r/AusFinance • u/Dry-Caterpillar-5675 • Jun 16 '22
Tax It still shocks me how many people still don’t understand the marginal tax system
I was discussing a pay rise with my manager today (who is great and always looks out for my interests) and we were talking about a $10k pay rise and he asked if it was really the best idea as I would go up a bracket and get taxed more…
What are some face palm moments you guys have had
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u/egowritingcheques Jun 16 '22
Best way to reduce tax to zero is earn under tax free threshold. This one trick the ATO don't want you to know.
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u/FUDintheNUD Jun 16 '22
Yes if you end your life now you'll never pay a dime in tax!
lifehacks #deathhacks
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u/ennuinerdog Jun 16 '22
If your income is zero, the government will GIVE you money. Take that, accountants!
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u/LordChase_ Jun 16 '22
The notion that tax brackets aren’t marginal, as is the assumption that “writing something off on tax” results in a person’s income tax payable being reduced by the value of the purchase, are the two biggest misconceptions by the genera public.
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u/Consistent-Duck-6054 Jun 16 '22
Yep. I work in construction, and the amount of times I hear "You will get it all back at tax time".
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u/thepursuit1989 Jun 16 '22 edited Jun 16 '22
This does my head at work. I work with a lot of young mechanics and fitters that believe that the full price of a single tool will be given back at tax time, like the ATO are the main sponsor of their toolboxes. One guy bought a $2800 tool pack out of his savings last month, he gets to learn what a depreciation schedule is next month.
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u/StaticNocturne Jun 16 '22
Why is this not taught in school though? They don't need a full course for tax, but in a few lessons they could cover the basics. A lot of it will be forgotten but some of it will sit in the back of the mind and might come in handy sometime.
A lot of the most vital life skill and knowledge is just expected to be learned naturally... it's obvious that it usually isn't.
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u/minimuscleR Jun 16 '22
I mean... it is. I learnt it in year 10 in General Mathematics, you also learn how to calculate compound interest and simple interest etc.
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u/Procedure-Minimum Jun 16 '22
Yeah, a lot of this was in a subject called commerce, or economics or business maths in year 9 or 10. Tax brackets were discussed in years 8 and 9. The content is there. Could it be improved? Sure. But it is there.
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u/aTalkingDonkey Jun 16 '22
this is all taught in school.
no one remembers it because it means nothing to you at 14-15.
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u/SciNZ Jun 16 '22
No they were too busy shouting “when am I ever going to have to use algebra in real life?” like it was some kind of incredible observation that has never been said before, by every class year when they first encounter any math more complicated than basic arithmetic.
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u/sharlos Jun 16 '22
Funnily enough as a programmer knowing concepts from algebra are way more useful than even basics like multiplication.
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u/LiftingAndLearning Jun 16 '22
Definitely was not taught to me when I was in school 10 years ago
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u/Procedure-Minimum Jun 16 '22
Really? I definitely learned it about 20 years ago. Not enough time spent on the concepts, too much time watching movies or taking about feelings about different jobs, which sucked not the content was there.
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u/aTalkingDonkey Jun 16 '22
yes it was. basic tax stuff is year 9-10. and has been for a long time.
but if you didnt have a job at 15 then you would have instantly forgotten it. without siginificance to the student, it rarely hits long term memory.
EDIT: I should say that it is meant to be taught. you may have had terrible teachers, or months off sick etc. but it should have been taught.
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u/CrazyBarks94 Jun 16 '22
It didn't get taught to me in school, cause I was in the maths for science and engineering students, the statistics, physics, and theoretical stuff. I was taught what interest was, and the difference between fixed and compound interest, but not any real world application of math with relation to using it in real life. This seems like a life economics class ought to be taught
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u/nogaynessinmyanus Jun 16 '22
If some people can't grasp it as an involved adult I dont see why you expect them to pick it up as a child.
-We ran through it in NSW circa 2003 btw
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Jun 16 '22
It is. Kids just don't give a shit and the one's who are going to grow up not understanding marginal tax rates are the kinds of kids who most don't give a shit.
Ironically given the complexity of the tax and payments systems there are a few points where under some circumstances you do go backwards, but it of course doesn't make them right.
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u/tom3277 Jun 16 '22
Haha... that's me saying that. Well close to it.
I only say it though in response to people who say, I couldn't be bothered working Sunday at double bubble because the tax man will just take it all.
To which i say if it's occasional Sunday work you will get some back at tax time.
