It’s everybody’s favourite time of year… tax time! (I’m not sure if anyone says that, but let’s go with it.)

In today’s newsletter, we’re going to answer your most asked questions about the end of the financial year, including how our tax system works, what a deduction is, and how they work.

And just a note on this edition: AustralianSuper is the sponsor of today’s newsletter, but haven’t had any editorial input on what I’ve written here.

Let’s get into it!

Firstly, there are no silly questions. A tax bracket is what determines the different rates of tax that apply to different levels of income. So someone who is earning $190K, is in the top tax bracket, and someone who earns under $18,200 is in the bottom bracket.

So, at a very top level, people who earn more, pay more tax (although this is not always true in practice because of deductions and other exceptions).

For this reason, our income tax system is called 'progressive', because you pay progressively more as you earn more.

The first $18,200 you earn, you pay no tax - so again, that’s the bottom tax bracket.

But then any dollar you earn above that gets taxed. Currently, the tax you pay above $18,200 starts at a rate of 16%, and eventually reaches 45% for every dollar earned over $190,000.

Let’s play this out with an example: Say Claudia earned $80,000 this financial year in her marketing coordinator role - that means she is in the 30% tax bracket. However, it doesn’t mean she is paying 30% on the full $80,000.

Instead, it means she’s being taxed nothing on the first $18,200, then every dollar earned between $18,200 and $45,000 is taxed at a rate of 16%, and then it's only every dollar earned between $45,000 and $80,000 that is taxed at a rate of 30%.

No, money going into your superannuation is generally taxed less than money taken as income. Reminder: Super is money that is generally put aside by your employer throughout your working life for your retirement. Your super is invested by superannuation funds to grow over time so you can live well in retirement.

Let’s go back to our Claudia example from above. We’ve established her marginal tax rate is 30%. Compare that to before-tax contributions (salary sacrifice), which are generally taxed at 15% going into super.

If salary sacrifice isn't available through your employer, which is often the case for casual workers or contractors, a personal after-tax super contribution can be claimed as a tax deduction. When you claim a tax deduction on an after-tax super contribution, it becomes a before-tax contribution and is taxed at 15% inside super.

Just be sure to notify your fund that you intend to claim a tax deduction ahead of lodging your tax return.

If you are lodging your own tax return (i.e. not using an accountant) then you need to lodge it by October 31 each year.

If you go to an accountant to help you with your tax return, you need to engage them before October 31, but not necessarily actually do the filing of it - you can do that with them a few months later.

If you miss these dates, the ATO may start applying fines, penalties or interest.

In most cases, you’re taxed the right amount by your employer, and if you don’t have deductions, you won’t get anything back on your tax return because you’ve been taxed the right amount.

However, other times you might receive money back at the end of the financial year because you’ve paid too much tax throughout the year - the Australian Tax Office (ATO) calls this a tax refund.

If you’re working in a full-time job, your employer is most likely paying tax for you throughout the year (this is called the ‘pay as you go’ tax system). There are a whole bunch of reasons you can get tax back. The most common reason is because of deductions you’ve claimed for work-related expenses, but you can also get some money back if you change income during the year, or if there are mistakes in the way the tax was withheld by your employer.

First up, a deduction is an expense you can claim to reduce your taxable income, which may lower the amount of tax you need to pay. Deductions are usually for eligible work-related expenses, and claiming them can sometimes result in a tax refund from the ATO.

We’d be here for a while if we listed every single thing you can claim as work-related expenses. The ATO actually has occupation-specific guides for common work-related expenses. A common work-related expense for us as journalists could be the cost of hiring a camera we need to use for a piece of work we’re making.

It is also a common misconception that you get back the full amount that you spend. That's not true. If you spend $1,000 on tax deductions and you are in the 30% bracket, the tax benefit is only $300. You're still out of pocket $700. Cameras are expensive, hey!

Making a small mistake on your tax return will not land you in jail. The ATO understands that mistakes can happen and typically allows you to amend your return. It’s a very different case when they come across instances of deliberate tax evasion or fraud, which can result in severe penalties, including jail time.

It's always best to correct any errors as soon as possible to avoid penalties, and if in doubt, go and speak to an accountant who can help you with your entire tax return.

This is a big one. We could spend a whole newsletter just on this topic, but let me try to provide a snappy answer.

Essentially, individuals like you and I and companies are taxed differently due to what the government has decided is needed to keep the economy moving, growing and relatively fair.

Companies are taxed at a flat rate on their profits, which can be reduced through various deductions and tax credits.

Individuals, on the other hand, are taxed on a progressive scale based on their income.

Small actions, big rewards

Did you know you could be eligible for extra tax deductions thanks to your super? Many Australians don’t realise super can come with valuable tax benefits - including the ability, in some cases, to claim a tax deduction on extra contributions.

Tax time is a great opportunity to take a closer look at your super and make sure you’re making the most of the benefits available to you. But checking in on your super shouldn’t stop when tax time ends. Regularly checking-in on your super via your fund’s app is easy and can make a real difference down the track – even small moves now can result in big rewards later.

Before adding to your super, consider your financial circumstances, eligibility, contribution caps that may apply, tax issues and when your super can be accessed. We recommend you consider seeking financial advice. Read the PDS and TMD at australiansuper.com Sponsored by AustralianSuper Pty Ltd, ABN 94 006 457 987, AFSL 233788, Trustee of AustralianSuper ABN 65 714 394 898.