October 19, 2018

Contractor Pitfall – When You Don’t Set Money Aside to Pay Tax

Any employee or business owner needs to pay income tax in Australia. This is money paid to the government from your earnings. How much is the income tax? It depends on how much your income is. In Australia, a sliding scale of tax is used to determine the amount of tax you need to pay, and the highest rate of tax is referred to as marginal tax rate.

To ensure that you have money to pay tax, set up a bank account only for this purpose and make regular deposits.

Take note that not all sources of income are taxable. Salary, pension, annuities, investments, capital gains, earnings from trust or business partnership, as well as foreign income are taxable. On the other hand, there is no need to pay tax on income sources such as winnings in a lottery, birthday gifts, child support, prizes, and government super co-contributions. If you have an employer, they will deduct your income tax from your salary and will be paid to the Australian Tax Office (ATO) on your behalf. If you don’t have an employer and are earning from a business, for instance, you need to pay your own income tax.

One of the common pitfalls is not setting money aside to pay tax. You may face hefty fees later on if you fail to pay your income tax in Australia. So how can you set money aside to pay tax? Here are some things self-employed individuals can do:

Open a bank account for tax

To ensure that you have money to pay tax, set up a bank account only for this purpose and make regular deposits. You need to pay tax so you might as well make it a priority.

Know how much you’ll likely earn throughout the year

The tax that you need to pay depends on how much you earn. You can use a tax instalment calculator to give you an idea of the amount you need to pay. You can always adjust the amount to set aside depending on your earnings.  

Don’t forget your GST obligation

Goods and Services Tax (GST) is tax that your consumers pay for goods and services. If you have a business, you act as a collection agent of the ATO. This is separate from your income tax, so make sure to set money aside on a regular basis for your GST obligation.

If you are employed or have a business, you need to pay tax. To avoid penalties, stay on top of your tax obligations by knowing what you need to pay and how much money to set aside for tax payments.

Do you know other things worth-knowing about income tax in Australia? You can share your ideas in the comments section below.

About the author  ⁄ Marxa Dillan

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