The amount of tax you pay is a major consideration from the day you get your first pay slip. The type of job you do will have a big influence on the things you can claim and the amount you pay. Being self-employed will also have an impact on the way you pay tax and the way you manage your finances.
Another thing that will chip into your pay packet is your superannuation. You can choose to contribute as much as you want, but the minimum contribution is 9% of your income, which is paid directly by your employer and generally you can't access this money until you retire. Following recent law changes, you have the freedom to pick the fund of your choice, as well as where the fund invests your money. This gives you input into its performance.
Like most financial matters, you don't need to be an expert (there's plenty of them already), but it's wise to keep a grip of tax and super, so there are no major surprises.
Tax by numbers
How much you pay depends which tax bracket you're in. Once you're a high-flyer, you'll pay a higher rate of tax. While you're a lowly junior in your first job, you'll pay less tax. Here's how it works for 2008-09:
The good news is you pay no tax on the first $6,000 you earn, but after that you pay:
15% on your taxable income between $6,000 and $34,000
30% on your taxable income between $34,001 and $80,000
40% on your taxable income between $80,001 and $180,000; and
45% on anything you earn over $180,000 (even if you feel that's a very long way off yet!).
These rates do not include the Medicare levy of 1.5% which applies to your total taxable income.
Tax File Numbers are issued by the Australian Taxation Office so they can keep track of your tax records. As numbers go, this one's pretty important.
Why your Tax File Number is so important
You need to quote your Tax File Number quite a bit. While you don't have to quote your tax file number, if you don't, you could lose out on all sorts of tax breaks and benefits.
For starters:
* You should discuss any tax questions you have with an independent tax adviser
Did you know?
Your Tax File Number is unique to you and is yours for life. Yes, even if you change jobs, work overseas for a bit, move interstate or change your name, your trusted Tax File Number will stay just the same. Learn more at the Australian Tax Office web site.
Depends on what sort of lifestyle you want
The Association of Superannuation Funds of Australia Limited (ASFA) did some research and here's what they found.
If you want have a 'modest' lifestyle when you retire, you will need approximately $18,000 (in today's dollars) per year as a single person, or $25,000 for a couple. This is assuming that you also own your own home when you retire. It's not a lot if you want to enjoy life's luxuries.
Like something more 'comfortable' so you can continue to live in the manner to which you have become accustomed? Some overseas or interstate travel, be able to update your computer when you want, buy a digital camera, afford your phone bill, and still eat at your favourite restaurants? You'll need approximately $34,000 for a single person and $46,000 for a couple. The bigger your plans, the more you'll need to put aside.
These days most people are living healthy active lives well into their 80s. To keep you going during those years you'll probably need around $370,000 by the time you retire at 65 to be reasonably comfortable - around $30,000 a year or around $577 a week.
The current 9% mandatory super contribution won't be enough for most people. The earlier you take an active interest in how much you should be putting into super, the more you'll reap the rewards later on.
What about the pension?
As the Australian population ages there will be fewer taxpayers to fund the aged pension relative to the number of retirees. By the time you reach retirement, access to the pension may be very limited. Planning your retirement with the hope of living comfortably off the pension is probably not realistic. Today, the aged pensions will give you just over $230 per week.*
Whatever your circumstances, you may want to talk to a financial adviser and make sure you're taking care of your future. The earlier you start, the better off you'll be.
Government co-contribution scheme
Essentially, anyone earning less than $58k is eligible can receive an effective return on investment of 150% on their superannuation contributions of up to $1,000.
*Age pension rates from 1 July 2004, source: www.centrelink.gov.au
5 tips for choosing the right super
1. Learn the fees and costs
You need to keep fees and costs down to a minimum. Over 30 years, even a difference of 1% between funds could mean that you have thousands less when you retire. For example, if your fees are 2% rather than 1%, your super could be reduced by 20%, or $20,000, over this period of time.
2. What about investment performance?
Unless you have a crystal ball it's impossible to know how well a fund will perform in the future. But, chances are if it's got a good track record, you're less likely to come unstuck.
3. Find out if your fund offers insurance
Some funds will offer you cover for various situations, like if you're too sick to work. Shop around, check about medicals and waiting periods and compare costs.
4. Can you choose where your super will be invested?
Some funds allow you to take an active role by asking you about what level of 'risk' you're comfortable with. (If you want big returns on your money you have to select an investment with a higher risk, meaning it could do really well or it could actually lose money, too.)
5. What's the follow-up service like?
Is there a useful web site or a helpline, and will you get regular statements?
You might not think you've got much super, but if you've ever worked casually, there might be some super funds floating around with different companies. Try and move them to just one spot. For a start, you'll only pay one set of fees and you'll be able to track it. Try the Australian Taxation Office's free SuperSeeker tool which instantly provides possible matches for lost super using your tax file number, name and date of birth.