How much do you know about tax

For most Australians, tax is an unavoidable fact of life. A portion of the money we earn, either through work or investment is remitted every year to the Australian Taxation Office (ATO).

How much income tax you pay will depend on how much you earn and what deductions and offsets you are able to claim. Other than this, how much do you really know about income tax?

Take our quiz and find out!

QUESTIONS

Q1: What is the tax-free threshold?

a) A threshold set by the government – income earned above this level is tax free.

b) The amount of income individuals don't need to pay income tax on.

c) The amount of company income that is tax free if the company meets certain conditions.


Q2: Do you pay tax on an inheritance?

a) No. If you didn't earn the money or asset, there is no tax obligation.

b) On cash investments only and calculated at the deceased person's marginal tax rate.

c) Potentially, depending on the type of inheritance.


Q3: Do you pay tax if you are under 18?

a) Yes, and possibly at a higher rate than as an adult.

b) Yes, unless you're not living at home.

c) No. You don't pay tax until you're legally recognised as an adult.


Q4: You are required to lodge a tax return…

a) when you earn above a certain amount.

b) always.

c) while you are working. Retirees don't need to lodge tax returns.


Q5: What is included in assessable income?

a) Everything you earn, except when those earnings are in cash.

b) Everything you earn, including cash payments.

c) Everything you earn except for earnings from private rentals, e.g. Airbnb.


Q6: To be eligible for the Government Co-contribution, your income must be below...?

a) $18,200 – the tax-free threshold.

b) the highest marginal tax rate.

c) $52,697


Q7: Franking credits are …

a) shares in a managed fund.

b) otherwise known as imputation credits.

c) share dividends that don't need to be included in your tax return.


Q8: How long should you keep receipts for?

a) Seven years

b) Ten years

c) Five years

ANSWERS

Q1: What is the tax-free threshold? (b)

The tax-free threshold is the amount of income individuals don't need to pay income tax on. The tax-free threshold is set by the Federal government and, as of July 2019, is $18,200. This means that everyone who is an Australian resident for tax purposes, will pay no tax on the first $18,200 earned each financial year.

This amount is adjusted proportionately for those people who were residents for tax purposes for only part of the year.

Income earned above the threshold is subject to tax on a sliding scale depending on how much is earned.

Q2: Do you pay tax on an inheritance? (c)

Depending on the type of assets or investments you inherit, you may be required to pay tax. For example:

Superannuation: tax on a superannuation death benefit will depend on a number of factors including whether you receive a lump sum or an income stream, whether you were a dependant of the deceased or whether the super fund has already paid tax on the taxable component of the fund. Superannuation can be a highly complex area so it's often wise to seek professional advice.

Assets: if you receive an asset, such as a house, you may be required to pay Capital Gains Tax (CGT) if you later sell that asset.

Income: if you receive an income from the deceased person's estate, that income will most likely be assessable for tax in the financial year of your entitlement, not the financial year in which you received the income.

Q3: Do you pay tax if you are under 18? (a)

Under 18s may be required to pay tax at a rate higher than adults if the income meets certain criteria, for example, when receiving a distribution from a family trust. This law was introduced to discourage parents from diverting income to their children.

For other sources of income, if you're under 18 years old, you are required to pay tax at the same rates as adults assuming you are considered an 'excepted person'. The definition of excepted person can be complex. Among other conditions, it may apply if:

  • You have finished full-time study
  • You are working full-time
  • You have disabilities or are entitled to a double orphan pension
  • Australian tax law is a minefield of rules and exceptions, so it's vital you seek professional advice if you have any doubts.

    Q4: You are required to lodge a tax return (a)

    If, in the past financial year, you have earned more than $18,200, (the tax-free threshold), you will need to lodge a tax return.

    If not, you will need to complete a non-lodgement advice form to update the ATO of your tax situation. This makes sure the ATO records your current tax position and you're not on their system as having an outstanding return.

    If you're not sure whether you need to lodge a tax return, the ATO provides a calculator so you can work it out for yourself. You'll find it on the Calculators and tools page on www.ato.gov.au

    Q5: What is included in assessable income? (b)

    Assessable income is income that results from work or services you perform and distributions or interest earned on investments.

    Examples of assessable income include, but are not limited to:

  • Salary and wages
  • Rent, including private rentals such as holiday lets, like Airbnb, Hotels.com, etc
  • Dividends and other returns from investments
  • Interest from bank accounts
  • Allowances for car, travel, laundry
  • Income paid by cash or cheque must also be included as assessable income and declared in your tax return.

    Q6: To be eligible for the Government Co-contribution, your income must be below? (c)

    To be eligible for the Government Co-contribution, your income, before tax in a particular year must be less than $52,697. Additionally, you need to make an after-tax contribution to your superannuation fund in that same year.

    When you lodge your tax return, the government will either match your contribution, or calculate your entitlement to a maximum of $500, and apply it directly to your super fund.

    How much your entitlement is will depend on your income and how much your after-tax contribution to super is.

    Q7: Franking credits are … (b)

    Franking credits are also known as imputation credits. They are dividends paid on investments for which the fund has already paid tax at the company tax rate.

    Shareholders whose top tax rate is less than the company tax rate are able to claim a credit of the amount of tax the company has already paid.

    Franking credits most benefit investors whose tax rate is between 0 and 30%, but rebates will be paid proportionally based on the investor's tax bracket.

    That is, an investor in the 0% tax bracket will receive the full benefit of the franking credits. As the investor's tax rate increases, the amount of franking credit rebate they are entitled to, will decrease proportionally.

    Investors with a tax rate above 30% are not entitled to claim a tax credit.

    Q8: How long should you keep receipts for? (c)

    When making claims and deductions in your tax return, you must be able to substantiate the claim. That means that if the ATO queries the amount, you must be able to provide evidence of both the amount and the fact that you've paid it.

    That evidence will generally be in form of an official tax receipt or paid invoice. These documents must be kept for five years from the date you lodge your tax return.

    So, how did you go?

    Australia has one of the most complex tax systems in the world, and with its ever changing and evolving legislature, it seems to grow more complex every year.

    Part of its difficulty lies in the entanglement of direct and indirect taxes, applied at both Federal and State levels – any wonder so many of us struggle to keep up!

    Tax mistakes can be costly – however inadvertent they may be. If you're unsure about your tax situation, or perhaps you simply need more information about a topic covered in our quiz, it's advisable to speak to a professional tax accountant.