Why do I have to do an income tax return (ITR)?
Your income tax return is a means of declaring the income earned and expenses paid during the year. Airtax gives you a live estimate on what the net result of your tax return is likely to be once filed. Remember, paying any sort of tax means you are making money so isn’t always a bad thing!
I have already done my Business Activity Statements (BAS) each quarter, why do I need to do a tax return at the end of the year?
It is important to realise that there are different taxes that we all pay in Australia. Goods and Services Tax (GST) which relate directly to your BAS is a final tax on the consumer. Businesses are just responsible for administering and collecting the tax on the Government’s behalf. Therefore, all you are doing in your BAS is working out what the difference is between the GST you have collected and the GST you have paid during the quarter and either paying or receiving the left over balance.
Income Tax sits separate to GST and taxes those actually earning the income rather than the consumer. If you work as a tradie or a rideshare driver then you would be a great example of both earning income and collecting GST. As you have already been recording the GST in your BAS statements, this doesn't need to be double counted in your ITR. Just input the figures without the GST and the expenses paid without GST attached.
If you are not registered for GST and do not file BAS statements then any income you receive or expenses you pay can be included in your tax return in full (inclusive of the GST amount). The rate on income earned increases based on how much you have earned for the year ie. the more you earn for the year, the higher your tax rate. GST is a flat 10% on all income and expenses regardless of the amount collected for the year.
What do I need to include as income?
As a general rule, usually anytime you are paid for something you have done or sell something to someone else, you need to record this for income tax purposes. Depending on the amount, you may need to pay tax on this. People are often confused as to what needs to be reported if the income comes from various sources - i.e. you earn a salary but also have a small sole traders business on the side. Unless you have a separate structure for this the income and expenses earned from this flow directly into your tax return. The section or item number needed to be completed for each of these different sources of income may change but they all contribute to your total income for the year.
When you are paid your salary or invoice as a customer, you will need to include this income when it is actually paid to you in that current period for your income tax return. If you complete a service in June but do not invoice and get paid for the work until July, include the income in next year’s tax return. We call this the paid basis and it is the simplest method when completing your income tax return. Of course there are variations on how this is done but this is the most straightforward way and most cash flow applicable we find: Put the total income received exclusive of the GST received in the income section of ITR.
What can I include as expenses?
Obviously the aim of the game is to capture all of the relevant expenses to decrease the amount of tax due as much as possible. However, there are particular guidelines set by the ATO that help frame what you can include. One of these is following the same “paid basis” as mentioned above for your expenses.
It is important to look at what the expense is and what the rules are. If the expense is too big - i.e. over thousands of dollars, then the ATO may have specific rules on what you can claim per year. Only expenses that relate to income you have included in your tax return are able to be claimed. There are also specific items that the ATO does not allow. These change each year so it is important to keep up to date. This is important to understand for people who are completing both BAS and ITRs as the rules vary between each. Airtax's Help Centre often provide up to date and easy-to-understand ways of keeping up to speed on what you can claim.
Some of my expenses partially relate to my business. What do I do?
This is a common one and easier to get right than you may think. Once you have made up your mind that the expense does relate to income earned and reported in your tax return, your next step is to decide how much to actually include. Each item and its deductibility can be determined by the “Time, Space or Use” method. The most common and easiest way to determine this is by using a percentage. An example here would be to include 80% of your phone bill as business use. We often gets asked how to work out what the percentage should be. This varies depending on what the expense is. If it is a car then keep a logbook which tracks kilometres travelled. If it is a phone then look at your bill. You need to look at a full month’s worth of calls and determine which calls relate to personal or business use. You can then use this for all calls and phone bills for the tax year.
Time to get started!
Once you have completed your first Income Tax Return and have created a relatively efficient way to track income and expenses (using the capture function on the Airtax app is a great start), completing your ITR each year should be a simple job done in a few minutes.
Airtax has hundreds of articles to help with more in depth queries if you have some. Please check out sections like “Tips and Tricks” and “Common Mistakes” to help save time when jumping into your first ITR on your own or if the first one seemed like it to forever to complete.