As the old saying goes prevention is better than cure – it’s much easier to address problems before they arise rather than after. One of the largest issues we see our taxpayers face is not knowing how much tax to put aside when they change from being an employee (where tax is withheld) to becoming a contractor, starting up a business or increasing their investment income.
The best advice is if your income position changes it’s important that you start putting money aside straight away to cover your tax. The challenge is that it’s not easy to give you an exact % or amount of tax you should be putting aside. There is no ‘rule of thumb’ as in Australia, Individual Tax is paid on a sliding scale (the more you earn the more you pay). The best advice is to come and talk to us for your own individual plan and calculation so you know up front what you may be liable for.
Generally, if your income increases the ATO won’t ask you to pay tax along the way straight away, until they become aware your tax situation has changed.
For example if you start a business (in your individual name) in addition to your employment on the 1st July 2014, your first tax return won’t be due until May 2016 (assuming your previous returns are all lodged up to date). The tax on the profit from your business will not be due until May 2016. The challenge will be that you will then be required to pay tax instalments quarterly (as the ATO identifies your business income from the recently lodged tax return). These instalments will commence and the amount payable will be similar to the amount of tax you paid in May 2016, this will be payable on the 28th July 2016. Meaning you effectively have 2 years’ worth of tax payable in the space of a couple of months.
From here you will have quarterly instalments due:
As the tax bills mount up there will be significant pressure on your cashflow if you’ve failed to put money aside early. Time and time again we see people who have already spent all the money and have nothing left to pay the tax man, which brings a lot of unnecessary stress. The best advice we can give is if your circumstances change contact us for a review of your tax position early on.