason to do so

 

understanding superannuation fund

Your superannuation fund – understanding the basics

18 Nov, 2016

What is superannuation?

Superannuation is money you put aside during your working life in order to provide for life in retirement. Aside from your family home, it may be the largest asset you ever own, so it’s worth knowing how your super fund works and taking good care of it. This needn’t be a time-consuming job, but considering how important it’s going to be to you later in life, it deserves a bit of your attention now and again.

Government pensions are still available to those who aren’t able to support themselves from money in their super fund.

 

Some super facts

  • The total assets held in Australian superannuation recently topped $2 trillion, exceeding the combined deposits on the books of all Australian banks and the Gross Domestic Product of Australia.
  • Super funds don’t just hold cash – they may invest in shares, property, term deposits and managed funds
  • They offer preferential interest rates for companies and individuals earning more than $18,200; 15% on income and contributions (30% on contributions from individuals earning more than $300,000) and capital gains tax of just 10% on assets held for more than one year

 

When should I start saving?

The earlier the better, really. Although it’s never too late to start contributing to your superannuation, adding just small amounts when you are young can have a big impact on your retirement fund.

If you receive a lump-sum payment, such as a tax refund, consider putting it into your super. Equally, if you get a pay rise, direct some (or all) of the extra money to your super – you’ll still be living off the same amount so you won’t even feel the pinch of saving more.

You’ll thank yourself when you retire and can live a much more comfortable lifestyle thanks to your sensible money management earlier in life.

 

For more information

For more detailed information about various aspects of managing your superannuation fund, keep browsing our articles which cover a variety of topics including how to make the most of the tax concessions available.

You can also find more information about superannuation and tax on the ATO’s website: www.ato.gov.au/super.

 

To summarise:

  • Superannuation is a savings fund that you pay into while you’re working to set aside money for when you retire
  • It’s important to put some time into managing your super fund to ensure you’re getting the most from it
  • Super funds offer favourable tax rates and can be used to invest in shares, property, term deposits and managed funds

The earlier you start saving the better, since small contributions made when you’re young will grow into bigger amounts by the t

 

tax on SMSF shares

Understanding how to minimise tax on SMSF shares

16 Nov, 2016

Holding shares within a self-managed superannuation fund (SMSF) can be a particularly tax-efficient way to manage your investments because of the favourable tax rates applied to super funds. Make sure you understand tax on SMSF shares so you’re not over-paying.

 

What tax rates are applied to shares in an SMSF?

Super funds must pay a flat rate of 15% tax on any income they receive, but fully franked dividends from shares come with a 30% tax credit attached. This effectively means you will not have to pay tax on SMSF shares dividends and the remaining tax credit can be used to reduce tax on other income earned by the fund.

If you have a share portfolio which mainly generates income from fully franked dividends, the most tax-friendly way to manage it may be via an SMSF.

When you make a capital gain from disposal of your shares, capital gains tax (CGT) will apply at a rate of either 10% (for investments held for more than 12 months) or 15% – clearly preferable to the individual tax rates of 24.5% or 49% that would otherwise apply if you earn more than $37,000.

Once an SMSF reaches pension stage, there is no tax at all to pay on income or capital gains from shares, so this presents an excellent long-term investment strategy.

 

The downsides of holding shares in an SMSF

Having an SMSF comes with certain limitations, the biggest one being to do with when you can access the funds. This is usually when you reach your preservation age (in retirement), although in some circumstances you may be granted access sooner – this is covered in more detail in a separate article.

This means that any income from dividends and capital gains you make from selling shares will be tied up in your super for quite some time.

There are also tax implications to consider when transferring shares to your SMSF.

 

Transferring shares to an SMSF

If you decide to transfer shares from your name to your SMSF, unlike with property, this may be done ‘in-specie’. However, there are limits to the number of shares that may be transferred each year at market value. The transfer may be tax-deductible at the individual marginal rate of the taxpayer, depending on their personal situation, but it is then assessable to the fund at 15% (or 30% for individuals who earn more than $300,000). 

This in-specie transfer will count as a CGT event meaning the individual will be liable for CGT on the shares up to that point. You should therefore time any transfer carefully to minimise CGT. You may choose to transfer shares at a time when they will make a loss or only a small gain, or make sure you have other losses in the tax year to offset any CGT due on your gains.

This presents a good opportunity to minimise your losses if you are holding shares when the market crashes. If you think the shares will regain their value, you may transfer them in-specie to your SMSF where they are subject to lower tax rates – potentially only 10% on future gains. Meanwhile you can use excess franking credits to reduce tax due on other sources of income in your super, and the CGT loss you record as an individual can be used to offset other gains you make that year or in future years.

