Along with opening a bank account and starting a part-time job, paying tax is a sure sign that you’ve reached financial adulthood. For most of us, the task of preparing and lodging an income tax return is a little daunting. But how do you know whether you have to lodge one in the first place?
Here to help guide you through tax season is Mark Morris, Professor of Practice in Taxation at La Trobe University. He’s summed up the 10 most important tax questions you’ll need to consider as a university student studying in Australia. Use them to decide whether you need to lodge an income return for the tax year ended 30 June 2018 – and how to prepare an income tax return if you have to.
1. Are you an Australian tax resident?
The first step is to work out if you are an Australian resident for Australian income tax purposes.
If you were born in Australia and continue to live here, you’ll be regarded as an Australian resident for income tax purposes, as this is the country you reside in.
But importantly, if you’re an international student, you can also be considered an Australian tax resident. That’s because the Australian Taxation Office (ATO) generally takes the view that by living in Australia for six months, your behaviour and routines are consistent with a person residing here for tax purposes.
For instance, one of the ATO’s binding public taxation rulings held that an international student who came to Australia for a four-year university course was an Australian tax resident – even though he left after six months to return to his home country following a family illness. Why? Because while he was in Australia, his living and working arrangements were consistent with those of someone living here every day. (To learn about the ruling in more detail, check out Example 10 of Taxation Ruling TR98/17).
If you’re unsure whether you’re an Australian resident for income tax purposes, you should contact the ATO or a registered tax agent to obtain more clarity.
Tip: Remember that being a resident for Australian tax purposes is quite different to being a permanent resident for Australian immigration purposes.
2. What happens if you’re an Australian tax resident?
Assuming you’re an Australian resident for tax purposes, what are some of the key tax implications you need to consider?
On the upside, you’ll be entitled to a tax free threshold. This means you won’t pay any income tax for the year ended 30 June 2018 if your total taxable income is $18,200 or less.
What’s more, you may be eligible for a refund. Say you worked part-time, earned a salary from which income tax was deducted by your employer, and your total taxable income was $18,200 or less, then you’d be able to receive a refund of any tax withheld from your salary income.
On the downside, you’ll be subject to tax on all your assessable income for the year ended 30 June 2018 – regardless of where you earned it. For example, as an international student, you’ll need to include both your Australian salary income and any interest income earned in a bank account held in your home country.
And if insufficient income tax has been withheld from your salary, or if you’ve earnt other assessable income on which you owe tax, you’ll be legally required to lodge a return in order to pay tax.
In addition, Australian residents are subject to a 2 per cent Medicare levy, but only where your taxable income exceed certain thresholds.
Tip: The tax your employer withholds is known as a Pay As You Go (PAYG) withholding. Look for it on your payslip.
3. What do I need in order to lodge a tax return?
Everyone who lodges an income tax return needs a tax file number (TFN). If you’ve been employed, you’ve probably already been issued a TFN.
Next, you’ll need to collate information to prepare your income tax return. This information includes things like your:
- payment summary, a statement your employer issues at the end of each financial year to show how much income they paid you and how much tax they withheld
- bank statements showing any interest you’ve earned
- dividend slips, to show payments made by companies you have shares in
- invoices and receipts.
Assuming you have a TFN and your tax affairs are reasonably simple, you may consider preparing and lodging your income tax return online using the ATO’s myTax product.
Otherwise, it’s prudent to contact a registered tax agent or the ATO to ensure you identify all your entitlements and that your income tax return is correctly prepared.
Tip: If you expect to receive a tax refund, you’ll also need to have your bank account details on-hand to nominate where your refund will be deposited.
4. What types of income need to be included in your return?
When you prepare your tax return, you’ll need to declare all the assessable income you’ve earned this financial year. Income is more than just ‘money’ – it can come from a range of sources, such as:
- Salary and wages, as a full-time, part-time or casual employee
- Allowances and bonuses
- Tips and gratuities, such as those earned while working in hospitality jobs
- Fees received as an independent contractor
- Business income (but not income earned from a hobby)
- Government payments and allowances like Newstart Allowance, Youth Allowance, Austudy payments and others
- Income from bank interest
- Dividend income
- Distributions received from a family trust or as a partner in a partnership, and
- Capital gains on the sale of assets – a highly complex area requiring specialist expertise.
5. What type of work-related deductions can you claim?
Your total assessable income can be reduced by what the ATO calls ‘deductions’. Deductions are amounts you can claim for any expenses you’ve incurred to make that income. They come in three main forms: work-related deductions, self-education expenses and personal deductions.
You can also claim an amount for the decline in value over time (‘depreciation’) of certain assets, like a computer, in relation to how much it’s been used to help earn your assessable income.
