Tax time is a fun time of year as most of us lodge our returns and then wait patiently for our tax refunds to arrive from the ATO. But preparing and lodging a tax return can be intimidating for some; particularly younger taxpayers who are less familiar with the process. Here are six common tax mistakes that younger people often make -- and how to avoid them.
Recent studies have found younger people are more afraid of filing their taxes than any other generation. 80 per cent said they fear they will make a mistake on their return and end up out of pocket in the long run.
When looking for help, young taxpayers are more likely to turn to family and friends for advice as opposed to tax professionals. Although well-intentioned, family members are unlikely to be up-to-date on the latest tax regulations or have a full understanding of what can (and can’t) be claimed. This only serves to make the process even more confusing and can mean younger people miss out on the best possible refund.
These days, 74% of Australians use a registered tax agent to help prepare their tax return. This ensures a qualified professional checks the return for extra deductions and ensures it’s correct before lodgement to the ATO.
In addition to using the services of a tax agent, here are a few additional tips for under 30s to watch out for at tax time.
#1 Not declaring income from sharing economy
Uber, Airbnb and Airtasker are becoming increasingly mainstream as a flexible way to earn a side income. But even if you only use these platforms to earn a bit of extra cash on the side, it all must be declared on your tax return.
Be sure to track your income and be honest on your tax return. Keeping receipts and invoices also allows you to claim tax deductions against this income. Be warned: those who under-report their income may end up owing back taxes and be hit with fines, penalties and interest charges from the ATO.
#2 Failing to set aside enough money earned through contract jobs, online stores or freelancing
If you are a freelancer or work in contract jobs, your tax might not be withheld from your income. That means you’re in charge of making those payments to the ATO yourself. If you don’t set aside some of your earnings, it can be a nasty surprise at tax time. During your first year you should put aside at least 30, even 40 per cent of any “non-taxed“ income you earn to be safe.
#3 Falling for an instant refund scam
Ads spruiking a “same day tax refund” or “instant tax refund” might sound good, but it is usually a prime example of ‘too good to be true.’
Tax refunds can only be issued by the ATO, so a “same day refund” is just a short-term, high-cost, high-interest loan from a third-party. An instant refund may put money in your hand a bit sooner, but it also comes with costly fees and hidden late charges inside a legal contact. Plus, if the ATO doesn’t give you the refund you expected, then you owe your entire “instant refund” plus the fees and interest back to the company who provided it. It’s almost never worth it.
#4 Not claiming car expenses correctly
If you use your car for work, one of the challenges this tax season might be working out which method of claiming car expenses is best for you.
Recent changes mean the only two methods to claim work-related car expenses this year are the logbook method and the cents per kilometre method. The cents per kilometre rate has also changed to 66c per km regardless of the size of your car.
Depending on how you use your vehicle at work, one method might lead to a bigger deduction, and as a result, a larger return. So it’s important to understand which is better for you. If you’re unsure, it’s best to ask a professional. Keep in mind that car expenses can only be claimed for genuine work-related use, not including driving to and from work.
#5 Not being smart with their refund
Avoid thinking of your tax return as “bonus” cash. Instead of splurging your return on a shopping spree or impulse purchase on a depreciating asset like a car, clothes, or electronics, consider using the money in a financially smart way.
If you want to tackle a big payment, consider putting your return toward high-interest debt payments including credit cards, car loans or a mortgage.
#6 Forgetting to lodge a return
Forgetting or avoiding lodgement of a tax return is a big mistake! If you miss lodgement deadlines, you might be hit with a failure-to-lodge penalty, plus interest. One bonus with using a tax agent is that they can often request an extension on your behalf and even negotiate payment plans with the ATO when required. Just don’t bury your head in the sand otherwise you could find yourself on the receiving end of some serious ATO penalties down the track.
Simone Gielis is a senior tax agent and general manager at Etax.com.au