Start-ups urged to be wary of tax-free threshold “trap”

Entrepreneurs who operate a business part-time could be hit by changes to the tax-free threshold, with an expert warning anyone with more than one income source could be caught in a tax trap.

From July 1, the tax-free threshold increased from $6,000 to $18,200. However, you can only claim the tax-free threshold from one employer at a time.

“If you claim the threshold more than once, it will likely result in you not paying enough tax for the income year,” the Australian Taxation Office warns on its website.

“This may result in a large tax bill.”

Frank Brass, regional director of H&R Block, says in light of the increased tax-free threshold, taxpayers who work two or more jobs concurrently could receive an unexpected tax bill.

“Changes to the tax-free threshold can cause taxpayers to have a tax bill if they have more than one job or source of income,” Brass says.

“The problem occurs even if the taxpayer and the employers do the right thing – as determined by ATO tax scales.”

“The cause is 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.”

Brass explains that as an employee, you are required to complete a tax file number declaration with each employer.

“But as you can only claim the tax-free threshold for one job, most employees claim it with the employer they earn most income from,” he says.

“Assuming a taxpayer has one job earning $60,000, their employer would deduct their tax and Medicare levy to the value of $11,960. This would leave them with no tax bill.”

“If a taxpayer worked two jobs at $30,000 and complied with all ATO tax prescriptions, they would pay $2,652 in the first job and $7,956 in the second.”

“This amounts to $10,608 and would leave them with a tax bill of $1,352.”

Brass says 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 tax deducted, the second $4,524 and third $4,524. This amounts to $9,360 tax and leaves a tax shortfall of $2,600,” he says.

Brass says taxpayers should ask one employer to take out an additional amount in order to cover their liability.

“So if your shortfall is $2,600, go to one employer and say, I want you to take out $50 a week to over it,” he says.