How to Avoid Tax Shocks
Effectively managing your tax affairs can help avoid tax shocks. Australia’s income tax system is based on self-assessment. This means that information you provide to the ATO is initially accepted as being true and correct when you lodge your tax return and other forms on which you disclose your tax liability. These forms may include activity statements and pay as you go (PAYG) instalment statements.
The self-assessment system places the responsibility on you to ensure your tax return complies with taxation laws. You must show all your assessable income and that you claim only the deductions and offsets (formerly called rebates) to which you are entitled.
An individual taxpayer may be liable to pay the following:
1. Income tax;
2. Division 293 tax if the sum of income plus low tax contributions exceeds $300,000; or
3. Tax on excess concessional contributions
It is wise to think about your tax now so you can avoid the pitfalls and mistakes when it comes to lodging your tax. The ATO uses computer data matching systems to identify any discrepancy in information you report on your tax return and details collected from financial institutions and other sources.
Some of the issues you might need to consider:
Pay tax on time.
Most people are required to lodge a tax return. If you are lodging your own 2015 tax return, it is due by 31 October 2015. If you don’t lodge your tax return before that date you could face financial penalties and interest charges from the ATO.
Keep the required records.
Keeping good records allows you to prepare an accurate tax return, activity statements and other documents as well as helping you keep track of your financial affairs. Generally, your records must be in English and you must keep them for five years.
You are responsible for working out how much you can declare and claim on your tax return. You also need to be able to show how you arrived at these figures – in some cases you may be required to provide written evidence.
Claim only what you are entitled to.
When completing your tax return, you’re entitled to claim deductions for some expenses, most of which are directly related to earning your income.
To claim a work-related deduction:
- you must have spent the money yourself and weren’t reimbursed
- it must be related to your job
- you must have a record to prove it (there are some limited exceptions)
If the expense was for both work and private purposes, you can only claim a deduction for the work-related portion.
Seek professional advice.
Getting early advice or direct assistance with your tax affairs could help to avoid unexpected tax bill or making mistakes.