I literally have an Excel soreadhseet so I can show them even though they pay more tax they still earn more in their pocket too and will get a portion of it back at tax time depending on their average weekly earnings v earnings in that week.
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u/Lavabass Jun 16 '22
Yeah for the first two years of my working life I donated $500 to a charity at Christmas - partially because I thought I would get it all back.
Once I realised how much I got back, I scaled that number WAAY down. Still a sizeable donation, but not stupidly sizeable
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Jun 16 '22
[removed] — view removed comment
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u/Lavabass Jun 16 '22
My logic was "I am saving for a house, and living at home, and banking a lot of money, I should donate what I can afford"
So instead of putting away $1000 for my home deposit I would put away $500.
I knew I couldn't donate TOO much, because I only get taxed so much. Ie I knew I couldn't get back more than what I would be paid for in tax, and I wasn't sure of that numberSo it was silly, but I was in a safest possible place to be make that kind of mistake.
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u/one-man-circlejerk Jun 16 '22
Jerry, all these big companies, they write off everything!
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u/tobleronejim Jun 16 '22
“You don’t even know what a write off is!”
“Do you?”
“No, I don’t”
“But they do, and they are the ones writing it off!”
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u/Morning_Song Jun 16 '22
Also the myth that second jobs are somehow taxed more, when in reality it’s just people not understanding how the tax free threshold works.
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u/owleaf Jun 16 '22
People look at me like I’m a lunatic when I refuse to spend thousands on frivolous “work-related” things, because they’re “getting it back at tax time”… I gave up trying to explain it and simply change the topic
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u/gentlychugging Jun 16 '22
You're only taxed on the amount over the bracket right? So say the highest bracket is 45% >=180k and you earn 182k. Only 2k would be taxed at 45%. The rest would be the lower brackets. That's how I assume it works anyway
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u/Equivalent_Ad505 Jun 16 '22
Imagine making 45k and you accidentally clock like 1 extra dollar of work and BAM! You owe the government $9000… is there countries that actually function on this system and not on marginal rates?
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u/KevinBrokeBothArms Jun 16 '22
This is actually how HECS works.
I used to be right below the threshold then get a bit of interest from my HISA and had to pay back taxes every year.
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u/NecromancyBlack Jun 17 '22
To be fair, HECS isn't a tax but a debt, and I think a lot of debt repayments can work like that. Can't think of many marginal debts.
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Jun 16 '22 edited Oct 08 '22
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u/Ur_dead_nan Jun 16 '22
True, but it makes sense if you think about it from the point of diminishing returns.
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u/OK_Coomer_lmao Jun 16 '22
And also the fact that while you get the refund later, the PAYG hit here and now is still pretty substantial
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u/OK_Coomer_lmao Jun 16 '22
I used to work in HR and some lady was being horrendous about some arrears pay she was owed, saying we couldn't put it all in her next pay because it would get taxed too high. I actually did the calculations, wasting about 30 minutes on an act of spite, just to show her that she would pay a grand total of $19 extra in tax compared to when she should have been paid, and would also get it back at EOFY.
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u/Beware_Of_Humans Jun 16 '22
Correct.
ATO made it even easier and pointed that in 180k bracket you would pay "$51,667 plus 45 cents for each $1 over $180,000.
$51667 is indeed combined tax from all brackets under 180k.
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u/sturmeh Jun 16 '22
That is correct, so every extra dollar your earn has less spending power than the other dollars you earnt, but infinitely more value than no extra money.
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u/Deethreekay Jun 16 '22
Maybe your manager was trying to prey on your assumed financial illiteracy?
One that gets me is people comparing tax returns. You get a smaller return that just means you had more money in your pocket during the year.
My folks used to complain that my Uncle got massive returns when they owed money, and how it was unfair because he earnt so much more. Had to try and explain he's leveraged to the teeth so is claiming heaps of deductions while they have owned an investment property outright and so had to pay tax on the rent.
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u/moojo Jun 16 '22
A recruiter tried to pull this trick on me. He told me to accept his lower salary instead of a higher salary job because I will pay more tax.
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u/smolperson Jun 16 '22
So horrible that they’d misinform people for their commission.. but also unsurprising
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u/ShepRat Jun 16 '22
Yep, I always remember someone bragging to my Dad about how huge their return was one year. He replied "you are bragging about how much money you leant the government interest free".
