Tax Terms – Part 1

Here’s a guide to help get your head around our crazy language! This first parts for most Individual Tax Payers! Next week we’ll provide more for those running a business!

The Individual Taxpayer

Tax File Number (TFN) – a number to identify yourself to the Australian Taxation Office

Pay As You Go (PAYG) – a system where most employees will pay their taxes over increments during the year through their weekly/fortnightly/monthly wages hence, pay as you go.Note: Sole traders do not operate this type of system and instead need to pay their taxes at the end of the financial year in one lump-sum.

Group Certificate/PAYG Summary – showing the full financials years income & allowances earned including how much tax and superannuation was paid on your behalf (other inclusions such as workplace donations can also be included).Note: some summaries will not show your superannuation payments so it will be worthwhile to ask and cross-check with your superfund.

Gross Pay – The total amount you have earned for a period. This payment doesn’t consider taxes that your employer will withhold, or superannuation payments made to your superfund.

Allowances – Separate payments paid to you by your employer for certain working conditions. Generally, the more allowances you receive the less tax is taken from it. This can increase your tax payable or reduce your tax refund at the end of the year.

Tax Withheld – an amount of your wages withheld from you by your employer as part of the PAYG system (see above). This will help you pay your taxes in portions over the year instead of a lump sum payment at the end when filing your tax return.

Superannuation – a minimum of 9.5% taken from your pay in addition to your taxes. This is directly paid towards your nominated super fund. It is crucial to check your superfund to make sure payments are being made as more and more employers fail to pay this on your behalf.

Net Pay – the amount remaining after tax, superannuation and other amounts have been taken from your pay. An easy way to remember net pay is by picturing a net capturing the amount left over in the end.

Taxable (Assessable) Income – the net profit of your total income. This is calculated by adding all income types (salary, business profits, interest, dividends etc.) and reducing it by your deductions (motor vehicle expenses, laundry, office equipment etc.). The taxes you have paid during the year is then based on your Taxable/Assessable Income. Too much paid will mean a refund is due and too little will result in a tax payable to the ATO.

Tax Refundable – Where you have paid too much taxed based on your Taxable (Assessable) Income you are entitled to a tax refundable.

Tax Payable – Where you haven’t paid enough tax based on your Taxable (Assessable) Income you are obligated to pay additional tax to the ATO.

Audit – where the ATO identities areas in tax returns and financial statements that contain risk, the ATO will conduct a review and further examinations to check and cross-reference the information reported. The audit stage involves checking the information reported and whether it is correct, reliable, and backed by source documents. The aim is to reduce the risk of fraud and tax evasion. Where fraud and tax evasion are identified, the ATO can consider prosecuting the taxpayers by issuing penalty units resulting in fines or in extreme cases, jail terms.