Basics of Taxation
This page is the starting point for the essential taxation basics that are needed to be understand blah to get blah.
Why do we do tax returns?: there is some legislation called the income tax assessment act that says … you have to prepare a tax return and establishes the ATO to enforce your legal requirement to do a tax return
Who is the ATO?: Big bad government organisation employing thousands of people to do stuff
What do we have to do?: fill out a form commonly known as a tax return that has many fields that are defined in the tax legislation and lodge with the ATO every year.
How do you lodge?: Paper or Electronically - paper is being phased out but you can still mail stuff to place. Otherwise we lodge via the electronic methods. ELS(Electronic Lodgement System) is the aged electronic method which we can lodge a return has similarities to fax in that it dials up the ato sends a bunch of bytes and hangs up. It is being replaced by PLS (Practitioner Lodgement Service) which is a web API that accepts XML.
What does the ATO do with that form?: It uses all to information you sent in the tax return to calculate your ‘Taxable Income’ then you are required to pay a percentage of that to the ATO on behalf of the government as ‘Tax’.
What is Taxable Income?: It is essentially the sum of all the money you have earned during the year from all sources. The tax legislation is pretty much a bunch of smaller parts that say if you earned money according to this definition (ie interest) then it contributes to your taxable income.
What percentage do I have to pay?: for individuals it is what is called marginal rates. The first $19k or so for example is tax free. The next $10k (up to blah) is 19% the next $30K is 30% blah
That sucks can I just not tell the ATO about stuff?: For ease of enforcement the tax returns we do are self assessed. What you say in the tax return will be taken on face value for calculating your payable. However the legislation dictates how to calculate your taxable income, if you ignore it and substitute your own calculation then the ATO can manually go over your tax return and correct it (Audit).
How does the ATO know if I don’t fill out the tax return correctly?: It doesn’t, but it applies statistical methods, data matching and random sampling on the population to find returns that are high risk and then they ask an auditor to investigate furthur.
What is data matching?: Poor people don’t drive Audi’s, and a thousand other common sense questions that the ATO asks to check if your return seems low.
How do rich people get away with paying no taxes?: They generally don’t, the news and media probably exaggerate the amount this happens. And when they do its also probably because they are miscalculating their taxable income and are haven’t been audited (yet)
But multinational corporations pay less tax than me!: No they don’t, and they are in the firing line at the moment because they have some ability to dictate what country they are in (So they choose tax havens). And the governments aren’t too happy about that, see apple’s fines.
But there are loopholes!: Like all law and the english language in general some definitions are vague and unclear. Lawyers are paid rediculous amounts of money to argue minute details. If you think the tax definition is unclear feel free to make a judgement call in your tax return, but the ATO will probably come knocking and you will have to argue with them in front of a judge, then if you win the government will probably change the legislation anyway.
I am poor! Why do i have to pay so much taxes?: Everyone is poor and the underdog in their own mind. Its called Hedonic Adaptation. Taxs feel painful because they are painful
Doing a tax return is hard! I learnt all these pointless things in school and no one taught me to do a tax return: That is what this wiki is all about! thankfully for an individual returns are mostly done from the prefill so all you really have to do is list your work related expenses to reduce your taxable income.
What is a prefill?: The ATO collects heaps of your data, your boss has to tell them how much you earned, your bank has to tell them how much interest you earned. This is good in that it saves you from having to remember and calculate it yourself but its also slightly scary in that eventually the ATO will track everything for you.
What are work related expenses: Generally money coming in increases your taxable income, but any money you spend to generate this income reduces your taxable income.
Awesome can I just load up my tax return with work related expenses?: Feel free to put whatever you want into the tax return, its your neck on the line and you might have to argue with an auditor about it though. If you’re not comfortable with that then I wouldn’t recommend doing it.
Can somebody else do this tax return for me?: Accountants and Tax Agents exist for this reason, its fair enough to delegate jobs so that you can focus on your strengths.
Why are accountants so expensive? only the rich can afford them and thats why the rich pay no taxes!: Tax legislation is a long list of sometimes contradictory rules that are duct taped together in a big frequently changing mess, made worse by politics and lobbying. Not many people want to go down the rabbit hole of trying to understand it all.
There is no good information available on how to do a tax return!: Agreed, that is what this wiki is for! Information relating to finance and tax generally is valuable. Those with the knowledge hold onto it and put paywalls in front of it, preventing most people from getting good explanations on what is needed. There is also legislation to prevent giving out advise on this stuff (to prevent people from giving out wrong information).
How do i get it right if the information is poor: Generally if you make an effort to be truthful and above the line then you will be right. The Tax Office understands that tax legislation is hard, especially for non-accountants. If you make a mistake and arn’t trying to hide stuff from them then the response will normally be to simply update your return with the correct calculation.
Where do I start?: First understand that Tax Legislation defines everything from scratch. Sometimes these definitions overlap with everyday meanings, sometimes there are slight variances. But generally if you go through each concept here and tick them off one at a time you will be right.
How do I lodge?: There are several ways to lodge a tax return, there are paper forms that can be ordered from the ATO website or it can be done electronically. The ATO is nice enough to define a Web API that programs can use to lodge an XML version of your tax return. Unfortunately it is extraordinarily complex and only a few vendors have actually created this software and the stuff that does exist primarily is for Tax Agents willing to pay thousands per year for it. Fortunately the ATO has actually created a version that every individual can use, it is accessable via MyGov.