How your second job is taxed differently (Hint: It's not)

As we come up to tax time, you should be getting excited for your tax return and getting your paperwork in order. With the proposed changes to the Australian Tax system it can all seem overwhelmingly difficult. I can't cover all the intricacies in one post but I can almost guarantee you that if you work two jobs, you're PAYG tax has been set up to disadvantage you.

I recently read an opinion piece complaining about the unfair taxing of second jobs. I'm not going to link it because it was overwhelmingly poorly written, contained incorrect maths, and a blatant misunderstanding of Australian tax laws. However the myth that your second (or third, or fourth) job is taxed differently to your first is so widely perpetuated that I need to address it.

This (incorrect) article claimed that any job after your first is taxed at a higher rate - 37cents in the dollar. They argued that it's impossible to get ahead working a second job if the $100 you earn in a night is immediately cut down to $63. Not only is this a ridiculous statement ($63 is still more than $0!) but it's completely false.

Okay, so how does Income Tax work?

Income Tax in Australia is sometimes seen as a big complicated issue and to be fair there are plenty of loopholes and boxes on the tax return form that can trip you up. However at the most basic level, when you are simply dealing with one income stream from an employer income tax is very simple.

To be fair it could be simpler, we could have a flat tax rate. But the above system means the if you aren't earning much, you aren't obligated to contribute as much. I like that system, because when you're not earning much the majority of your income gets poured back into our economy by way of day-to-day spending and all the little taxes on that spending (e.g. GST).

But I digress.

Our system requires you to plug in how much you earn, and spits back an amount of have to pay. You can use the able table and back of a napkin to work out your income tax, or use the ATO calculator here: https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=STC&anchor=STC#STC/questions 

The important part is, whether you earn that money working for an employer, through 3 employers, or through a PAYG job, and a side hustle it all rolls up into one figure that you apply to this table.

There are different tax rates for running your own business, money earned overseas, franking credits etc. but for the sake of this article, I'm ignoring them.

Claiming the Low Income Tax Threshold

Fact: You can only claim the Low Income Tax Threshold once

Myth: You can only claim the Low Income Tax Threshold with one employer at a time

The first $18,200 you earn is tax free, this is what I am referring to when I say Low Income Tax Threshold. It is a fact that this can only happen once per tax year. If you earn $18k from two employers, you can't ask for all of it to be tax free. As above, the two amounts are rolled together and you pay tax on $36k.

The myth that perpetuates from this is an assumption that you cannot ask for the Low Income Tax Threshold to be applied when arranging your PAYG deductions. When filling in the tax forms to hand your employer you are allowed to ask for the Low Income Threshold to be applied or not to all of your jobs, or none of them. 

What is withheld during the year is an estimate of the correct amount, made by the information that the people in the payroll have. If you have one employer and earn $30,000, they know to withhold based on that amount. If you have more than one employer, each calculates your withholding based on your salary there, not the overall amount you earn. After all, your employers aren't chatting to each other about your earnings.

Case Study: John, Cindy and Stephen

Let's go back to my case study friends John and Cindy, and one extra participant, Stephen.

John earns $30,000 a year. He has only a single income source and claims no deductions at tax time. John has $2,242 deducted from his salary payments throughout the year. 

Introducing Stephen:
 our third financial case study doggo

Cindy works two jobs, earning $15,000 at each. On advice from her (well meaning) friends and family, she only claims the Low Income Tax Threshold at one of her jobs. When earning less than $18,200 in Australia, no tax needs to be paid, so her first job doesn't deduct anything from her pay. However, she isn't claiming the Low Income Tax Threshold from her second job, so they immediately begin deducting 37c in every dollar she is paid as withholding tax. Her second job deducts $5,550 throughout the year! Cindy is $3,308 worse off than John!

