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Article by Jess Gately
Those dreaded words. The ones that fill our heads with question marks and swear words. For many people tax is frustrating, confounding and unintelligible. Having a tax agent is a really good idea when you’re freelancing, but there are still lots of things you can do to make tax time easier. Likewise, Superannuation seems like a lifetime away and the reports your super fund send you end up in a file or in the bin with no real comprehension as to what it all means. But these are big topics and as a business owner you are going to need to tackle them.
Please be advised that the information provided below is general and is valid as of January 2019 in Australia. The purpose of this section is to provide you with an overview of the types of things you may need to look for and you should ensure you seek professional advice on your tax situation as individual variances will always occur.
Many freelancers register as a sole trader and this makes the process of tax a little easier. As a sole-trader you’ll be taxed in the same way that you are when you are employed by another company. That means there is a tax-free threshold up until AUD$18,200. From there upwards tax works on a sliding scale. So, the next income bracket is for $18,201-$37,000 at 19%. This means that for every dollar you earn over $18,200 you will be charged 19c (the initial $18,200 remains untaxed). At the next tax bracket you’ll be charged 19c for the range of $18,201-$37,000 and then 32.5c for each dollar over $37,000.
Are you following me?
Below is the current income tax rates for Australia in the 2018/2019 financial year as they appear on the Australian Tax Office Website. Please note that these rates do not include the Medicare Levy of 2% and are only valid for Australian residents. Different tax rates apply if you are considered a foreign resident, are here on a working holiday visa, or if you are aged under 18 and receive what is called ‘unearned income’.
|$0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $90,000||$3,572 plus 32.5c for each $1 over $37,000|
|$90,001 – $180,00||$20,797 plus 37c for each $1 over $90,000|
|$180,001 and over||$54,097 plus 45c for each $1 over $180,000|
So why do you need to know all this?
Because your tax is no longer being automatically withdrawn from your pay like it is when a company employs you. Now that you are doing your own, you need to know how to manage your tax so that you’re not lumped with a giant sum at the end of each tax year and scrabbling to find the money. So here are four strategies for managing your tax throughout the year.
- Put away a set percentage of each job
Some freelancers will simply pick a percentage that they can afford to take out of their earnings and put it away for the end of the year. Whether this is more or less than what they expect to pay, they know the money is there.
The positives here include knowing you have money put away for tax even if it may not be the full amount. It also means if you end up having to pay less (or don’t need to pay at all as may be the case in your early days) you get a nice little bonus for yourself at the end of the financial year. If this is the case, it also means you’ve got a nice little rainy-day fund top-up in case things go wrong.
However, the negatives are that you may not be putting enough away, or you may be putting away too much causing you some financial stress. If you are getting so little out of your jobs because you’ve overestimated how much tax you may need to pay, you may need to consider reducing your amount or one of the other options below.
- Count your income as you go and put away tax according to the income tax brackets
Essentially this is looking at your income and saying, ‘When I’ve reached $18,200 then I’ll start putting away tax as I know I’ll actually need to pay it.’
On the bright side, you’re not putting away more money than you need to (although for it to be accurate, you’d need to be counting your expenses as you go as well) and you’ll be more inclined to keep a close eye on your earnings and potential tax opportunities.
On the other hand, you’d really need to understand your tax and make sure that there aren’t any other circumstances that may affect how much you have to pay. You’d also find that your jobs earlier in the year will be earning more money because you’re not allowing for tax to come out and it may make you feel like your jobs later in the financial year are not worth as much because your tax is now coming out. This may affect the way you set your rates if you’re not careful.
Overall this method could be quite complicated depending on your position.
- Estimate how much you think you’ll earn and therefore how much tax you think you’d need to pay, and withdraw it from your earnings throughout the year
If you know you’ll have regular work, or you’ve been doing it for a few years and know roughly what you’re likely to earn, this could be a really good way to ensure you’re putting away enough for tax without overpaying or underpaying.
