WHAT AUSTRALIA'S TAX SYSTEM MEANS FOR BACKPACKERS
WHAT AUSTRALIA’S TAX SYSTEM MEANS FOR BACKPACKERS
If you’re backpacking in Australia on a working holiday visa, you’ll be required to lodge a tax return to report on your income for the financial year. Tax returns rank alongside visas in terms of their legal importance during your stay in Australia; the lodgement procedure will determine the amount of tax due on your income for the financial year.
Regardless of whether you’re due for a tax refund or not, your tax return must be lodged with the Australian Taxation office (ATO). Individuals who consider lodging a tax return unnecessary are still required to sent non-lodgement advice to the ATO. The worst-case scenario is to put off your tax return and do nothing, just because it seems tricky or you don’t understand something.
The Australian financial year runs from 1 July to 30 June. Your income for this period must be reported to the ATO in the next consecutive financial year between 1 July and 31 October. So for example, income for the financial year beginning 1 July 2016 and ending 30 June 2017 should be reported in your 2017 tax return. All earnings accumulated in the same financial year are reported in a single return. Accordingly, in the case that you received different salary payments on 30 June and 1 July, each payment would fall in different financial years – and be reported on two separate tax returns as a result.
Tax returns must be lodged by 31 October or the next business day annually. Once overdue, you aren’t disqualified from lodging a return; you simply become subject to fines and possible legal action for failure to lodge, or lodgement of an overdue return. Your obligation to report your earnings to the ATO remains permanent throughout your lifetime.
A tax return must be lodged with the ATO to meet your reporting obligations for the financial year. In Australia, the financial year runs from 1 July to 30 June, and all income for this period must subsequently be reported to the ATO between 1 July and 31 October in the next consecutive financial year. All the income you’ve earned in Australia for the last financial year must be included in the one return, even if you’ve worked for several employers over this period.
PREPARE YOUR TAX RETURN
Follow the steps below, and you’ll be ready to lodge your tax return.
Did you know that savings interest counts as income?
ANZ, CommBank, NAB and Westpac, which are known as Australia’s ‘Big Four’ banks, offer a range of high-interest savings accounts such as the Progress Saver, NetBank Saver, GoalSaver and the iSaver. Money deposited into these accounts will increase automatically as it earns interest payments. Although interest isn’t employment income, it still counts as part of your taxable income and must be declared to the ATO in your tax return. The total amount of interest you’ve earned for the financial year can be confirmed with your bank. This information is also available for confirmation through the ATO’s Tax Agent Portal from mid-August – as long as you’ve provided your bank with your tax file number. As a certified public accounting firm, Ezy Tax Online is able to check these details for you when preparing your return.
APPLY FOR A TAX FILE NUMBER (TFN)
What’s a tax file number?
Taxpayers in Australia are issued with their own personal tax file number (TFN), which is used in the management of their tax and superannuation records. Regardless of your residency status, you’ll use the same TFN for life – so make sure any information displaying it is kept secure. Beware of email scams designed to obtain your TFN, and don’t make it easy for a third party to gain access to it. Having your TFN exposed or stolen in this way can put the privacy of your personal information at risk.
How do I apply for a tax file number?
You can apply for a TFN through the ATO tax file number application or enquiry page, which is accessible via the link below. Your TFN will be sent to your postal address within 28 days of submitting your application; accordingly, make sure when applying that you can receive it at the address you provide.
♦ Apply for a TFN with the ATO online
The ATO now uses data matching to detect visa-holders who aren’t meeting their obligations
As one of its new compliance activities, the ATO has announced a data-matching program in collaboration with the Department of Immigration and Border Protection (DIBP). Visa-holder data now available to the ATO will include addresses, contact details, visa application and agent history, arrival and departure dates, sponsoring institutions and visa types.
The ATO will match visa-holder data with its own records of an individual’s tax return lodgement history, ABN cancellation due to departure from Australia, compliance with tax obligations, and tax payments or debts.