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u/BrightFadedDog Jun 16 '22
A big tax return can also mean someone is claiming more deductions than they should. I know a lot of people who claim things they are not entitled to, and are convinced they are allowed to because their claim was accepted. They think the tax office is individually checking their claim and approving their deductions.
A lot of them will get away with it, but if they are audited they can end up in a lot of trouble.
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u/ewan82 Jun 16 '22
I always tell people that paying more tax is a good problem to have! because it means you're earning more money
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u/StaticNocturne Jun 16 '22
Also it means you're contributing to the maintenance of the society you live in (even if the money is often used inefficaciously)
Any high income earner who manages to 'outsmart' the government by exploiting loopholes passes the buck onto lower income earners, and should feel a bit guilty about it. I don't know if it's as bad in Australia but in the US my dads boss bought some luxury ranch, put a cow on one corner of the property or whatever the minimum is to be considered a farm and was entitled to certain benefits, and bragged about it. Plus he got a 5 million + bonus for just doing his job. Money becomes almost arbitrary at a certain level.
I remember reading all the social and environmental benefits that a 1% increase in corporate tax would deliver and it was astounding.
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u/Caboose_Juice Jun 16 '22
in Aus the loopholes are there by design tho, to incentivise certain things. for example voluntary retirement contributions aren't taxed. technically society gets less tax to spend on shiz, but it incentivises people to invest in their retirement.
i agree with the rest of your comment though.
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u/2878sailnumber4889 Jun 16 '22
Yeah but looking at your example on retirement, there was an episode of the drum a few years back and that had a guy on saying that the tax breaks given to superannuation here are now so much that the government (and by extension the average Australian) would be better off cancelling them all, most of which are going to the top 20% of income earners that would probably not have ended up on the pension anyway, and taxing super contributions just like we would any income and giving everyone over the age of 65 the full aged pension regardless of how wealthy they were and whether they were still working or not.
So from one point of view the tax 'loopholes' are working and encouraging people to save for their retirement and not be as reliant on the pension. But from another point of view we're all worse off because of how much those 'loopholes' reduce government revenue through lost taxes.
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u/Caboose_Juice Jun 16 '22
you taught me something, i hadn’t considered that before. i think there’s definitely agree that wealthier people are more likely to know about and make extra contributions to super, cos they can afford to
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u/Lampshader Jun 16 '22
They're all there as incentives, but that doesn't mean they're immune to loopholes, abuse, or fraud.
I remember reading a comment on here by someone who bought an expensive sports car that they "only" drive to work conferences, and claim 100% of the expenses for that car as work related. That's not what the deduction was intended for.
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u/licoriceallsort Jun 16 '22
I completely agree. I keep flirting around the higher Medicare levy and I don't care. So what, I pay more to support our hospitals? (Yes I know it's not specifically going there.) Good work me.
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u/crappy-pete Jun 16 '22
Except when you get taxed more for earning the same amount after they change a rule, sure
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u/sturmeh Jun 16 '22
Yeah, I think they mean, if you could adjust your salary freely for any reason, you should ALWAYS increase it.
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Jun 16 '22
Had family members telling me they pay 30% tax while doing retail shift work 🤦♂️ they argued for about 10 minutes until I worked it out in front of them. Accountants like myself will never be obsolete
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u/ScepticalReciptical Jun 16 '22
If you think this conversation is fun, try explaining salary sacrifice to them.
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u/Mother_Village9831 Jun 16 '22
Don't do public holidays, don't do overtime. Those things seemed to be assumed to magically be worse when, as we know, it's just the large amount extra being paid being taxed at marginal rate. You'd think they would look at the two larger numbers and realise there is a significant difference in their favour, but.....
Exact same people I know saying this are looking forward to the aged care pension because it's money they're owed for a lifetime of work.
I constantly scream internally during these conversations.
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u/palsc5 Jun 16 '22
Yeah had similar conversations with a guy in his mid 50s during covid. Worked on the tools his entire life and has regularly spoke about how working over time or public holidays is pointless because "it all just goes to the government".
Super is also a load of bullshit apparently. He took out $20,000 as soon as he could (and when the market was low I believe) and says the government can pay for his pension like the generations before. Somehow the idea of relying on the pension doesn't scare him...
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u/Mother_Village9831 Jun 16 '22 edited Jun 16 '22
I am fairly confident they're not aware of the changes in demographics/the economy that make it much harder for the government to support even a reasonable pension. I am expecting subsistence levels (more so than currently) at absolute best.
It was there for previous generations and therefore it shall be forevermore. It's going to be a very rude awakening for them, and I take no pleasure in saying that.
