Do you know how people usually pay income tax? I mean, do we walk into a tax office every week and pay with cash or credit? Do we send it off online somewhere or post a cheque? Hayden’s finished his first week at work. He may not have realised it, but he’s already paid his taxes by the time he receives his pay check each week.
Hi boss takes it out and sends it to the ATO for him.
Why do they do it that way?
Well firstly, it’s easier. Some people might not feel like paying their taxes, and try to avoid it.
So, when your boss takes the cash, it’s called tax withholding. Your boss withholds your taxes, meaning he takes it out and holds it in his own account before sending it off to the ATO. Hayden gets what’s left over.
So. Hayden’s boss sorts it all out for him. It gives him one less thing to do each week. But how much are they going to take out?
Good question. And the answer is not really simple. The government knows that over the course of any given year people’s jobs change, their income go up or down, things just change. Because the government doesn’t know for sure how much you’re going to earn in the year, they don’t know how much tax you have to pay until the whole year is over. But they’re not going to wait until the year is over for you to pay your tax.
So they ask you some questions about you, your situation, and your income when you start work (that’s in your TFN declaration form).
Depending on that information, the ATO has some rules about how much tax should be taken out. They list it all in what they call a tax withholding table. You boss checks the table and takes the amount from your pay check.
It’s a good system for calculating how much tax to take out, but it’s still only an estimate of what your taxes will end up being at the end of the year.
Now. What if they take too much? Well... They usually do.
They take out what ever seems right, and at the end of the year they do all the maths properly and see how much tax you are really supposed to have paid for the year.
And if you’ve paid too much? You get the extra bit back. It’s called a tax refund.
And if you haven’t paid enough? The, you get you a bill.
Most of the time, regular employees like you or I get tax refunds at the end of the year. But not always. Especially if you haven’t been telling the ATO the truth about something, you might get a bill at the end of the year. The way all of this is worked out is by filling out a tax return and giving it to the tax office. A tax return is your summary of everything important for the year, including everything you’ve earned, and from there the ATO figures out who owes who what.
Then they usually send you a letter telling you what they’ve discovered. That letter is called your tax assessment. It’s a final summary of your taxes for the year, and it tells you how much you’ll get back, or what you owe.
So. Some phrases to learn.
Tax Withholding and Pay-as-you-go are both terms to describe the way we pay income tax, which is a tax on what we earn.
Your tax return is a document you fill out at the end of the year to summarise what you’ve earned. It’s what you send off to the tax office for assessment.
The Tax Assessment is what the tax office sends back with all the results on it.
The tax refund is the money they send you if they owe you for some over-paid taxes.