What does this all mean for working holiday makers? In practice, the new data-matching program is expected to simplify the process of exposing illegal cash-in-hand workers, ensuring taxpayer compliance with visa conditions, and detecting visa holders with overdue tax returns or unpaid tax debts. So as long as you lodge your tax return correctly and meet your tax obligations, you’ll have no need to worry about any of this.
DECLARE YOUR TFN TO YOUR EMPLOYER
Once you start work for your employer, you will need to complete a tax file number (TFN) declaration form. This is necessary for them to withhold tax from your pay, and send it to the ATO. If your total amount of tax withheld exceeds your total tax payable for the financial year, the ATO will refund you the balance once your tax return has been processed.
If you’re a working holiday visa holder, it’s essential to let your employer know when you start whether you would like them to withhold either 15% or 32.5% of your pay for tax. Instead of 15%, choosing the higher withholding rate of 32.5% will set you up for a sizeable refund when you lodge your tax return.
New ‘backpacker tax’ rules apply from 1 January 2017
A different rate of taxation applies to income earned by working holiday visa holders from 1 January 2017, under new tax rules commonly referred to as the ‘backpacker tax’. Due to this, working holiday makers can no longer hope for a sizeable refund on their tax return, as in previous years, and in some cases, may now be required to pay tax owing. Lodging a tax return is still an obligation, however, which all working holiday visa holders are required to meet regardless of the new rules.
If you’re in Australia on a working holiday visa, make sure you confirm with your employer whether you want them to withhold either 15% or 32.5% of your pay for tax. With the minimum hourly award wage set at approximately $18, a withholding rate of 15% still leaves you with a reasonable take home pay; asking your employer to withhold this as soon as you start working for them will prevent a tax bill when you lodge your return.
Being familiar with the new backpacker tax rules is absolutely essential for all working holiday visa holders Australia, so refer back to them if there’s anything you’re unsure of when it comes to tax time.
Avoid the pitfall of cash-in-hand work
When working as a backpacker in Australia, you may come across an employer who pays their employees ‘cash in hand’ or ‘off the books’. By paying you in cash, they are able to leave no trace of your payment, and claim that you never worked for them.
In this case, you will not only be unable to lodge a tax return; you will not be paid any superannuation. Individuals who do not lodge with the ATO may then be viewed as hiding their income. In many cases, employers who pay cash in hand are deliberately attempting to cheat the system, with evasion of superannuation or minimum wage payments being two of their major motives.
Although dishonest employers themselves are at fault to begin with, by working for them, their employees are exacerbating the problems that arise from the illegal cash-in-hand economy. This is a concern in Australia, just as in other countries where illegal labour exists disguised beneath the surface.
It’s easy to be fooled into thinking that you can avoid having to pay tax by doing cash-in-hand jobs. In reality, however, many illegal workers not only receive less than the minimum wage; their cash-in-hand pay amounts to less than what they would have received if they had paid any tax at all. Don’t let yourself fall into this trap!
RECEIVE YOUR PAYG PAYMENT SUMMARY BY 14 JULY
What’s a PAYG payment summary?
If your employer is registered for pay as you go (PAYG) withholding, they must provide you with a PAYG payment summary for your tax return. You need the details on your PAYG payment summary to prepare your tax return, and employers are required to issue them by 14 July every year. Keep the phone number and email address of an employer you stop working for before then handy, and make sure you can get in touch with them during July just in case.
What if I can’t get a PAYG payment summary?
No PAYG payment summary, or no luck trying to contact an employer? No worries. If your employer is registered for pay as you go (PAYG) withholding, Ezy Tax Online can track down your income records using the ATO’s Tax Agent Portal. Thanks to this resource for CPAs, lodging your tax return with no PAYG payment summaries is no problem in almost all cases. A copy of your last pay slip can also be used as a substitute for a PAYG payment summary. If your employer is unresponsive and has not filed your PAYG withholding amount with the ATO as required, increase your frequency of email contact and state the following:
My accountant has advised me that employers must provide PAYG payment summaries by 14 July, subject to Fair Work and ATO requirements.