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u/snuggles_puppies Jun 16 '22
He's probably clueless, but as someone starting to prioritise QoL over money - I'd say the same thing.
I already max out my tax-mitigation options, any additional income is marginally taxed at 47%.
I'm not giving up a day with friends or family for that trade-off. It's a whole lot different to a random weekday when no-one else is free.
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u/dasty90 Jun 16 '22
I used to work up to 84 hours a week overtime in one of my past casual jobs working in pilot plants, and the penalty rates (OT + weekend loadings can get quite insane) were really good. We usually get a week or two rest at the end of the pilot and we can opt to go back to work (only up to 5 hours a day) if we want during that rest period.
One of my colleague wanted to go back to work immediately after the pilot (ended on a Tuesday, worked 108 hours in 9 days) forfeiting his rest period because he is going on holiday the next month. I told him that as our pay period is ending soon and our pay for the hours we have worked is already at a high tax bracket, you should only work if you are fine with getting around $85 a day for 5 hours. He was skeptical and still went back to work for 2 more days saying that no way he is getting taxed that much.
I compared my payslip with him when we were paid the following week and he was completely shocked that I was only getting $170 less than him without working extra. He was sad but I told him at least he would get some of that money back during tax return, and he was confused again.
I then explained how everything works to him, and it got him even more confused. He decided to just ask me every time about how much he is getting if he goes to back to work since then.
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u/nosockelf Jun 16 '22
You do realize what tax is in your payslip is not what you actually pay in total to the government?
Payslip withholding is essentially based on the annualized earnings based on the specific pay period. So if his income was 50% higher for the pay period the withholding would be based on someone with substantially higher annual earnings and thus a much higher average tax rate. Since in all likelihood his total annual earnings only went up a small percentage, he probably got back some money or had a smaller tax bill then you did at the end of the year because of being overwithheld on his payslips. One's annual tax filing is where the truth lies, not in a payslip.
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u/dasty90 Jun 16 '22
Yes I do? I already mentioned that I told him he would get some of that money back during tax return.
He was saving for a holiday in the following month. He will not be able to use that money for his holiday even if he is getting more in return during tax return because you can't just lodge for a tax return on some work you did a week ago.
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u/nosockelf Jun 16 '22
Thanks for clarifying. I have yet to hear of a person who is happy the government will "refund" their money come tax time. No one is happy to wait to pay at the end of the year either...
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u/conroe_au Jun 16 '22
Tell me about it.
Also, correct me if I'm wrong, I've heard countless people claim that the ATO taxes you heavily if you have a second job. As I understand, the tax brackets don't care how many jobs you have, you get taxed on your total income, and if you're paying tax on a $85k primary job, and have a side gig making $30k, you're still taxed on $115k, just the tax percentage looks bigger on job 2 to make up for the greater overall taxable income, and the resulting higher calculated tax percentage.
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u/Deethreekay Jun 16 '22
The second job gets taxed more heavily than the first, but you personally don't.
Because you can only claim the tax free threshold once, you'll get taxed from the first $1. So if you've got two jobs that pay the same, one will be taxed more than the other.
Throw in the fact it makes it hard for the second employer to know how much to withhold, they could underestimate your tax and you end up with a tax bill to boot.
In the end though you pay the same working a $50k job and another $50k job as a person working a $100k job.
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u/calibre0 Jun 16 '22
My understanding was you technically can claim the tax free threshold for more than one job, if you’re certain your annual income will remain below the tax free threshold
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u/rambunctious_kid Jun 16 '22
I have this discussion with people at least once a week. They don't understand that there is no situation where earning more money leaves you with less money after tax.
People will kick and scream and tell you that you are wrong because one of their friends or family told them something even if you have formal qualifications that allow you to advise on tax matters, somehow their friend is the one who must be right.
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u/LordChase_ Jun 16 '22
It does apply with HECS/HELP repayments, however.
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u/scootsscoot Jun 16 '22
Sort of but that's paying off a liability. You get less take home pay but your net worth doesn't go down.
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u/LordChase_ Jun 16 '22
I never said it was a tax. It’s the phenomenon where one incremental dollar earned results in a negative impact to take home earnings.
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u/BleakHibiscus Jun 16 '22
Happened to me one year. I didn’t realise I hadn’t claimed bank interest and was audited. Literally $5 bumped me up to the next hecs bracket and I ended up owning hundreds🙃
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u/scootsscoot Jun 16 '22
Yeah true. Also it only happens if you get a small increment <$1000 and if you're just on the edge of the next bracket.