Stephen also works two jobs, and also earns $15,000 at each. However he claims the tax free threshold at both of his jobs. Since neither employer speaks to the other they both only know that he is earning $15,000 with them, so neither of them deduct tax from his pay. Stephen pays no tax throughout the year, getting all $30,000 straight into his pocket.

Wait, what, how?

Simply by working two jobs instead of one, and ticking a different box on their payment forms we have three different people paying three different amounts of tax? Except, that's not actually true. This is why we do an (incorrectly named) Tax Return each year. 

The point of a tax return is not (like most people think) to get a refund on the tax you've paid throughout the year. The point is to confirm that you have paid the correct amount, and balance the books with the ATO. Generally we claim some deductions (and with tax time coming up, make sure you know about these easy to claim tax deductions), which means we get a refund, but that's not always the case.

Looking at our case study, John, Cindy and Stephen have all earned the same amount of money, but have had wildly different amounts deducted from their salary throughout the year. When they lodge a tax return, they find out their correct tax bill, $2,242 each. 

Since Cindy has paid $5,550 during the year, she receives a refund. As Stephen hasn't paid anything he gets a bill for $2,242. As Johns was deducted correctly throughout the year, he owes nothing, and gets no refund.

So, what's the best approach?

At the end of the day, who has more money? It's actually Stephen. While they all earned $27,758 after tax, if Stephen puts that extra money into a high interest savings account during the year he can make roughly $50 of interest. 

Of course, the opposite could happen and Stephen could actually be worse off. If he takes that spends that extra money throughout the year, not realising he will have a tax bill, then he will find himself in a sticky situation when he lodges his return.

This sticky situation is (in my opinion) why everyone is discouraged from claiming the Low Income Tax Threshold at multiple jobs. Not because it's illegal, or because it impacts your tax bill, but because A. many people cannot manage their money, and B. the ATO would rather pay you a refund, than chase you to pay a bill.

So if you're responsible and confident with your money handling skills, I strongly encourage you to claim the Low Income Tax Threshold at all of your PAYG jobs. If not, only claim it at one job and consider it 'forced savings'. Then enjoy a big tax refund at the end of the year. Either way, enjoy that second job or side hustle, whatever you earn, you earned it.

Disclaimer time: I'm not a tax professional. This is not gospel. This is my experience, the laws may have changed. I strongly encourage you to speak directly to someone at the ATO before claiming the Low Income Threshold on two jobs. Don't ask an experienced 'friend', don't ask an accountant. Go directly to the source. This is a good starting place: https://www.ato.gov.au/individuals/working/working-as-an-employee/claiming-the-tax-free-threshold/ 

Pay less tax in Australia - the legal way

Happy financial new year everyone! It's time to do your tax return - which for most of us means getting some money back in our pockets.

The average person pays almost $17,000 a year in tax - how great would it be to pay less? Here's some simple, legal tricks to pay less tax.

A quick google search tells me that Australians pay 125 different taxes, and while some of them are wonderful things that keep our healthcare and education systems running, we are also paying some ridiculous things like the "Wine Equalisation Tax" and the highly contentious Carbon Tax.

For most of us 20% of what we earn disappears into paying taxes. I don't mind the taxes that let me get free healthcare, or the ones that make sure I have law enforcement and children can read. However when I leave work on Monday and realise I've worked that whole day and I don't see a cent of it, I get a little grouchy.

Here are the absolute basics of reducing your tax bill. Some of these you can implement for the year just gone, some you'll need to keep records to claim next year.

Pay less tax by Doing your laundry and wearing good pants

Do you wear clothes to work? Good start. Do those clothes have your employers logo on them? You can claim for washing that. You can also claim for washing 'Occupation specific clothing' like nurses scrubs, or checked chef pants, and you can claim for buying protective clothing like safety vests, hard hats, non-slip shoes and sun protection.

The best part is, if you're claiming for laundry then you don't need receipts if you claim less than $150 and if your total work-wear claim is less than $300.

You will need to front receipts for any work-specific clothes you've bought.