In spite of this, if you are unsuccessful in obtaining all of your PAYG payment summaries by 14 July, Ezy Tax Online can still generally get your return over the line. If you’re experiencing this issue, monitor the situation until before the lodgement deadline of 31 October. Rushing your tax return in a panic can result in a lengthy processing time, and the ATO contacting you after lodgement.
Working with an Australian Business Number (ABN)
Businesses in Australia, including sole traders, require an Australian Business Number (ABN) to carry on their enterprise. Although working with your own ABN as a sole trader is no problem in itself, unscrupulous employers coerce their employees into working on this basis to avoid having to pay them any superannuation or minimum wages. Accordingly, it’s important to be wary of this if you are requested to work with an ABN as a sole trader, and not as an employee.
When you earn income working with an ABN, your employers or clients will not provide you with PAYG payment summaries. In this case, it is your responsibility to keep a record of how much you earn.
If you’ve earned both business income with your ABN as a sole trader and other employment income, it should all be reported to the ATO in a single tax return.
LODGE YOUR TAX RETURN BETWEEN JULY AND OCTOBER
The Australian financial year runs from 1 July to 30 June, and your income for this period must be reported to the ATO in the next consecutive financial year, between 1 July and 31 October. So for example, income for the financial year beginning 1 July 2016 and ending 30 June 2017 should be reported in your 2017 tax return. All earnings accumulated in the same financial year are reported in a single return, regardless of whether you had multiple employers or not. Accordingly, in the case that you received different salary payments on 30 June and 1 July, each payment would fall in different financial years – and be reported on two separate tax returns as a result.
Why do you receive a refund by lodging a tax return?
If you receive a payment from the ATO after lodging your return, you are being refunded the excess tax you paid above the applicable rate for your income bracket. It can seem as if everyone is entitled to receive a subsidised payment from the ATO for lodging their return, but this is not the case.
Any amount refunded to you by the ATO is in fact the remainder of income which was withheld as tax by your employer during the financial year. When you report your taxable income to the ATO, they calculate your tax payable and deduct the balance from your total tax withheld. By comparison, if your total tax withheld is greater than your total tax payable, you’re due to be refunded the remaining balance. In the opposite case, you will receive a tax bill from the ATO and be required to pay the balance.
By having your employer withhold tax from your pay at a higher rate, although you’ll be reducing the amount of your take home pay, this will work out to a higher tax refund. Making the decision of how much you want your employer to withhold therefore comes down to whether you want to increase your take home pay or tax refund – both ultimately resulting in neither loss nor gain.
From 1 January 2017, new tax rules for working holiday visa holders have applied a flat income tax rate of 15% to the first $37,000 of taxable income. This is commonly referred to as the ‘backpacker tax’, and can affect the result of a tax return depending on the amount of tax your employer has withheld.
If your employer has withheld:
- 15% of your pay, you will receive an expected refund of $50 with the Ezy Tax Online CPA service
- less than 15% of your pay, you will owe tax
- 32.5% of your pay, you will receive a substantial tax refund
The second case above is commonly associated with fines and other trouble with the ATO, so is best avoided.
What do I need to lodge my return?
