By Lacey Filipich BEng(Hons) MAICD Cert Gov (NFP)
Next year I’ll be clocking up my 20th as a submitter of tax returns. That’s twice as long as my relationship with the father of my children – a looooong time in my book.
Over nearly two decades, I’ve seen the methods of submission change: when I first started, you had to lodge via a form that you posted to the Australian Tax Office (ATO). FY15 will be my seventh online submission via eTax, which has evolved and improved significantly since my first experience with it in FY08. I’ve also seen the rules change over time: health care levies have been introduced, medical claim limits have dwindled away and superannuation limits and levies have changed considerably to name but a few.
You can take this lesson from my experiences: tax is not static.
Every year there are new advances in how we submit, and changes (sometimes subtle, sometimes not-so-subtle) in what we can and should claim. It doesn’t do to be complacent about your tax return because you could be missing key opportunities to maximize how much you get back… or minimize how much you pay, whichever way you prefer to look at it. It’s also not mandatory to get an accountant to do it for you. Most people can handle their own tax returns if they want to, especially with the increased efficiency of the online system these days.
Through all this, one thing remains certain: you’ll be submitting a tax return. Why not make the most of the experience?
There are some stock-standard, tried-and-true ways to get as much out of your tax return as possible every year while minimizing the stress created and time consumed in the process. Here are five you may find useful:
1. File as you go throughout the year
Whether it’s a shoe box into which all valid receipts are tossed, an email folder with all relevant bills/donations/receipts etc, or a physical file with dividers, it will save you time and stress if you simply keep them all in one spot. Or several spots, so long as you can get to them quickly when you need to.
I personally have:
- A concertina file with categories I reuse each year (one slot for each property, one slot for donations, one slot for work-related expenses etc). When I finish the return for a given year, I take all the docs out and file them together with the print-out from eTax.
- An email folder with any tax-related comms (e.g. the donations I’ve made online, property income reports etc).
I file as I go, so when tax time rolls around I don’t spend weeks wracking my brain for all the little (or not-so-little) items that could be relevant, or kicking myself the day after I submit the return when I remember some major claimable expense.
Too late to do it for the FY15 return? Well, take that as a lesson and start your FY16 files now – and start using them!
2. Submit early for a refund, submit late for a bill
If you estimate you’ll be getting some tax back, then the longer you leave it to submit your tax return, the more money you’re giving to the tax office. How? They’re earning interest on your cash. You’re not. The time available to submit your return is July to October: four months. One third of a year. It’s significant.
For example, let’s say you’re due a return around $5,000. Four months, compounded monthly, at 2.25% per annum means the difference between getting that return in July and receiving it in November (after your last-minute 31 October submission) is $37.61. That’s $37.61 you just gave away to the ATO, on top of what you’ve given them already.
If you put your tax returns into your mortgage offset account when your mortgage rate is currently 4.5%, the result of delaying is you paying $75.42 more for your property than you needed to.
Keep in mind that interest rates are at historical lows. These amounts increase exponentially with every interest rate increase. Over the decades of tax submissions you’ll be making, the cumulative effect can easily reach thousands for the interest you’re sacrificing by submitting in October instead of July.
Conversely, if you think you’ll be paying a bill (e.g. you made money from interest and dividends that wasn’t taxed at the time and isn’t offset by a tax loss), delay. Submit at the last minute, perhaps allowing yourself a day or two for technical bungles. This doesn’t mean you don’t work out your return earlier – you can still do that in July. Just don’t hit the submit button until around 29 October. Why? For the inverse of the above – you can earn interest on the money due for that bill in the interlude. It offsets your bill a little bit.
Be warned, the tax department is not complacent about interest. If you have a bill one year, they may require you to pay installments of increased tax (often quarterly) throughout the following year unless you can present a case that shows you won’t be making as much money.
3. After you submit, reflect
From around April, those radio ads about joining a health fund to get a tax return start to appear. ‘Save money!’ they claim. ‘Sign up now to save on tax!’ is a common line. While it’s true that your tax bill is reduced when you have private health cover, it’s pro-rated to the number of days in the year you have it. So if you sign up on 30 June, you’ll get just one day of the 365 or 366 that year applied to your tax return.
For this reason, many of us put it off – it’s too late to do it for tax reasons in June. The time to sign up – if you decide you need private health cover – is after you’ve submitted your return and kicked yourself for giving away another 1.5% (or whatever rate applied to you) of your salary. Do it while the feeling is fresh – it’s an excellent motivator.
This goes for all the opportunities you curse yourself for missing as you submit. During and shortly after the submission, try to identify at least one thing you can do differently in the next financial year to improve your return. If you can’t think of anything, perhaps now is the time to consult a tax expert. If you’re convinced you’ve squeezed everything you can out of your return, look at ways to reduce the time required and stress involved in submission.
4. If you get a return, use it – don’t waste it
This is the biggie. So many of us see those extra hundreds or thousands of dollars in our account and think ‘Yippee! Shopping spree time!’ If this is you – STOP RIGHT THERE. Put down that credit card and take a break. Consider: could you do something more meaningful with this lump sum of forced savings?
Of course you could.
You could put it to work for you, for example:
- Putting it into your mortgage offset account, bringing down the interest bills on your home.
- Putting it into an interest-bearing savings account or term deposit, making your dollars breed more dollars.
- Buying a parcel of shares with it – hopefully contributing to a passive income when you get dividends (if you don’t reinvest them).
Learn to see tax refunds as forced savings, not surprise spendings. Resist the urge to visualise the shoes you can buy with that wad and instead do something today that will set you up for the future.
5. Timing is important
Give some thought to timing of both income and expenses. Usually, for non-business owners, both are brought into account for tax at the actual time they are received or spent, so prepaying a deductible expense like salary continuance insurance in June could give eligible taxpayers that deduction a year earlier than paying it in July. If you have a term deposit maturing and paying you interest in June, you’ll most likely be including that income a year earlier than if it pays you the interest in July.
Check this ATO list of deductions and make sure you don’t miss out on claiming something that you can http://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/
Subscriptions that are work related, maintenance of uniforms and home office expenses are common deductions that people miss, so make sure you note and file them during the year (see point #1) as a reminder to include them in your claim.
Where to from here?
- If you’ve already submitted your FY15 tax return, well done! Put your feet up and consider point #3, reflecting on what went well this year and what you’d like to do differently next year.
- If you haven’t submitted your FY15 tax return, get cracking! You may be inadvertently paying the ATO more than you need to by letting them hang onto your refund and earn interest on it.
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Lacey Filipich is the co-founder and director of Money School. She helps parents raise financially savvy kids and helps adults get on top of their finances. Connect with her on LinkedIn and follow the Money School Facebook page to learn more.