Pay less tax by driving a car

Unfortunately you can't claim for driving to work in the morning, but you can claim a tax deduction for driving for work. If you're employer has two different work sites and you travel between them you can claim for that trip. If you drive somewhere for work, say to the bank, or to a supplier, then you can claim that trip. If you drive to an "alternative workplace" you can claim that expense, so long as it's not a regular trip, because then it becomes a regular workplace. The definitions around this are a little hazy, but if you only need to head out to the alternative place a couple of times a year you should be okay.

If you drive less than 5,000 kilometres in a year, then the easiest claim method is Cents per Kilometre. You'll need to record how many kilometres you drove for business (either with a work diary, or a logbook) and you can claim 66cents per kilometre, up to 5,000 kilometres. That's $3,300 worth of deductions, just for keeping a diary.

If you drive more than 5,000 kilometres (or want to do the paperwork) you can claim a percentage of use. You'll need to track to odometer readings for all business and personal trips, plus keep receipts for every expense (petrol, maintenance, etc.). You can then claim a percentage of your car costs and depreciation. This method can be more lucrative, but also requires a lot more effort on your part.

 Pay less tax by getting smarter

Studying? Taking a short course? You can claim for schooling expenses like notepads, textbooks, accommodation if you travelled for the course, course fees and even your home office and internet costs - as long as your course is related to your current employment. If you work in a bank and are studying to be a vet, you won't be able to make a claim, but an accountant taking an advanced tax course can claim the expenses.

Unfortunately you can't claim HECS / HELP fees, or lunch - unless you had to spend the night away from home.

Pay less tax by giving to charity

Okay, here's a big one. We pay taxes to keep our country running. Our taxes keep hospitals open, keep police on the streets, teachers in classrooms and libraries open. Our taxes also pay for things we might disagree with like international troop deployment, building jet fighters and politicians pensions.

If you think there is a cause that your tax money isn't doing enough to support, make a donation and you can claim it as a tax deduction (assuming that charity has the right tax status - they'll tell you.)

Of course you'll need a receipt, then rather than your taxes going to a politicians bank account, you can make a donation to the Hutt St. Centre to support homeless South Australians and you can pay less tax at the same time.

Also, you can claim $10 of unexplained donations. This covers the coins you drop in charity jars.

Pay less tax by getting married!

You don't need a white dress and a wedding ring for this one, a De Facto marriage will do. If a single person earns more than $90,000 they are required to pay an extra 1% towards the Medicare Levy Surcharge. However as a family you can earn up to $180,000 before this surcharge comes into play.

I'm definitely not saying shack up with a stranger to avoid this tax - there are a lot of strings attached to being declared a De Facto couple. But if you're sharing a house and a bed with your partner for more than six months then a good lawyer will be able to argue you had a De Facto relationship and take half your stuff in a messy breakup.

That 1% surcharge will cost you at least $900 on your tax bill, so maybe it's time to drop to a knee and ask your dearly beloved to tax marry you.

Pay less tax with your phone and internet

Are you on call for work? Do you answer work emails out of hours and have long boring chats with your boss well after you leave work? Congratulations, you can claim that back on tax.

Simply work out what percentage of your phone and internet usage is work related, and how much is personal, then times your bill by that amount. If 50% of your phone usage is for work, and you pay $60 a month, then you can claim a $360 deduction at the end of the year. ($60 p/month times 50% equals $30. Over 12 months that equals $360)

Pay less tax by getting someone else to do your tax

Paying a tax agent is a double whammy of deductions. A good tax agent will get you more in deductions than you paid to see them in the first place, and you can claim their fee as a deduction next year!

A tax agent is also a great idea because they stay on top of all the shifting rules of our tax system. Each year the rules about what can be claimed, how much you can claim and what receipts you need to hold on to change. Paying a tax agent to be aware of these things is a great idea.

Is it worth the extra drama?

