Tax tips for employees and contractors

Lodge on time

If you’re lodging your own tax return, you need to lodge it by 1 November 2021. You can do this using myTax via myGov or through a paper return.

If you use a registered tax agent, they will generally have special lodgment schedules and can lodge returns for clients later than 1 November 2021. You’ll need to get on their client lists before 31 October to take advantage of late lodgment dates.

A lot of information will be pre-filled by the ATO in your tax return. So it’s best to wait until all the data is finalised before lodging. This is usually completed by the end of July but can take until mid-August.

Check that your end-of-year income statement from your employer says ‘tax ready’ and your private health insurance, dividend and interest information is available before completing your return. Otherwise it may include unfinalised data and you may need to amend your tax return and pay additional tax.

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Are you a resident for tax purposes?

The tests used to work out residency status for tax purposes are not the same as residency tests used for other purposes such as immigration. The rules can be complex and the ATO publishes information on tax residency to help. There are rules for international students, working holiday makers and dual residents.

For non-residents temporarily in Australia as a result of COVID-19, the ATO has advised that individuals who are in Australia temporarily for some weeks or months will not become an Australian resident for tax purposes, as long as they usually live overseas permanently and intend to return there as soon as they are able.

For Australian tax residents temporarily stuck overseas as a result of COVID-19, there is no change to your Australian tax obligations. If you are required to pay foreign income tax overseas, a foreign income tax offset will ordinarily apply to reduce your Australian tax bill.

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Are you in business?

It’s important to understand the differences between a hobby and a business for tax and other purposes. There’s no simple definition and sometimes what starts out as a hobby grows into something more. Factors to consider include whether you intend to make a profit, repeat similar types of activities or carry out activities in a businesslike manner. The ATO provides information on online selling, share trading, and home-based business and you can test out the business.gov.au tool.

You can't claim a loss for a business that is little more than a hobby or lifestyle choice. Even if it has business-like characteristics, if it is unlikely to ever make a profit and doesn't have a significant commercial purpose or character, you can't offset the loss against your other income. However, you can defer the loss until you make a profit from the business.

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Report your income

Your income statement

Most employers are now required to directly report your pay, tax and superannuation information to the ATO each payday via Single Touch Payroll (STP). All employers will eventually report via STP.

An employer who reports via STP will provide you with an income statement. This will be finalised and show as ‘tax ready’ by 31 July. You can access it through ATO online services in myGov. Your tax agent can also access your income statement for you.

An employer who does not report to the ATO via STP will need to give you a PAYG annual payment summary by Wednesday 14 July 2021.

Government payments

The ATO prefills tax returns with a number of Australian Government payments including JobSeeker and Newstart. These will appear in your tax return by the end of July 2021.

Check that all required allowances and payments have been included in your tax return but don’t include amounts that are not taxable such as tax-free government pensions and benefits.

For employees, JobKeeper payments are treated the same as your usual salary or wages. If you received JobKeeper as an employee, it will be included on your income statement as either salary and wages or as an allowance, depending on your circumstances.

Contractors (i.e. sole traders) who received JobKeeper payments as eligible business participants need to include them as business income in your individual tax return. Include the amounts paid to you at the label 'Assessable government industry payments'.

Termination and redundancy payments

You need to include income protection, sickness or accident insurance payments, redundancy payments and accrued leave payments in your tax return.

If you take leave, are temporarily stood down or lose your job and receive a payment from your employer, there are different tax rules that apply for the different payments.

Early access to super

If you accessed your superannuation early due to COVID-19, you do not need to pay tax on these amounts and don’t need to include these amounts in your tax return.

Online, sharing and gig economy

If you drive people around, do odd jobs, rent out your possessions, run social media accounts or sell products, your income from these activities may be assessable and your expenses deductible. This can include income from barter, cryptocurrency payments and the sharing economy as well.

Examples of activities you may need to declare:

  • the gig economy where personal services are provided through short-term contracts or freelance work including ride-sourcing, graphic design or dog-walking
  • the digital economy where activities are based on and income is earned through electronic platforms including social media
  • the sharing economy where people share assets including rooms, cars or storage space for a fee, often through a digital platform.

The ATO receives data from a range of platforms including AirTasker, Uber, AirBnb and Amazon which is matched against tax returns. Make sure you keep records and report this income correctly.

For some activities such as online selling or personal services, you first need to determine whether you are in business.

Cash payments

It’s ok to receive income in cash rather than electronically but you must declare these amounts in your tax return.

If you’re an employee who’s paid cash, your employer must still pay you the correct award wages, withhold tax from your pay and pay your super as required by law. They must also provide you with an income statement at tax time which should match up with the income they paid you.

For contractors, the consequences of not declaring cash income may include a tax bill with interest as well as criminal and administrative penalties. The ATO is cracking down on the cash economy so it’s best to do your taxes properly.

You can report cash and hidden economy activities to the ATO.

Personal services income and sole traders

If more than 50 per cent of the amount you received for a contract was for your labour, skills or expertise, then the personal services income (PSI) rules may apply.