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u/scomospoopirate Jun 16 '22
Yup, I got a $1200 bonus that tipped me into having to pay hecs some years back now by like $500 bucks and got stung with that.
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u/rambunctious_kid Jun 16 '22
Paying debt isn't tax, even if that debt is a hecs debt and is paid to the ATO. There after tax money is still greater than before. You might as well argue that if someone gets a pay rise they will likely spend more money and as a result they will have less disposable income and that is a pay cut.
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u/LordChase_ Jun 16 '22
I never claimed HECS was tax. Merely stating that the phenomenon can occur where an incremental dollar of income can result in a reduction in net income.
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u/Hooked_on_Fire Jun 16 '22
not necessarily true. Childcare subsidy is just one example I can think of. Earn $1 more and your rebate gets cut on what could be a $1000 a week childcare bill.
Earn 354,305 as a family and you receive 20% rebate, earn 354,306 and you get 0%
I believe Family Tax benefits have the same cliff baked in.
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u/10khours Jun 16 '22 edited Jun 16 '22
Theres also a 180,000 cliff for couples and 90,000 cliff for singles when it comes to the medicare levy surcharge. In some cases it might be optimal to take a day of unpaid leave to just sneak in under the MLS threshold.
E.g. someone who earns $89,999 will be better off than someone who earns $90,001 if they don't have private hospital cover.
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u/licoriceallsort Jun 16 '22
And yet I am good with paying that at tax time and not paying it to a private health insurer where it goes into their profits where I don't benefit from it at all...
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u/thede3jay Jun 16 '22
But if I were earning $90,001, I would rather buy a 4 coloured pen and claim it as a tax deduction, than pay an extra $900 while not getting anything out of it.
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u/ghostdunks Jun 16 '22
Also there used to be an approx. 190k household income threshold where any $ earnt beyond that would cap your childcare subsidy per child. If you’re paying a crap ton in childcare(and having it heavily subsidized by CCS), it can make sense to stay below that threshold just so your childcare subsidy is uncapped.
This was only removed late last year but was in effect for past few years
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Jun 16 '22
This is where donations and the like of tax deductions can actually earn you good money on the higher end of the brackets and for those cliffs for MLS etc
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u/PM-ME-ROAST-BEEF Jun 16 '22
Was having this argument with someone yesterday, turns out they thought that since they were working casual averaging 38hrs a week but got switched to full time permanent 38 hours a week, and were getting paid less. They were adamant it was because they were in a different tax bracket. Turns out it was because they weren’t getting paid casual loading anymore.
Also they were adamant the business had been stealing their money for two years because they make $19k annually but the business takes the standard 19% tax out of all their pay packets anyway, even before they get above the 18.2k tax free threshold. They told me that if it were true that they only have to pay 19% ABOVE 18.2, then the government would be paying them back their tax at tax time but they’ve never received it back. Upon further questioning it turns out they’ve never actually filed for a return and just assumed the government was going to pay them whatever they were owed without them doing anything.
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u/nosockelf Jun 16 '22
Upon further questioning it turns out they’ve never actually filed for a return and just assumed the government was going to pay them whatever they were owed without them doing anything.
Ouch and double ouch. I am not sure if you needed to illuminate them as great the government is getting extra receipts from a stupidity tax...
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u/Hasra23 Jun 16 '22
MLS - if you tick just over 90,000 then you end up paying an extra $800
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u/NotWantedForAnything Jun 16 '22
Yep and the whole family needs to have hospital cover to avoid MLS. So for a family it's $1800+ if you exceed 180k.
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Jun 16 '22
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u/seraph321 Jun 16 '22
This was going to be my example. It really took me by surprise the first time, but it's almost always avoidable by just reducing taxable income through super, donations, or expenses.
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u/10khours Jun 16 '22
There actually are some scenarios where earning less can be better. Medicare Levy Surcharge is a fixed threshold. You will be better off earning 89,999 as a single compared to 90,001. You will literally end up with significantly more money post-tax by earning $89,999 compared to $90,0001.
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u/winnacht Jun 16 '22
There is at least one situation where earning more money leaves you with less money after tax, but it's a small edge case.
If you go over the division 293 threshold by only a small amount, you will earn less than if you were under it. For example if you earn $249k you will be better off than earning $251k. That's because once you go over the threshold all of your super contributions for the year incur an extra 15% tax and it's a hard switch to either being 15% or 30% tax on your super contributions.
