Tax debt, you might be next!

The New Financial Reality: Multiple Income Streams

Recent economic pressures have fundamentally changed how Australians earn their living. Many people now juggle several income sources to make ends meet - from traditional second jobs to side hustles, gig economy work, investments, and online businesses. While this income diversification helps many households stay afloat financially, it creates significant tax complications that often go unrecognised until tax return time.

How Your Tax Is Actually Calculated

One of the most common misunderstandings relates to how our tax system actually works. When you lodge your tax return, the Australian Taxation Office doesn't view each of your income sources in isolation. Instead, they add everything together:

• Your primary employment income
• Secondary or casual job earnings
• Self-employment or business income
• Investment returns (interest, dividends, rental income)
• Capital gains
• Cryptocurrency profits
• Certain Centrelink payments
• Foreign income
• Cash-in-hand or platform-based side hustles

This cumulative approach means your total taxable income might be pushing you into much higher tax brackets than you realised during the year.

Why PAYG Withholding Often Falls Short

For standard employment, your employer withholds tax through the PAYG (Pay As You Go) system. However, this system has significant limitations when dealing with multiple income sources:

1. Your primary employer withholds tax assuming it's your only income. They apply the tax-free threshold and calculate withholding based solely on what they pay you.
2. Second jobs or additional income sources stack on top of your primary income. This means they should theoretically be taxed at your highest marginal rate -which, from 1 July 2024, could be 30%, 37%, or 45% depending on your total income.
3. The tax-free threshold of $18,200 can only be claimed once. Many people accidentally claim it on multiple income sources, resulting in significant underwithholding.

The Health Insurance Factor

Another often-overlooked contributor to tax debt is the Medicare Levy Surcharge (MLS). If your income exceeds certain thresholds and you don't have adequate private hospital cover, you'll face an additional tax of between 1% and 1.5% on your entire taxable income - not just the portion above the threshold. These thresholds are: As of FY2025 (2024–25 financial year)

• Singles: $93,000
• Couples/Families: $186,000 (plus $1,500 for each dependent child after the first)

What makes this particularly problematic is that additional income sources might push you over these thresholds unexpectedly. For example, a single person earning $85,000 from their main job who makes an additional $10,000 from a side business would suddenly become liable for the MLS on their entire $95,000 income if they don't have private hospital cover.

The Most Common Tax Debt Scenarios

Based on our experience helping clients manage their tax affairs, these are the most common situations leading to unexpected tax debts:

• Working Multiple Jobs: When you work two or more jobs simultaneously, your secondary employers often don't withhold enough tax. If you've claimed the tax-free threshold on your primary job (as you should), your second job should theoretically have tax withheld at much higher rates. Many people don't realise they need to complete a withholding declaration form differently for their second job, or they may need to request additional tax be withheld from their salary.
• Side Businesses Without Proper Tax Planning: Starting a small business or side hustle while maintaining regular employment is increasingly common. However, unlike employment income, business income doesn't have tax automatically withheld. Without implementing a system of setting aside money for tax or making voluntary quarterly tax installments, many self-employed people face a significant tax bill when their business profits are added to their other income at tax time.
• Crossing Tax Thresholds: Our tax system has various thresholds that trigger additional obligations:
• 1. Higher marginal tax rates as your income increases
  2. Medicare Levy Surcharge thresholds
  3. HELP/HECS debt repayment thresholds
  4. Family Tax Benefit and other government payment thresholds

A relatively small amount of additional income can sometimes trigger disproportionately large tax consequences if it pushes you over one of these thresholds.

How to Avoid an Unexpected Tax Bill

The good news is that with proper planning, most tax debt scenarios can be anticipated and managed:

• Understand your actual tax position. An ITP tax professional can help you project your total annual income and likely tax obligation across all income sources.
• Adjust your withholding. If you have multiple jobs, you can submit a PAYG withholding variation form to request additional tax be withheld from your salary, or adjust how you complete your Tax File Number Declaration.
• Set aside money from non-withheld income. For business income, investments, or other sources without automatic withholding, establish a separate account where you regularly deposit a percentage of your earnings for future tax obligations.
• Consider voluntary installments. You can make voluntary tax payments throughout the year using the ATO's payment facilities.
• Review your private health insurance needs. If your income is approaching MLS thresholds, compare the cost of basic hospital cover against the potential tax implications.
• Get professional advice early. A tax professional can help you structure your affairs optimally and prevent nasty surprises at tax time.

Don't Wait Until It's Too Late

Tax debt issues are much easier to manage proactively than reactively. If you've recently taken on additional income sources or your financial situation has changed, seeking professional tax advice should be a priority. Remember that tax planning isn't just for the wealthy - it's increasingly important for everyday Australians juggling multiple income streams in today's complex economy. A small investment in professional advice now could save you from a significant tax headache later!