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5 misconceptions about personal income tax

We noticed these common misconceptions during our interaction with thousands of individual tax payers over the past several years. Most of these are simple matters and majority of tax payers have the right understanding.

Myth#1 What you claim as work related expense is what you get as refund

Claiming deduction for work related expense is commonly referred to as claiming expense and some tax payers have the wrong understanding that what they claim should be refunded to them by the ATO. Claiming deductions for work related expense just reduces taxable income. How much tax gets reduced or tax refund increased by reducing taxable income depends on marginal tax rate of the tax payer. For example, if someone’s gross income for 2019/20 is $100,000, claiming $1000 work related expense will reduce tax by around $390 (including Medicare Levy but without taking into account tax offsets or Medicare Levy Surcharge).

Myth#2 You don’t need receipt or any other supporting for claiming any expense below $300

You don’t need to keep receipts if your total work-related expense deduction is $300 or below. If your work-related expense deduction exceeds $300 you must keep receipts/ supporting for everything you claim. The threshold is not for per item of work-related expense.
Further, you cannot just claim $300 total work-related expense, if you didn’t incur any work-related expense. Even though you are not required to keep receipts, you still should be able to explain what you claimed it for and how you arrived at the amount.

Myth#3 You save tax if you change your work arrangement and become a contractor from an employee

Australian tax laws aim at making it fair for all individual tax payers whether they work as employee, self-employed or do business through a company. More tax deductions are allowed for businesses but businesses do incur variety of expenses and occasionally suffer loss.
If you start working for the same employer as a contractor by obtaining an Australian Business Number (ABN), your income will most probably be considered Personal Service Income (PSI). Personal services income (PSI) is income that is mainly a reward for your personal efforts or skills. When PSI rules apply to you, there are limits to deductions that you can claim against your income. In general, you will be treated as though you are in the same position as an employee.

Myth#4 You save a lot by having a negatively geared property

When you have a rental property which is mortgaged, interest on the mortgage is deductible against the rental income. When the mortgage interest and other cost associated with the rental property exceeds the rental income, the property is regarded as negatively geared.
Rental loss is allowed as a deduction against your taxable income from other sources. However, as we mentioned on #1 above, tax deduction is not equal to tax saving. Therefore, only a portion of your rental loss is compensated by saving in tax; there will still be a loss.
Some so called “wealth experts” try to convince that negative gearing is some kind of silver bullet in generating wealth and get their clients buy property at a premium price. When property prices are going up, someone could make a real economic gain from a negatively geared property. However, it is not always advisable to go for a heavily negatively geared property when you can actually get a property with a rental profit.

Myth#5 If you use tax agent, they will take responsibility for your work-related claims

Even if you use a tax agent, you are ultimately responsible for the information in your return, including the deductions you claim. You cannot transfer that responsibility to your agent so make sure you give them complete and accurate information.