Taxpayers with two or more income sources - beware of a possible tax trap caused by the tax free threshold.

Some taxpayers with two or more jobs or other taxable income sources may be caught in an unintentional tax trap as a result of the tax free threshold.

The problem occurs even if the taxpayer and the employers do the right thing – as determined by the Australian Taxation Office (ATO) PAYG tax scales. The problem is caused as the first job attracts the tax-free threshold while second and subsequent jobs are taxed in line with the second job tax rate and progressive tax tables supplied by the ATO.

It causes taxpayers to be, in effect, under-taxed on their ordinary earnings, which can result in a tax bill at the end of the financial year.

A Case Study Example

Assume a taxpayer has one job earning $60,000. Their employer would deduct their tax and Medicare Levy to the value of $11,947 dollars. This would leave them with no tax bill. If a taxpayer worked two jobs at $30,000 each and complied with all ATO tax scales, they would pay $2,692.00 in the first job and $7,956.00 in the second. This amounts to $10,648.00 and would leave them with a tax bill of $1,299.00

The problem compounds in the example of a taxpayer earning $60,000 over three jobs, or income sources, paying $20,000 each. The first has $312.00 tax deducted, the second $4,524.00 and third $4,524.00. This amounts to $9,360.00 tax and leaves a tax shortfall of $2,587.00.

Tax Free Threshold - FAQs

Q1. Why is my refund lower than last year? OR Why do I have an unexpected amount owing? OR Why do I have a tax bill when I’ve heard that the tax rates have gone down?

This is due to changes to the tax free threshold. As the tax free threshold was raised to $18,200, it is likely that you had less tax withheld by your employer (and therefore received more money each pay), which has resulted in a smaller refund or a bill payable.

This is particularly the case for taxpayers with multiple jobs (and Payment Summaries). Even if each employer follows the ATO tax scales properly to calculate tax withheld, the total tax paid on your income may not be enough to cover the tax payable because of the progressive tax scales.

Q2. What can I do to make sure this doesn’t happen to me again next year?

Have one of your jobs deduct a greater amount of tax each pay period to cover the shortfall. Contact your payroll/HR department to arrange this change. Your Tax Consultant can advise you of the shortfall amount per pay period based on this year’s tax.

Alternatively contact your local H&R Block office by the end of March and advise how much you have earned from each job and how much tax you have paid. They can let you know any shortfall and you can adjust what you pay as you go.

Q3. I cannot afford to pay this back right now. What should I do?

H&R Block can defer your tax return for lodgement until the due date next year. You will need to finalise the tax return now and we will hold for lodgement in May 2017 or your due lodgement date according to the ATO.

This information is intended as a guide for H&R Block clients. All actual detail and circumstances differ. Please discuss your situation with an H&R Block Tax Consultant. If you don't have a tax consultant but are interested in our services, please contact us today.

 

 

Book an appointment

With over 440 offices staffed by over 2000 experienced tax accounting professionals, our tax accountants have the knowledge to walk you through the tax refund process with ease. We are committed to offering expert and personal service year-round at a location convenient to you. Find an office and book an appointment online.

Book now

Book an appointment

With over 440 offices staffed by over 2000 experienced tax accounting professionals, our tax accountants have the knowledge to walk you through the tax refund process with ease. We are committed to offering expert and personal service year-round at a location convenient to you. Find an office and book an appointment online.

Book now