Is your client required to lodge a tax return?

When entering paid employment, it’s not long before we are told that we’ll need to lodge a tax return.

With automation and online communications, a notification that you have a new message on myGov will ordinarily alert an individual who had not otherwise realised.

There are circumstances however where an individual may be excepted from the requirement to lodge a return, and a financial planner may be asked for assistance as retirees are a group that are more often within the bounds of the exceptions.

This article examines the legislative mechanisms for both the requirement to lodge a return, and the exceptions that exist to that requirement.

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Who needs to lodge?

s 161(1) Income Tax Assessment Act 1936 contains the authority for the Commissioner of Taxation to make a legislative instrument for each financial year that requires individuals to lodge a tax return.

s 161(1A) ITAA36 allows the Commissioner of Taxation to include in this instrument an exception from the requirement to submit a return for people who are not liable to pay income tax.

The Commissioner ordinarily makes two instruments for each financial year.

The primary instrument (https://www.legislation.gov.au/Details/F2022L00508  is the legislative instrument for the 2022 financial year) requires every person in a series of tables in the instrument to lodge a return. The tables then contain exceptions to these broad requirements.

The second instrument is made each financial year to require parents with a child support assessment to lodge a return (https://www.legislation.gov.au/Details/F2022L00509 ). This is because Australia’s child support assessment system relies on taxable income to determine whether amounts are payable, even where no income tax may be payable.

There are a wide range of circumstances that are covered by the tables in the primary instrument. For the purpose of this article, we have focussed on those that are most likely to be applicable to individuals or couples who would be working with a financial planner, and who may not have a regular engagement with their own accountant or tax agent.

Examples of the individuals who are required to lodge a return are any person who has:

• Had an amount withheld from payments under the Pay As You Go (PAYG) withholding system (table A(1));
• Incurred or is entitled to deduct a tax loss (table A(2));
• Made a net capital loss, or is able to apply a net capital loss carried forward from previous financial years (table A(3));
• Earned income above $416, is under the age of 18 for the whole financial year, and that income was not from personal exertion (table A(9));
• Paid PAYG instalments (table A(11));
• An entitlement to a private health insurance tax offset, but didn’t claim this as a premium reduction from their insurer (table A(13));
• Received either a reportable fringe benefit, or has reportable employer superannuation contributions (table A(14));
• Received assessable income from dividends, distributions and franking credits that exceed the tax-free threshold (table A(15));
• Are eligible to receive a co-contribution benefit (table A(16));
• Exceeded either of their concessional or non-concessional superannuation contribution caps (table A(17));
• Received a superannuation lump sum that contains taxable (untaxed) component at any time or a taxable (taxed) component when aged under 60 (table A(18)).

The requirement to lodge outlined above is then subject to several conditions that may exempt an individual from the requirement to lodge. This is not a complete list of those exemptions, but a summary of those that are more likely to apply to an individual working with a financial planner:

• Those in receipt of various social security payments such as JobSeeker, Youth Allowance, or Parenting Payment, and had either no other assessable income, or taxable income less than $21,885 (table K(1))
• Any individual who qualifies for the full amount of Seniors and Pensioners Tax Offset (SAPTO) (table K(2))

In practice

There are some scenarios from the above that may mean it’s relevant to discuss whether there is a need to lodge a return with your client:

• A single instance of PAYG withholding will require an individual to lodge a return, so a client in receipt of an age pension who undertakes casual work, especially if hours are concentrated into a single pay period, could have income tax withheld even when they would have no income tax liability for the financial year. This would create a need to lodge that may be avoided if appropriate withholding declarations are completed.
• An individual or couple where one or both have assessable income that is greater than the tax-free threshold, may still be exempt from lodging if they are eligible for the full Seniors and Pensioners Tax Offset (SAPTO).
• Individuals who have retired after the age of 60 without a source of income other than superannuation, may no longer need to lodge a return.
• If a client who would otherwise not be required to lodge a return, is not claiming their private health insurance tax offset directly from their insurer.
• Clients with certain tax offsets (eg, those payable on untaxed defined benefit pensions) may not have a net tax liability due to those offsets, but may still exceed the prescribed thresholds and need to lodge a return.

Advising on the requirement to lodge

When dealing with tax, financial planners should always be mindful of staying within the bounds of what their licensing allows.

Tax Agent Services Act 2009 distinguishes between a tax agent service (s 90-5) and a tax (financial) advice service (s 90-15). A financial planner is able to provide a tax (financial) advice service, but is unable to provide a tax agent service unless they separately hold this registration.

The primary distinction between the two is that only a tax agent is allowed to:

• Represent an entity in their dealings with the Commissioner of Taxation (s 90-5(1)(a)(iii); or
• Prepare an income tax return (s 90-15(3)(a))

Both services however include a definition that covers advising an entity about their obligations (ie, to lodge an income tax return) under a taxation law. This means that a financial planner who is covered by the tax (financial) advice registration is able to advise a client on whether they are required to lodge an income tax return.

If the client has an existing tax agent relationship, it would be prudent to refer the question to that professional as they would be involved in the preparation of the return itself. If a financial planner does not have the expertise to determine whether an income tax return is required, a client may also be directed to the ATO’s Do I need to lodge a tax return tool.

A final consideration in working with a client who is no longer required to lodge may be highlighting to them that it is an assessment of eligibility each financial year. Many may have similar circumstances for long periods, particularly in retirement, that means they remain within the exemptions from lodging.

Changes such as the following may however mean that an exemption does not apply, even if only for a single financial year:

• Undertaking part-time or seasonal employment; or
• Downsizing their home and investing excess capital; or
• Receiving some death benefits from superannuation, where they are not a tax dependant.

By helping your clients to understand the need to be aware of these changes, or incorporating them into the checks you do as a part of a regular financial planning review, your clients’ tax affairs will remain complete and up to date.

Anzac Flint is an accountant and Michael Miller CFP® is a financial planner at Capital Advisory.