 

Summary of tax on SMSF shares:

  • Holding shares within a self-managed super fund (SMSF) offers a tax-friendly investment strategy since tax on SMSF shares is generally applied at lower rates than those held outside super
  • Income from dividends will be subject to 15% tax but fully-franked dividends come with a 30% tax credit which will offset this and can be used to reduce tax on other sources of income
  • Capital gains tax (CGT) will apply at a flat rate of 10% or 15% when you dispose of any assets – potentially much lower than the individual tax rates. When your SMSF reaches its pension phase, there is no tax to pay at all
  • You generally won’t be able to access your super funds until you retire (reach your preservation age)
  • Transfers of shares to an SMSF can be done ‘in-specie’ but will trigger a CGT event and therefore should be carefully planned to minimise any tax due

 

 

salary sacrifice superannuation

Understanding tax and salary sacrifice for superannuation

14 Nov, 2016

Employers often offer their employees a salary sacrifice arrangement whereby a portion of their salary or wages is given up in return for certain benefits, including superannuation contributions and fringe benefits such as company cars, private health insurance and other expense payments.

There is no limit on the amount or type of benefits that can be included in this kind of arrangement, as long as they form part of your remuneration.

 

Implications of salary sacrificing for employees

If you have a salary sacrifice agreement in place it means:

  • You still pay income tax on the reduced salary or wages
  • Your employer may be liable to pay fringe benefits tax (FBT) on the non-cash benefits they provide and it’s likely they’ll pass the cost on to you via a salary reduction
  • You’ll pay less tax on salary-sacrificed superannuation contributions than you would on the same amount in income tax since these contributions are classified as employer contributions rather than employee contributions
  • You can’t get your sacrificed salary back; it must be permanently forgone for the period of the arrangement
  • Some of the benefits your employer provides may need to be disclosed in your annual income tax return

 

Weighing up the pros and cons

You’ll generally get the greatest tax benefits from salary sacrifice in the form of superannuation, exempt fringe benefits and some car fringe benefits.

Any superannuation contributions made under a salary-sacrifice arrangement are classed as employer contributions and are taxed at 15% (increasing to 30% for individuals with income over $300,000), subject to contribution limits. This can be more tax-effective than paying income tax on your salary, especially if you are on the highest marginal tax rate of 49%.

If you are a high-wealth individual and you run your own business via a company structure, you may be able to keep your income under the $300,000 threshold by holding funds inside the corporate entity instead of taking a wage or dividend for yourself. If you do need to exceed the threshold, try to plan it so you take the hit in one financial year but stay below the threshold the rest of the time.

You should pay less income tax under a salary-sacrifice arrangement than you would otherwise. However, there are other considerations which may offset that saving. Work out whether the benefits on offer are truly worth the amount you’re giving up, and whether there are any surcharges which may arise as a result of the benefits.

If you salary sacrifice your super, this will result in a reduction in your earnings base – on which your compulsory superannuation contributions are calculated – although it may be possible for you to avoid this as part of your agreement.

Read more about how salary sacrifice works in practice.

 

Documenting your salary sacrifice arrangement

You may have a verbal agreement in place with your employer, but for tax auditing purposes it’s better to get everything in writing. If the ATO starts asking questions, it can be hard to prove anything that was only agreed verbally. You should document the agreement before you start work, so your employment contract is a good place to get the details down on paper.

The agreement can be re-negotiated at any time, but do make sure any changes are documented.

 

To sum up:

  • You may have a salary sacrifice agreement in place with your employer in which you forego a portion of your salary in return for various benefits
  • This can offer greater tax benefits, particularly if your agreement includes super contributions
  • If your income is over $300,000 you will be subject to higher tax rates, but there are ways around this if you run your own business
  • Although there are tax benefits from a salary sacrifice scheme, you need to look at the wider picture and make sure you’re not losing out elsewhere
  • It’s best to get any arrangement documented in writing, ideally in your employment contract. Make sure it’s updated with any changes.

 

tax on a second job

Understanding how to apply income tax on a second job

11 Nov, 2016

While having a second job adds to your income, understanding tax on a second job can get tricky. If you are an Australian resident for tax purposes, you can receive the first $18,200 of your yearly income tax-free – also known as the tax-free threshold. You can only claim the tax-free threshold from one payer when you fill out your TFN declaration (NAT 3092).

You should claim the tax-free threshold with the payer from which you receive the most income. Tax on a second job should be withheld by the payer at a higher rate.

If you want to change the payer from which you claim the tax-free threshold, you must advise your current payer that you no longer wish to claim the tax-free threshold through them by completing a withholding declaration (NAT 3093).

 

When tax on a second job is applied incorrectly

If you don’t inform your payers properly, you may end up receiving the tax-free threshold from both, meaning you end up with a tax debt at the end of the year. This is not a situation you really want to be in as it’s likely you’ll have already spent the extra money by that point.

If your payer is not withholding enough tax, you can supply them with a completed (NAT 5367) form to instruct them to increase the amount they withhold.

If you do end up receiving the tax-free threshold from both payers, there is no penalty at the end of the financial year, but the ATO will ask you for the extra money that you should have paid in tax. Better to fix it early on and know you’re not in for a nasty tax bill at the end of the year, or at least make sure you have enough set aside to cover the difference.

