Tax is a reality of life when you start working but have you ever stopped to ask why? We break down the how and why of taxes.
“Who the hell is taking away my money?”
That was my initial reaction when I noticed that someone was taking money out of my pay cheques. I was working for $5 an hour and someone called “PAYG” was taking money from me without asking. I was outraged. When I earned less than $40K and was struggling to pay my inner city rent, this “PAYG” person took even more of my money, again without asking first. Rude right?
It turns out “PAYG” means Pay As You Go tax which means that the government or your employer on their behalf takes money from of your each pay cheques during the year in taxes rather than you facing a big tax bill at the end of the year. It’s that big tax bill which has bankrupted many celebrities in past headlined who didn’t budget ahead to pay their taxes.
Why do we pay tax?
Tax is money that our government takes from us to pay for programs and services. This includes affordable healthcare, the welfare system as a safety net for those who need it and building roads so that we can drive our cars around. These services and programs cost money and that money comes from taxes. If you want affordable healthcare, you need to pay for the construction of public hospitals, equipment and the salaries of nurses and doctors who work there. This all takes money and your taxes are collected by the government as revenue that they can use to pay for these costs.
What are the three different types of taxes?
The government administers tax and in Australia, we have three different types of taxes because we have different three levels of government. This includes:
- Federal or national government – in Australia, taxes including income tax are administered by the Australian Tax Office, known as the ATO.
- State or territory government – in Australia, this is paid when you use services or gain assets like paying stamp duty to buy a house or payroll tax to employ people.
- Local government – in Australia, this is your local council who you pay rates or council tax to so that they can run community services like collecting the bins and maintaining public toilets. In territories, territory governments might manage your rates.
What is GST?
In addition to being taxed on your income and the services you use, you’ll also pay a tax on the goods you buy. The GST or the Goods and Services Tax is a tax of 10% that is added to the cost of most goods and services and other items sold or consumed in Australia. It’s a hidden tax because you don’t see it, it is automatically added to the price of what you buy.
How much tax do I pay?
For income tax, you’ll pay a percentage of your income. You can also factor in deductions which are costs directly related to your work that are taken off your total tax bill. The organisation who administers income tax in your country will tell you what you can and can’t claim. You’ll also need to file a tax return if you run your own business or operate as a sole trader.
How are taxes spent?
Each year, a government will show you their budget. This is similar to the personal budgets we make as it’s essentially a plan for how the government are going to spend tax revenue for the year. In Australia, the budget is presented in a speech given by the Treasurer in Parliament. The ATO also gives you a cool graphic when you submit your tax return, which is a pie chart showing you exactly where your money goes.
What is the financial year?
The financial year runs from 1 July to 30 June, which is why you’ll see finance nerds get really excited around the middle of the year because it’s their version of Christmas. After 1 July, we go through everything we’ve earned and add up the costs directly involved in earning that money to see how much money you need to pay in tax for the year.
How can I lodge my tax return?
In Australia, you can lodge your tax return online or via a hardcopy paper tax return. The online option is quite easy to follow so it might worth checking out the do it yourself online tax return, particularly if your tax situation is relatively straight forward. You can also use a registered tax agent to help you submit your tax return, which is also a great option. Whether you do your own taxes or get a professional to help you, you must keep your receipts during the year for deductions you claim and ideally you’d also have a PAYG statement from your employer so that you know how much tax you’ve already paid during the year.
In this world nothing can be said to be certain, except death and taxes
This quote credited to Ben Franklin still holds true about taxes because they are inevitable and will always be needed. Running a health system, operating free public schools, providing aged care, and building playgrounds all take money. The tax system could always be more straight forward but we pay tax in order to keep government programs and services running and that makes tax worth it.
Read more: Why you need an emergency fund