In order to prepare your tax return, the following items are essential:
- PAYG payment summaries, or final pay slips from employers
- interest income details
Keep your tax debt down by claiming expenses
Records of your work-related expenses over the last financial year come in handy for reducing the amount of tax you owe. A work-related expense is a cost you were liable to pay for in the course of earning your income, which can typically include:
- cooking equipment and utensils for kitchen jobs
- gloves, hats, sunscreen, sunglasses and safety boots for farm jobs
- a portion of mobile phone expenses for tour guides (including the cost of a work phone)
- stationery for office jobs
- staff uniforms displaying an employer logo
Remember, claiming a work-related expense as a tax deduction doesn’t mean that you will be refunded the money you paid for it in your tax return assessment. Making a claim simply reduces your taxable income, thereby reducing the amount of tax you will have taken out of it. Keeping all receipts for deductions exceeding a total of $300 is compulsory; if you’ve purchased something for your job, make sure you keep the receipt for it. In the case that you incur expenses which aren’t 100% work-related, you are entitled to claim the business-use percentage. This doesn’t mean you can claim anything as a work-related expense, just because you use it at work. Work-related items that seem tax-deductible but are not can include:
- black trousers for restaurant, office and farm jobs, t-shirts, everyday footwear, suits
- client and colleague meeting and entertainment expenses
- commuting and vehicle expenses
Why it’s better not to rush your tax return
Don’t panic. If you haven’t organised your tax return by the first week of July, it’s okay. Just apply to lodge with Ezy Tax Online by 31 October, and you’ll be fine. In fact, the lodgement process is more efficient during September and October, when ATO pre-filling information has become available. As a CPA firm, Ezy Tax Online is licensed to access client income data using the ATO’s Tax Agent Portal. During July and August, the earliest stages of the lodgement period, pre-filling information is incomplete, leaving only the information you can provide for us to rely on when lodging your return. This leaves the possibility that your tax return may be lodged incorrectly, even if you are sure it is complete, because we have no way of confirming otherwise. Interest income earned from savings accounts is a particular blind spot at this stage. Accordingly, the safest time to lodge is from September, once income data has started becoming available for pre-filling from the ATO.
Lodging an early tax return
Australian tax returns are usually lodged between 1 July and 31 October, and declare income for the previous July-June financial year. So for example, this means that tax returns for the 2017-2018 financial year can be lodged from 1 July through 31 October 2018.
Tax returns can be lodged early before July, however, only if you leave Australia permanently (for more than 2 years). Lodging early is not an obligation, though; lodging during a normal tax return time which is between July and October is no problem. On the other hand, if you’re worried that you might forget to lodge once you leave Australia, early lodgement could be a good idea.
WORKING IN AUSTRALIA: KNOW BEFORE YOU GO
National minimum wages
When you’re paying tax in Australia, it pays to know about the Fair Work Ombudsman. This government authority determines the minimum wages for award and agreement-free employees, and is responsible for the resolution of employment disputes. Employees who experience any issues with their employers at work, including the underpayment of wages, are provided with an opportunity to resolve their dispute by reporting their employers to this authority.
Modern award or enterprise bargaining agreements are finely subcategorised according to industry, in contracts which specify minimum wages and conditions of employment. Minimum wages differ depending on the level of responsibility employees are entrusted with, and their working hours; the minimum hourly wage for employees in positions with the lowest rate of pay stands at $17.70, as of 30 June 2017. You can check the minimum wage for your position using the pay calculator on the Fair Work Ombudsman website; in the case that you are being underpaid by your employer, you are able to take legal action against them.
Working in Australia: types of employment and leave
In Australia, there are three types of employment: full time, part time and casual. Employees on full-time or part-time contracts accrue annual leave and personal leave (including paid sick leave) in accordance with the number of hours they work.
Neither of these types of leave, however, are available to casual employees. To compensate for this, employment legislation sets forth that casual employees must be paid at a rate 25% above the minimum award for their position. Casual employees are also subject to job insecurity, and can be dismissed by their employers with less than a day’s notice.
As such, it’s a good idea to check your employment contract to confirm your status as an employee, including whether you are entitled to any paid leave or not. If not, see whether your rate of pay corresponds with the casual award rate. Unused annual leave accrued by employees is paid out to them as a lump sum when they leave; personal leave, however, cannot be redeemed.
Also, rules concerning tax returns and superannuation are exactly the same whether an employee is full time, part time or casual.