As a sole trader earning PSI, you won't be able to claim certain deductions against your PSI. For example, rent, mortgage interest and payments to your spouse or associate would generally not be deductible. You will also need to complete the PSI question in your tax return.

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Claim your expenses

You can use the myDeductions tool in the ATO app to keep track of your expenses during the year then upload it in myGov to prefill your tax return. If you use a tax agent, they can access your uploaded data through their practice management software.

Work-related deductions

Claiming all your work-related deductions may considerably reduce your tax bill.

Typical work-related expenses include:

  • uniforms and protective items
  • employment-related mobile phone and internet costs
  • subscriptions and union fees
  • travel expenses between worksites or client locations (but not the commute to and from home).

If an expense was for both work and private purposes, you can only claim a deduction for the work-related portion.

As a result of COVID-19, the ATO expects to see increased deductions for working from home and protective items required for work. They’re also expecting reduced claims for laundry, motor vehicle and travel expenses. You can’t claim the cost of travelling to and from work and working from home as a result of COVID-19.

Your usual pattern of work may have changed during the year due to COVID-19 or other circumstances. If so, you may need to prepare an additional record for the period your work pattern changed, especially where claims are calculated using representative periods.

Make sure you keep receipts, diaries and documents to back up your claims and show how you calculated your private use percentage. The ATO publishes fact sheets for a range of occupations.

Be aware that the ATO checks work-related deductions closely and uses real-time analytics to detect claims that appear out of the ordinary.

Remember, for an expense to qualify:

  • you must have spent the money yourself and weren't reimbursed
  • it must directly relate to earning your income, and
  • you must have a record to prove it.

Home office expenses

Working from home may entitle you to claim a deduction for home office expenses like electricity, office equipment depreciation and phone and internet expenses.

However, coffee, snacks and toilet paper aren’t deductible and, for most employees, neither are rent, mortgage interest, water or rates.

There are three ways you can claim home office expenses:

  1. shortcut method
  2. fixed rate method
  3. actual cost method.

You must have a dedicated work area such as a home office to use the fixed rate method, and under the actual cost method you’re unlikely to be able to claim much if you don’t have a home office.

You should consider which method will get you the biggest deduction particularly if you have pricey assets to depreciate or high running costs.

The shortcut method is available for expenses between 1 July 2020 and 30 June 2021. It allows you to claim a deduction of 80 cents per hour worked at home and doesn’t require you to have a dedicated work area, such as a private study. But be careful – if you use this method, no other expenses for working from home such as depreciation can be claimed for that period. You must keep a record of the number of hours you worked from home. This could be a timesheet, roster, diary, or similar document that sets out the hours you worked. For your claim, you just need to calculate the number of hours worked and multiply by 0.8.

The fixed rate method gives you 52 cents for each hour for home office expenses and covers the decline in value of furniture and furnishings, electricity and gas, and the cost of repairs. You need to keep a record of hours worked as well as a diary for four-weeks to show your usual work-from-home pattern.

The actual cost method is exactly that – your actual costs. If you don't have a dedicated work area, such as a home office, you will generally only incur minimal additional running expenses. All actual cost claims need to be supported by records of hours worked, receipts and how you worked out the amounts claimed particularly if you work in a shared space.

The ATO has information for employees working from home during COVID-19 to help calculate your expenses.

Self-education expenses

You can claim self-education expenses provided your studies are directly related to either maintaining or improving current occupational skills or are likely to increase income from your current employment. If your study is unrelated to your work, the expenses incurred are not deductible.

Typical self-education expenses include course fees, textbooks, stationery, student union fees and the depreciation of assets such as computers, tablets and printers.

You must also disallow the first $250 of self-education expenses incurred from a place of education, such as from university or college. This $250 can be offset by non-deductible amounts such as childcare while attending self-education activities or capital expenses related to self-education.

Higher Education Loan Program (HELP) repayments are not deductible.

Car expenses

If you use your motor vehicle for work travel, you have two choices for how to claim:

  1. cents per kilometre method
  2. logbook method.

The cents per kilometre method provides 72 cents per kilometre for travel up to 5,000 kilometres. This amount includes all your vehicle running expenses, including depreciation. The ATO and your tax agent (if you have one) may ask you to show how you worked out your business kilometres. The ATO is concerned that some taxpayers are automatically claiming the 5,000 kilometre limit regardless of the actual amount travelled.

If your work travel exceeds 5,000 kilometres, you must use the logbook method to claim a tax deduction for the work-related portion of your car expenses. You’ll need to keep odometer readings, receipts and invoices to support your claim.

In most situations, you can't claim any expenses under these methods relating to a car owned or leased by someone else, including your employer or another member of your family.

Travel expenses

You can claim certain travel expenses incurred when travelling overnight for work. These may include meals, accommodation, transport fares, bridge and road tolls, car parking, car hire fees and other incidental costs.

You will need to reduce your claim if your trip and travel expenses are partly private. For example, travelling with family members or combining personal and work activities in the same trip may require you to make adjustments to the amount deducted. You may also need to adjust the amount claimed if you receive a travel allowance.