Let’s look at the example of Deb, who works two part-time jobs. She gets $30,000 from the first job and $18,000 from the other. Using the ATO’s (NAT 1006), Deb would have tax withheld on her wages as follows:

Example — tax withheld

 

Annual income Fortnightly income Tax withheld
First job $30 000 $1 153.85 $134
Second job $18 000 $692.31 $130
Total $48 000 $1 846.16 $264

Source: © Australian Taxation Office for the Commonwealth of Australia.

 

At the end of the financial year Deb’s situation would look like this:

Income tax on $48 000 $7147
Medicare levy (2%) $960
Total tax payable $8107
Less: tax withheld ($264 × 26) $6864
Net tax shortfall $1243

 

Deb has two choices to deal with this: either ask one or both of her employers to withhold extra tax so there is no shortfall, or save a fixed amount each fortnight so she has the money ready to pay her tax bill.

If you believe your payers are withholding too much tax from your wages, you can apply for the amount to be reduced by completing a PAYG withholding variation form. Alternatively, you can see it as an automatic savings scheme and when you get a nice tax refund at the end of the year, do something sensible with the money.

 

Claiming travel expenses with a second job

If you travel directly from one job to another, you may claim the expenses incurred on the journey between your two places of work as a tax deduction. You may not, however, claim for the journey to your first place of work or home from your second place of work. Read more here about claiming for car expenses.

 

Tax on a second job – in short:

  • You can receive up to $18,200 tax-free each year, but this can only come from one of your payers
  • It’s your responsibility to ensure your payers are withholding tax at the correct rates. If not, you can apply to have the rates changed
  • If you pay less than you should over the financial year, you’ll receive a tax bill at the end of it but no additional penalty – make sure you’ve saved up during the year so you can pay the bill
  • If you’re paying too much tax, you can apply to reduce the amount or opt to receive a refund at the end of the year
  • If you work two jobs, the journey from one workplace to the other (but only that journey) is tax deductible

 

redundancy tax rates

Understanding when redundancy tax rates apply

09 Nov, 2016

Although unemployment rates are on the decline, they are still some way off pre-GFC levels and there is a remaining amount of uncertainty in the employment market. If you are unfortunate enough to lose your job through redundancy, there is one silver lining in the form of favourable redundancy tax rates.

 

Determining a ‘genuine’ redundancy payment

If you are an employee aged under 65 and you receive a redundancy payment from your employer, the ATO will consider it ‘genuine’ if:

  • the payment being tested is received because of an employee’s termination
  • that termination involves the employee being dismissed from employment
  • that dismissal is caused by the redundancy of the position
  • the redundancy payment is made genuinely because of a redundancy

 

Redundancy tax rates

Part of your redundancy payment will be tax-free but must be taken in cash. For the 2015–16 income year the tax-free allowance is $9,780 plus a further $4,891 for each completed year of service.

Any amount exceeding this tax-free limit is classed as an ‘employment termination payment’. The first $195,000 of this in 2015–16 is taxed at 17% for those aged over 55, or 32% if you are under 55. A rate of 47% is applied to any excess payment. These tax breaks will only apply to the part of a payment that, when combined with other taxable income, is not above $180,000.

You may opt to roll over the balance of a genuine redundancy into your superannuation fund as a personal contribution (subject to annual limits), meaning it then only concessionally taxed at 15% within the fund.

 

Unused leave entitlements

Just 5% of any unused annual or long-service leave that relates to service prior to 16 August 1978 is taxed at your marginal rate. If your reason for leaving your employment is a genuine redundancy, invalidity or early retirement scheme, then the balance is taxed at 32%. This leave entitlement cannot be rolled over into your super fund. If you leave employment for any other reason then tax will be applied differently.

Let’s say that Barbara is made redundant on 30 June 2015 aged 51 after working at her company since 15 February 2005. She receives $130,000 from her company as a genuine redundancy plus unused leave entitlements of $31,234.

With 10 full years of service behind her, she’s entitled to a tax-free amount of $58,960 ($9,780 + [$4,891 × 10]) on her redundancy pay, and the balance of $71,310 is treated as an employment termination payment.

As she is only 51, and chooses not to roll over any money into her super fund, the normal redundancy tax rates apply to the remaining $71,310 at 32%  ($22,819). Her unused leave entitlements are taxed at 31.5% ($9,995).

 

Check the numbers

Don’t assume that your payroll department has got all the calculations correct when it comes to working out your redundancy or termination pay. Although most do a pretty good job of this, there are occasions where they get it wrong, potentially leaving you thousands of dollars out of pocket.

It pays to work out for yourself what your company owes you and how it should be taxed, and make sure this matches what your payroll department has calculated. Alternatively, get your tax advisor to take a look and double-check the figures.

 

In short:

  • A redundancy payment is considered ‘genuine’ if you are dismissed from your employment due to redundancy of your position, and the payment is offered as a direct result of this
  • You will be entitled to a fixed amount tax-free depending on the number of years of service completed
  • Any additional amount will be taxed at special rates, or can be rolled over into your super and taxed at a lower rate of 15%
  • There are also special rates applied to unused leave entitlements resulting from redundancy, invalidity or early retirement
  • Always check your payroll department’s calculations, or have a tax expert verify them, to ensure you’re not being short-changed