Taxpayers with two or more income sources - beware of a possible tax trap caused by the new tax free threshold.

Some taxpayers with two or more jobs or other taxable income sources may be caught in an unintentional tax trap as a result of the new increased tax free threshold.

The problem occurs even if the taxpayer and the employers do the right thing – as determined by the Australian Taxation Office (ATO) PAYG tax scales. The problem is caused as the first job attracts the tax-free threshold while second and subsequent jobs are taxed in line with the progressive tax tables supplied by the ATO.

It causes taxpayers to be, in effect, under-taxed on their ordinary earnings, which can result in a tax bill at the end of the financial year.

For example

Assuming a taxpayer has one job earning $60,000. Their employer would deduct their tax and Medicare Levy to the value of $11,960 dollars. This would leave them with no tax bill. If a taxpayer worked two jobs at $30,000 each and complied with all ATO tax scales, they would pay $2,652.00 in the first job and $7,956.00 in the second. This amounts to $10,608.00 and would leave them with a tax bill of $1,352.00

The problem compounds in the example of a taxpayer earning $60,000 over three jobs, or income sources, paying $20,000 each. The first has $312.00 tax deducted, the second $4,524.00 and third $4,524.00. This amounts to $9,360.00 tax and leaves a tax shortfall of $2,600.00.

Tax Free Threshold – FAQs

Q1.    Why is my refund lower than last year? OR Why do I have an unexpected amount owing? OR Why do I have a tax bill when I've heard that the tax rates have gone down?

As the tax free threshold was raised to $18,200 this year, it is likely that you had less tax withheld by your employer (and therefore received more money each pay) which has resulted in a smaller refund or a bill payable.

This is particularly the case for tax payers with multiple jobs (and Payment Summaries). Even if each employer follows the ATO tax scales properly to calculate tax withheld, the total tax paid on your income may not be enough to cover the tax payable because of the progressive tax scales.

Q2.    What can I do to make sure this doesn't happen to me again next year?

Have one of your jobs deduct a greater amount of tax each pay period to cover the shortfall. Contact your payroll/HR department to arrange this change. 

Q3.    I cannot afford to pay this back right now, what should I do?

MDB Accountants can defer your tax return for lodgement until the due date next year. You will need to finalise the tax return now and we will hold for lodgement in May 2014 or your due lodgement date according to the ATO.