Absolutely yes! Studies show that Australians are missing out on $426 worth of unclaimed tax deductions each year. If you are earning $50,000 and claim $1,000 in deductions, that puts $325 back in your pocket. That's a 32% return and better than any investment I know of.

You've done all the hard work to earn this money, with a few tiny extra steps you can make sure you keep it.

Keep in mind, I'm not a qualified tax agent. I've got years of experience with my own tax returns and I have Google. Don't take this as gospel - all the things I've mentioned can be claimed, but do your own research and make sure it applies to your situation. No one wants the ATO knocking on their door because they claimed too much for laundry.

Sudden (tiny) windfalls

I just scored a couple of tiny leg-ups towards my $20,000 by July goal. My tax variation went through, and my interest rate on my loan has dropped meaning my required repayments have also dropped. Naturally I'm headed straight to the shops for new shoes!

Ahaha, yeah, definitely joking there. Although I have a rather impressive shoe collection (mostly Converse) and no idea how I ended up with 20+ shoes I would never get excited about buying shoes. Last time I had to replace my shoes I found the exact same pair I had just worn through for $12, so I bought two pairs. That's how I feel about shoes.

But I did hit a couple of windfalls, although I'm using the term quite loosely because I actually had to go chasing these wins. Unlike the Latte Equation, these are ongoing wins from a once off piece of work.

Tax variation

Let me open with the fact that I do not recommend this unless you like swearing at online forms, doing everything twice and using Internet Explorer. This process was a giant pain, but since I've owned my rental for almost six years now I was able to reference old tax returns while working through it. I had a stretch without tenants this year (about 2 months) and I shelled out close to ten grand on renovations and repair work that the previous tenants never bothered to mention. Minor things like the sliding door not rolling smoothly, or the fan being old and rattly. The sort of things that could have been maintained over six years for a small fee that all happened at once. Urgh.

In short I knew my income was down this year, and my expenses up. Rather than waiting for my tax return and getting a lump sum back I decided to fight with some horrendously unfriendly and out-dated forms and request a lower withholding for the year. I had to submit some invoices to confirm I wasn't making up a $10,000 spend, and they lowered my taxable income by almost $8,000.

It's not more money in my pocket, but it means I get pay less tax now and I'll have a smaller return at the end of the year. Since my goal is to have $20,000 before July, I couldn't wait for my tax return.

4 hours work, return $150 a fortnight

Changed to home loan rate

Is your mortgage on a variable interest rate? Stop reading. Right now. Unless it's outside of business hours. Google two or three of the big name banks in your area and have a look at their home loan rates. If it's lower than yours call your bank right now and read this line out loud:

"Hi, I've been looking around online and I can see that Bank Name is offering home loans for interest rate. My current loan with you is higher than that. Anything you can do to help me out?"

Nine times out of ten the person on the phone is empowered to drop your home loan rate right then and there. I strongly recommend repeating this exercise every six months. Banks make an absolute killing on mortgages, it is their number one income stream. They will squeeze you for every dollar they can, so make sure you squeeze back.

I recently had my mortgage rate dropped by .3% which means my minimum repayments have dropped as well. I just received a letter saying they are going to vary their automatic withdrawals from $493 to $477. One less than 15 minute phone call, $16 a fortnight back to me.

If I didn't have savings goals I would probably throw that money straight back at the mortgage. Or into a different investment with a higher return. But as it stands my goal is $5k in a savings account (Done in my December Update) and $15k in my offset account. Overpaying my mortgage or holding the money in the offset account will have the same affect on the amount of interest I'm paying, so I'll take this tiny win and push it towards my savings goal.

15 minutes work, $16 a fortnight

Sudden (tiny) windfalls

I just scored a couple of tiny leg-ups towards my $20,000 by July goal. My tax variation went through, and my interest rate on my loan has dropped meaning my required repayments have also dropped. Naturally I'm headed straight to the shops for new shoes!