This method involves using the above table to figure out how much you’re likely to have to pay and then working out the number of jobs you expect to do. You then divide the amount to pay by the number of jobs and withdraw an equal amount of tax each time.
While this can be a highly accurate way of calculating tax, it may not be useful if your earnings are still very up and down, if you don’t feel comfortable calculating tax, or if the amount you are paid for jobs varies drastically. You don’t want to be withdrawing $100 tax from a job that only paid $300 simply because other jobs you get are worth a lot more money.
- Work out each month how much you’ve been paid and withdraw tax as if you’ll earn the same each month
This is pretty much what big businesses do and this is how it works with casuals in Australia. At the end of each pay period (you may want to do it weekly, fortnightly or monthly), you look at how much you’ve made and calculate how much tax you would pay if you were earning the same amount every pay period. You then deduct that amount of tax and put it away.
The pros of this one are that you don’t end up in the situation where you are withdrawing large amounts of tax from your earnings in a week where you weren’t as busy; however, you’re unlikely to ever end up having saved less tax than you need to pay.
You may however find that you end up putting away large amounts of money that you won’t need to pay in the very successful months. While this will act as a nice little bonus for you at the end of the financial year, it may put pressure on you if funds are tight.
It’s important to look at the above options and find what will work best for you. It may not always stay the same. You may start with one method and then move to another. The important thing is to make sure you allow for your tax. As per a previous entry in this series, it’s a good idea to have a separate account set up for your tax so that once you’ve put it away, you know you’re not going to accidentally spend it.
“[Your process] may not always stay the same … The important thing is to make sure you allow for your tax.”
GST (Goods and Services Tax)
If your annual turnover (i.e. your gross business income – not your profit) is more than $75,000 in Australia, then you need to register and pay for GST. GST is a tax that is paid to the government for your services and is applied to just about every product and service in Australia. You need to be keeping a constant eye on what you’re earning and make sure that you register as soon as you hit that $75,000 mark. Alternatively, if you know you’ll earn that much in your first year, you may wish to register up front when you get an ABN.
GST is a 10% tax, and your invoices will then go from saying INVOICE to TAX INVOICE and will need to include a section that specifies how much of your invoice is GST to be paid to the government. There are some exclusions on GST and calculators to help you work it out so if you’re in this position you should head to the Australian Taxation Office website for more details.
Superannuation is, essentially, a retirement fund. In Australia, businesses are required to put a certain amount of money into employees’ super funds who then invest that money in things such as shares, property and managed funds, and also offer insurance. When you retire you can then use the money in your super fund to help with bills, living expenses and generally just enjoying being alive.
Superannuation was developed as a way to ease the burden on the government retirement pension as we grow into an increasingly aging population. The idea is that if everyone is putting money away throughout their working life, then fewer people should need to draw on the government funds to get through their retirement.
As a sole trader, you are not legally obliged to make super payments, but it’s still a good idea (and it does count as a tax deduction as long as you don’t go past a certain point). The Australian Securities and Investments Commission advises that your superannuation should be equal to 9.5% of your ‘ordinary time earnings’. That basically means that if you’re earning $50,000 a year then you should be paid an additional $4,750 in superannuation. So not only do you want to be considering this when setting your rates, but you should then be putting that 9.5% away into your superannuation fund.
Again, there are various exceptions and all sorts of things (because it wouldn’t be the government and it wouldn’t be tax and it wouldn’t be finances if it wasn’t just a little bit complicated) so make sure you investigate your options fully and with professional advice.
Now that your mind is likely squirming with too many numbers and another list of things to consider and setup, we recommend you start to develop some systems for managing all this information. Whether you’re an Excel whiz or you purchase programs to help you, or hire an accountant or tax agent, there are many options out there for you to figure out what will work best for you. In our next post, we’ll be revisiting our resident freelancers who will share some tips and tricks on how to set up your business despite the overwhelming number of things to do.