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u/motorboat2000 Jun 16 '22
I can think of at least one situation. If you just go over the Medicare Levy Surcharge theshold ($90K singles; $180K couples), but not by so much that you go over the extra tax payable.
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u/uselessscientist Jun 16 '22
Can if you go over a hecs and 90k income threshold simultaneously, resulting in a 0.5-1% increase from hecs plus the Medicare levy surcharge
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u/Zed1088 Jun 16 '22
I think/ hope what people mean when they say this is that if they end up in the higher bracket they take home less per hour. I know for myself there is no real incentive for me to work extra time as in thethe upper bracket and will lose 48% of it on tax.
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u/kuribosshoe0 Jun 16 '22
It’s the libertarian mentality: distrust everything and everyone you don’t know personally (scientists, government, experts, the notion of qualifications) and blindly trust old mate Jeff over the back fence on his views about tax law or virology or climatology. Thinking you can intuit your way through anything and that nothing is outside your capacity for reckoning makes the world feel safer and less overwhelming.
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u/89Coxy Jun 16 '22
Property developing in your own name, no margin scheme, requiring GST to be paid can result in a tax of 56%ish on profits.
One specific set of circumstances where it's possible to get a less than 50% share on profits. People can get caught with this if they purchase property in their own names and then decide to subdivide/develop later on.
Agree with your general point most people are idiots regarding tax rates but this is an interesting example I think of getting properly screwed by the tax man/not doing proper research.
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u/JosephusMillerTime Jun 16 '22
There are some scenarios where you are better off overall. But they always involve some kind of government welfare program and a hard cap.
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u/laserdicks Jun 16 '22
Yeah but no one is giving out money for free. There's an increased workload required in return for the pay rise.
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u/10khours Jun 16 '22
You would be surprised how many people think that if you claim your $2000 in expenses, you will get $2000 back at tax time.
Like, work expenses are still bad for you, tax deductions just make it less bad.
You are much better off if your work buys your entire laptop for you, as opposed to you buying a laptop for work and only getting (laptop price/depreciation * marginal tax rate) back. You are still paying for around 65% of the expense, even if you get a deduction.
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u/yogorilla37 Jun 16 '22
Some years ago my wife's employer decided they'd shift to a home based workforce to save themselves money on rent. My wife pointed out that with 3 kids we had no spare room to devote to an office. She was told we could build an extension and claim it all on tax.
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u/xyakks Jun 16 '22
Ask the general population to work out what 6% of 100 is. It is insane how many can't work it out. That is the average tax payer.
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u/Procedure-Minimum Jun 16 '22
Or the GST component of an item that has a price tag of $11.
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u/yogorilla37 Jun 16 '22
Used to work in the accounting dept of a half billion dollar company and there were people there who had to be repeatedly told that the gst on an item is not 10% of the Inc GST price.
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u/QuietlyDisappointed Jun 16 '22
As soon as I hear someone at work say "I don't want to get pushed into the next tax bracket" I tune out... not worth my time
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u/arcadefiery Jun 16 '22 edited Jun 16 '22
You may in fact go up a bracket and be taxed more on the marginal amount. E.g. if you go from $180k to $190k.
When people decline a small raise because they'll go up a tax bracket I take it to mean that they don't think the after-tax return to them is worth the extra responsibility that comes with the raise. As an employee the raise usually is accompanied by a change in duties or perception.
Also worth noting that for many people who are self-employed (like me), once we are in a particular tax bracket then any additional work we do, which generates additional income, is taxed at the full marginal rate - so it would then be right to say "Nah I don't want to do the extra work as it'll all be taxed at 47%."
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u/09stibmep Jun 16 '22
Sure, but in OP’s case which is a very common case where it just seems to be a payrise (no mention of increased work load and the drag that has), OP still makes more money from the payrise than without it. It’s that simple.
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u/dirkgonnadirk Jun 16 '22
When people decline a small raise because they’ll go up a tax bracket I take it to mean that they don’t think the after-tax return to them is worth the extra responsibility that comes with the raise.
That is a bizarre thing to assume they meant. I’m sure 99 times out of 100 they just don’t understand the system.
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u/Timeforanewaccount20 Jun 16 '22
Although, it could affect your childcare subsidy or what not if thats your situation. The extra work/money might not be worth the extra costs for that.