Some of the more common types of deductions you might be able to claim are:
- Work-related subscription and union fees
- Protective clothing and compulsory work uniforms
- Home office expenses (if you’re required to work at home after hours, and you keep a diary listing the hours you worked at home, for a minimum of four weeks)
- Work-related phone and internet costs, and
- Travel expenses between worksites (but not for travel between home and work).
You might also be entitled to claim a deduction for the cost of tools of trade, briefcases and calculators costing less than $300, to the extent that you use them for work.
Tip: Take care when claiming deductions for work-related expenses, as this is an area that’s closely scrutinised by the ATO. You can’t claim an expense that your employer reimbursed you for. And you’ll need written records of the expenses you’ve incurred (such as invoices, receipts and bank statements).
6. When are self-education costs allowed?
If you’re studying a course that will maintain or improve your skills in your current occupation, you can claim the costs of study as a self-education expense. You can also claim the costs of course fees, textbooks, stationary, travel costs and the depreciation of items like laptops, tablets and printers.
Accordingly, you can’t claim study costs if you’ve not yet started a particular career. For example, as an undergraduate student, you can’t claim costs associated with obtaining your initial academic qualification. The same logic applies if you’ve decided to change careers – you can’t claim the costs of studying a new area of expertise. You also can’t claim Higher Education Loan Program (HELP) repayments.
Tip: To see some specific examples of when you can and can’t claim self-education expenses, check out Taxation Ruling TR98/9.
7. What personal deductions can you claim?
You can claim donations of $2 dollars or more to a deductible gift recipient (for instance, a charity like the Australian Red Cross) provided you’ve kept copies of receipts for any gifts made.
You can also claim a deduction for any fee paid to a registered tax agent during the year ended 30 June 2018 for the cost of managing your tax affairs. However, in a unique twist, this particular deduction is held over until the following year – a good incentive to do your tax return in the financial year ending 30 June 2019!
Tip: For gold-coin donations (like those you drop into a collection bucket), you can claim a deduction equal to your contribution up to $10 without a receipt.
8. What tax offsets can you claim?
Tax offsets are different to deductions. While deductions can reduce your assessable income, tax offsets are directly applied as a credit to reduce your tax payable. And sometimes, for certain tax offsets, the tax credit received might be more than your tax payable – which could even result in a refund!
The most common tax offsets you can claim as a student are the beneficiary tax offset, the franking credit tax offset and the small business tax offset.
A beneficiary tax offset may be available if you receive Newstart Allowance, Youth Allowance, Austudy payments or certain other Commonwealth education or training programs.
If you’re a shareholder in an Australian company, you might be eligible for the franking credit tax offset. When a company pays you a franked dividend, the company may pass on a tax credit for tax it’s paid on its income. Such a tax credit can be claimed as a franking credit tax offset.
Finally, if you’re a student who’s also running a business, you might be entitled to the small business income tax offset. This equates to 8 per cent of the income tax payable on the portion of your taxable income that’s ‘total net small business income’, provided the aggregated turnover of the business is less than $5 million.
Tip: The small business income tax offset is quite complex, so seek specialist advice if you intend to claim them.
9. What are some of the potential traps to watch out for?
If you’re aged under 18 (a ‘minor’) on the last day of the tax year, there are special rules to discourage your parents from splitting investment income with you. In these cases, penalty tax rates apply to your share of dividends, interest, rent, royalties or a family trust distribution. This penalty rate of tax is generally payable at a rate of 45 per cent.
These rules don’t apply to income earned by a minor who is:
- engaged in full-time work or in running a business; or
- receiving a carer allowance, disability support pension or double orphan pension; or
- a person with a disability, or a beneficiary under a special disability trust.
Tip: Remember, this penalty rate of tax doesn’t apply if you’re 18 years or over on the last day of the tax year. But you should seek specialist advice if your mum, dad or guardian is splitting income with you.
10. Where do I go for help?
If you’d prefer to get independent tax advice, find an accountant who’s not only a tax expert, but also a registered tax agent, to ensure they’re legally authorised to provide such services.
And if you’re entitled to a tax refund – go get what is yours!
Keen to help others manage their money? Specialise in accounting, finance, commerce and more with a Business degree from La Trobe.
Disclaimer: La Trobe University has used reasonable care and skill in compiling the content of this general commentary. However, it should not be relied upon as advice in any circumstances, and no warranty is provided by either the University or the author concerning the accuracy and completeness of these materials. Accordingly, we disclaim all and any liability to any person in respect of reliance on any of the matters raised in these materials, and professional advice should be sought from an appropriately qualified registered tax agent where required.