I have completed 3 consecutive tax seasons now and some of my most frequently asked questions revolved around what my clients filled out when they put in their Tax File Number Declaration with their employer.
The humble Tax file Number declaration form, it holds so many mysteries for our taxpayers. Well 2 really, Q8 and Q9 on the form that talks about claiming the tax-free threshold and declaring whether or not you have a higher education debt.
So let’s break these down.
Q8 – the ability to claim the tax free threshold. If you are earning an income from a single employer you want to say ‘yes’ at this question. What this means is that the first $18,200 you earn you won’t be taxed on.
If you are working more than 1 job, the job(s) you are working less or earning less from, you want to say ‘no’ at this question. The only time you may want to claim the tax free threshold for more than 1 job would be if you are working these jobs alternatively (not in the same pay cycle) or if income from both or all employers is less than $18,200. For instance if you are a university student and you only have a full-time income when you are on vocation and go back to working casually during the semester you may want to claim the tax-free threshold for both jobs. If you are earning more than $90,000 annually and have more than one job make sure you are NOT claiming the tax free threshold for your second income. This will only bring you a lot of pain and debt at tax time.
What are the effects of claiming or not claiming the tax free threshold?
If you claim the tax free threshold, each pay week you will pay less tax than if you don’t claim the threshold (you should be paying the correct amount of tax for your 1 job). If you don’t claim the tax free threshold you will effectively pay 47c (45c + 2c Medicare) on every dollar you earn including the first $18,200 regardless of what you earn over the year.
What happens if your employer has taken out too much tax over the course of the year? This means a big fat tax refund (YAY)! I have met individuals who only had the one employer and didn’t claim the tax free threshold as a force saving technique. I probably wouldn’t recommend this option; there are much easier ways to save but if you have no self-control with your finances maybe it is something you could look into.
This simple question on your tax declaration form can be the difference between a large or small refund at the end of the financial year. But if you are getting a large refund because you didn’t claim the tax-free threshold means your pay packet will be much lower week-to-week.
Now Q9 – declaring if you have an education loan with the government. This includes the Higher Education Loan Program (HELP), a Student Start-up Loan (SSL) or a Trade Support Loan (TSL).
If you have any of these at any amount you should declare the loan so that your employer takes out the correct amount of tax during the year. You won’t actually have to make a compulsory repayment unless your income goes over $51,957 in the 2018-19 income year. If your income goes over this threshold you will need to pay 2% of your entire loan back the government at tax time. By declaring your loan at the start of employment your employer should take out enough tax to cover your compulsory repayment contribution.
Now when you see the HELP contribution on your payslip this DOES NOT mean your employer is paying off your loan for you. This just means they are taking tax out for you to pay the loan contribution if you go over the threshold. Your loan only actually gets paid at the EOFY when you complete your tax assessment. I have unfortunately seen many clients who thought their HELP debt was being paid by their employer each week when they saw it on their payslip and didn’t realise it was just extra tax being taken out. If you don’t go over the threshold, all the contributions your employer has been taking out on your behalf actually gets given back to you via your tax refund at the end of the year.
Some employers do offer voluntary contributions to your debt, which means that they offer to pay off your loan via a salary sacrifice option. So they take some of your pre-tax income and contribute it towards your debt. Unfortunately not too many employers offer this option for their employees. It’s just another step in their payroll they don’t want to do. But this doesn’t stop you from making your own voluntary contributions with your after-tax income.
So that HELP section on your payslip is actually extra tax your employer takes out. And claiming the tax free threshold correctly will ensure you are paying the right amount of tax with each pay packet.
I hope this article might clear up some of the mystery behind the Tax File Number declaration and what the options actually mean for you.