Trips between home and work are generally considered private travel and aren’t deductible. There are some situations that you can claim such as travelling from your home to an alternative workplace, when you need to carry bulky tools or equipment or when you do itinerant work.

If you're 'travelling on work' during COVID-19 and must quarantine, you can claim a deduction for accommodation, food, drink and incidental expenses. No deduction is available for private quarantine expenses or when you travel to or from a work location and need to quarantine.

How you report and claim allowance and expense amounts will depend on whether it’s shown on your income statement and how much you spent.

The record-keeping rules depend on whether you receive a travel allowance, travel for six nights or more and whether you are claiming less than the reasonable amount. We suggest that you keep track of your travel allowances, maintain a travel diary and store your receipts to make it easier to support your claim.

Depreciation

Immediate deductions can be claimed for assets that cost under $300 to the extent the asset is used to generate non-business income. These include tools, calculators, briefcases or computer equipment.

Assets over $300 that are used for an income producing purpose can be written off (depreciated) over a period of time as a tax deduction.

The amount of the deduction is generally determined by the asset’s value, its effective life and the extent to which you use it for work purposes.

Be aware that if you use the ATO’s 80 cents per hour shortcut method for working from home claims, you cannot claim depreciation for your home office expenses.

Expenses for contactors

You can claim a deduction for most costs you incur in running your business, for example travel, car, marketing, home-based business expenses and business finance costs. For asset purchases, consider the simplified depreciation rules. Make sure you account for private use correctly, and keep good records.

Donations

The ATO will pre-fill your tax return with information they have received about gifts and donations. Make sure you add in any donations that weren’t included where the receipt shows your donation is tax deductible.

If you made a donation of $2 or more to bucket collections conducted by an approved organisation for natural disaster victims, you can claim a tax deduction of up to $10 for the total of those contributions without a receipt.

If you made donations to an approved organisation through workplace-giving, you need to record the total amount of your donations. Your income statement or payment summary, or other written statement from your employer showing the donated amount, is sufficient evidence to support your claim. You do not need to have a receipt.

Superannuation contributions

Consider maximising your concessional or non-concessional contributions before the end of the financial year with a concessional contribution cap of $25,000 for the 2021 income year.

Check your superannuation contribution limits and don't leave it until 30 June to make your contributions as your super fund will not receive the contribution in time.

Carry-forward rules also allow you to make extra concessional contributions – above the $25,000 concessional contributions cap – without having to pay extra tax.

If you’re aged 67 or over, you will have to satisfy the work test to contribute superannuation. If you’re under 18 at 30 June, you can only claim the contribution as deduction if you earned income as an employee or business owner. Other eligibility criteria also apply.

You may be able to claim a tax deduction for personal super contributions that you made from your after-tax income and will need to lodge a Notice of intent to claim or vary a deduction for personal contributions form.

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Tax offsets

Tax offsets directly reduce your tax bill. Eligibility for tax offsets generally depends on your income, family circumstances and specific conditions. Some offsets are automatically applied while you’ll have to provide additional information on your return for others. Most offsets are non-refundable meaning they can reduce your tax bill to zero but any excess isn’t refunded to you.

Examples of offsets include the low and middle-income tax offset, the low-income tax offset, senior Australians and pensioners offset and the offset for superannuation contributions on behalf of a low-income spouse.

The small business income tax offset of up to $1,000 is available for sole traders with turnover of less than $5 million. The offset rate is 13 per cent of the income tax payable on the portion of an individual’s taxable income that is their ‘total net small business income’.

If you receive certain government allowances and payments, you are eligible for the beneficiary offset that ensures you do not have to pay tax on those payments. You may, however, have to pay tax on other income, such as wages or investment income. The ATO provides a beneficiary tax offset calculator to estimate your offset.

You may also be eligible for the low income super tax offset which is automatically paid into your super fund after you lodge your tax return.

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Superannuation

If you’re an employee and are paid more than $450 before tax in a calendar month or are under 18 and work more than 30 hours per week, your employer should be making contributions into your nominated superannuation fund. You can check if you’re entitled to super payments and can report your employer if they haven’t paid them. If you want to get a head start on your super and subject to eligibility, you might want to consider the super co-contribution where the government gives you up to $500 extra in your fund when you make personal contributions.

You might also have a number of small-balance super accounts from working different jobs. From 1 July 2019, inactive low-balance accounts started to be consolidated, exit fees were removed and insurance will be provided on an opt-in basis for members under 25 or with balances below $6000. To find your lost super check out Searching for lost super on the ATO website.

The First Home Super Saver Scheme allows you to save money for your first home with the concessional tax treatment of superannuation. If you’re eligible, you can make additional voluntary salary sacrificed superannuation contributions up to $15,000 per year ($30,000 in total) into your complying fund. The tax savings go towards your first home deposit, helping you save faster.

Salary sacrifice arrangements

You may wish to review your remuneration arrangements with your employer and consider a salary sacrifice arrangement. This means you forego future gross salary in return for receiving exempt or concessionally taxed fringe benefits and/or making additional superannuation contributions under a valid salary sacrifice arrangement.

You should seek financial advice before entering into a salary sacrifice arrangement.

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