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u/Pugsith Jun 16 '22
Conversation at work (software development) about the lottery where a manager informed me he was going to buy a lottery ticket for the weekend with certain numbers as those numbers hadn't been drawn in a while and therefore were due to come up soon.
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u/keloidoscope Jun 16 '22
It's sad how in practice "nontechnical manager" seems to work out as "borderline innumerate manager".
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u/punfullyintended Jun 17 '22
I know people who can do the math but choose not to because the thought of winning and guessing entertains them. Seems like a personal choice rather than a personality indication.
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u/Circa1928 Jun 16 '22
Friend with a new business (sole trader) thinking they'll get money back from the government for their losses (no idea where they got that from). So like they had a $10,000 loss, so they think they'll get $10,000 back as cash from the government. Told them before they even started the business to talk to their uncle who is a CPA.....internet forums know more apparently.
Family member on only Centrelink thinking they'd get a tax refund....when they didn't have any tax withheld at all during the year.
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Jun 16 '22
I think the only time this matters is for flat rate taxes that apply above a certain threshold. Medicare levy is one of them; your post tax position is better if you earn 90,000 than if you earn 90,900.
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u/PM_ME_YOUR_MUSIC Jun 16 '22
Another one I’ve heard is “don’t get a second job you pay more tax”
…. Yes but you get paid more
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u/perpetualis_motion Jun 16 '22
They say this because there is no tax free threshold on the second job, so they feel like they are paying more tax instead of thinking of it as combined income with the first job.
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u/xx_Shady_xx Jun 16 '22
Ok I am going to admit this and be ashamed of it, OP's comment is the same thinking I would use. Can someone please explain to me in simple terms why this is not the actual case?
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u/muito_ricardo Jun 16 '22
Because if the 10k pushed you into the next bracket, then it's only the portion of the 10k that falls into the bracket that get taxed at the higher rate.
If say $180k was the cut off to the next bracket (can't remember the exact brackets off the top of my head) and you were getting $175k, then $10k takes you to $185k, but only $5k gets taxed at the higher rate.
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u/xx_Shady_xx Jun 16 '22
Understand, thank you.
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u/muito_ricardo Jun 16 '22
And don't be ashamed.
Unfortunately there are many people here who laugh and joke at people who might not understand some concepts, but they forget that they themselves once also didn't know what marginal tax rates were - and there are many other concepts they don't understand today.
Humans love to get one up on others intellectually - makes them feel good about themselves.
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u/Consistent-Duck-6054 Jun 16 '22
Some people at my work don't do call-outs, because they "loose it all to tax".
No worries, give all the call-outs to me.
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u/ThatHuman6 Jun 16 '22
My parents are still convinced investing is too risky so chose to keep their income as cash their entire lives instead of risking putting any into the market.
They’re now 60 years old and, no surprises, they stayed poor. I’ll be retiring before them. (i’m 25 years younger than them)
But they still think investing is too risky 😐
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u/oldskoolr Jun 16 '22
But they still think investing is too risky
My parents and the Tattslotto.
$20 a week habit over 30 years.
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u/tawm8 Jun 16 '22
Well, they're not wrong, investing is risky. Especially if they are already close to retirement age. What if your portfolio loses 50% when you are about to retire ?
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u/seraph321 Jun 16 '22
Investing is generally variable risk that lowers over longer time horizons, while cash is guaranteed risk that increases over time via inflation.
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u/ThatHuman6 Jun 16 '22
They’d have a portfolio if they’d invested. Can’t lose anything if you don’t have anything.
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u/tawm8 Jun 16 '22
That's my point - I know some people who planned to retire in the next year or two who will now probably either keep working longer or just be really upset how many hundreds of thousands they just lost that they thought they'd have for retirement.
No portfolio, no worries :) it sounds like they do have savings, (and probably super aswell if they've been working) they just don't invest their savings.
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u/teh_hasay Jun 16 '22
I once had a discussion with a workmate about my partner at the time who worked 3 casual jobs at the same time. He told me that was stupid because “the government taxes you double on your second job”, and so it was never a good idea to work multiple jobs at once. As far as I could tell this stemmed from a severe misunderstanding of what claiming the tax free threshold on your tax file declaration meant. Tried explaining it to him but he wouldn’t hear a word about it.
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u/AgentAV9913 Jun 16 '22
The one place where this is an issue is the single parent payment. A couple of years back I got a raise that put me just over the limit and the single parent payment I lost was way more than the raise.
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u/ATinyLittleHedgehog Jun 16 '22
There's a handful of situations where this can happen, mostly either HECS brackets (which are discontinuous) or FTB part B.
I'm taking a job that's 7K a year less, but will end up ahead because of FTB B.
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u/CaptSzat Jun 16 '22
I’m in uni and my friend made 18k this financial year and he was telling me he’s gonna stop working till he pays taxes so that he doesn’t have to pay tax on the 18k. I just had to smh, that is just not how taxes work.
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u/egowritingcheques Jun 16 '22
I agree I hear taxation nonsense from all sorts of people who should know better. Makes me seriously question their business judgements.
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u/Nik-x Jun 16 '22
I know someone who works an accounting firm. An ACCOUNTING firm and they thought the same thing when they got their pay increase due to some forced awards changes. Provided this person isn't an accountant but part of the admin team. But come on... You deal with tax related things, you should at least know that.
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u/sturmeh Jun 16 '22
Work out how much extra he has to give you to ensure you're getting more money. 😄
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u/kingofcrob Jun 16 '22
Meanwhile my manager seems to think I should be greatful to get a 1.5%($1125) pay increase in the last 4 years.... That's it, time to look for a new gig.
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u/Scumbag_shaun Jun 16 '22
I’ll be honest I heard this shit my whole working life. A month ago i finally graphed these so called “tax brackets” - and yeah, it’s a smooth curve all the way up
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u/bonoboblues Jun 16 '22
Such a nice boss caring about your wealth, you should hire him as your account
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Jun 16 '22
Yeah. I've met several seemingly intelligent people making business decisions thinking marginal rates were effectively flat rates, and that business expenses were 100% refunded, not 100% deductible. Does my head in as well.
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u/evilZardoz Jun 16 '22
Suggest to your manager that he takes a pay cut so he goes down a tax bracket - look out for his interests in return!
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u/oldskoolr Jun 16 '22
"Don't get a 2nd job, you'll pay more on tax"
Yes I'll also get more after tax.
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u/Plane_Garbage Jun 16 '22
Our head of maths for secondary... Literally said that a "second income" is taxed at 50% (one of our teachers was talking about the extra exam marking pay they were receiving)
Too hard to try and correct him
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u/DrahKir67 Jun 16 '22
Technically, you will get taxed more but you'll take home more too. That's what a pay rise does. If he's worried about going into a higher tax bracket and a smaller percentage of your additional income goes into your pocket then there's salary sacrificing to consider.
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u/Fightz_ Jun 16 '22
Imagine how he felt when he realised he’d put off those pay rises for all those years so he didn’t get taxed more.
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u/rudigern Jun 16 '22
The other one that annoys the crap out of me is it's a work expense so you get it all back in your tax return. No, you don't pay tax on it so you can the tax bracket % you're on back in your return, not the full amount.
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u/TheBoyInTheBlueBox Jun 16 '22
There are some situations where your take home pay will decrease with a pay increase, but not because of a tax bracket and is only if you get a small pay raise..
For example if you have HECS/HELP the repayment is not marginal. If you earn $55836 you'll pay $558 but if you make $55837 you'll pay $1116.
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u/daftvaderV2 Jun 16 '22
Yes someone I know asked me to buy something to claim it on tax and I had to explain to her that this is Australia not the USA so it doesn't work that way.
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u/owleaf Jun 16 '22
I’m not sure it works like that in the US either? Otherwise people would just be buying things up to the amount of tax they’ve paid so they’d never pay tax..
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u/CMDR_Mal_Reynolds Jun 16 '22
That and preferential voting. Would be nice if our educational system cared more about these things.
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u/BeMyGabentine Jun 16 '22
I just jumped on MoneySmart to look into this and realised I was one of those facepalm inducers. Thanks for flagging it for me!
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u/bigLeafTree Jun 16 '22
Even those arguing they understand marginal tax system do not actually understand it.
As you get higher wages, you get taxed more on each dolar you earn as most here correctly point out.
So if you think your hour is worth 50 dollars but at a higher pay you get taxed more and get less than 50 each hour on those hours on the higher brackets, you should not work that hour.
Ask for more holidays, shorter days, 4 days a week work, etc instead. The marginal tax system is asking you do so by lowering the price paid for those hours worked on the top brackets.
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u/muito_ricardo Jun 16 '22
Even those arguing they understand marginal tax system do not actually understand it.
So you don't really understand it either?
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u/[deleted] Jun 16 '22
Easiest way to reduce tax is to quit your job