If you’ve been living under a rock, Australia has had an income tax since 1942! Robert Menzies first introduced it as part of his wartime coalition government’s budget.
Nowadays, it is managed by the Australian Taxation Office (ATO), which collects about $350 billion per year from taxpayers around Australia.
The Australian Taxation Office (ATO) is the government organisation that collects taxes for the Australian Government. They are responsible for administering all tax legislation and regulations and collecting income tax on behalf of the federal government.
The ATO provides plenty of information about how Australians should file their income tax, but some aspects may not be clear or easy to understand. This guide will provide a complete overview of what you need to know so you can get your taxes done without any stress!
Australia is a popular destination for many people around the world. From Sydney to Uluru, there’s plenty of amazing attractions that make it a worthy trip even without considering all the sights and sounds that this beautiful country has to offer.
However, before you go on your Australian adventure, it’s important to know what can happen when you get home.
Even if you’re just visiting for a few weeks or months, the Australian Tax System should be something that interests you because not understanding how income taxes work might result in some unwelcome surprises when tax season rolls around again! So, in order to help our readers better understand how taxes work in Australia, we’ve put together a complete guide detailing everything.
Taxes are one of the most dreaded parts of adulting. But if you’re an Australian, it’s not all bad news! Many different factors determine your tax rate, and this complete guide will help you figure out what they are.
The first step is to work out how much income you have in a year – do this by adding up all your wages, business profits, investment interest etc.
Next, find out what type of income it is so we can calculate your tax bracket: wages or salary typically fall into the lowest bracket with a rate of 19%, while other types of income like rental income falls into higher brackets with rates ranging from 32% to 45%.
The Australian Income Tax System is a complex one, and there’s a lot to learn in order to be fully compliant with the law. In addition, the penalties for non-compliance are severe – up to $180k in fines or five years jail time!
This blog post will give you all of the information you need on the Australian Income Tax system so that you can avoid these hefty fines or prison sentences.
Let’s get started!
Understanding the Australian Income Tax System
1. What is income tax?
Income tax is the most significant stream of revenue in the tax system; it consists of three main pillars:
- Personal earnings
- Business earnings
- Capital gains
Income tax is applied to an individual’s taxable income and is paid on all forms of income. This includes wages from your job, profits from business and returns from investments. Income tax can also apply to assets such as when a house or shares are sold.
2. Income tax rates
Australia has a progressive tax system, which means that the higher your income, the more tax you pay.
You can earn up to $18,200 in a financial year and not pay tax. This is known as the tax-free threshold, and after which, the tax rates kick in.
The lowest rate is 19%, and the highest rate is 45%, which is only charged on income over $180,000. So most Australians sit in the middle bracket.
You are also taxed on superannuation contributions and earnings, and there are several tax benefits to paying money into your fund.
Working holidaymakers (visa types 417 and 462) pay 15% on all income up to $45,000, then resident rates on all income from $45,001 onwards.
3. Lodging your return
Lodging your tax return can be done anytime after the 30th of June, and the absolute deadline for self-lodgement is the 31st of October.
Whilst there is the option to the self lodge, it is best to go through a tax agent to ensure everything is filled out correctly and you receive the best return possible on time.
In order to ensure the lodgement process is as smooth as possible, make sure you have all your important documents together before coming in for your appointment or lodging online.
Filing away important receipts, invoices and documents throughout the year will save you a lot of time when it comes to completing your return. However, it’s also important to ensure all your details are up to date.
If you’ve moved or changed your name, these details need to be updated with the ATO. Minor errors like these can hold your return up for weeks or even lead to fines.
If you’re retired or have access to your super fund, you must be fully aware of your tax obligations. People of different ages have different levels of obligations when it comes to tax on superannuation withdrawals.
Any money spent as part of your work is tax-deductible. If you spent money on something to allow you to do your job, you are entitled to claim that cost as a deduction.
For example, travel expenses for work purposes or the cost of uniforms. In addition, if you use your personal laptop, desktop, tablet or phone for work, you can claim a deduction for work-related use of the device.
It is important to remember only to claim what you’re entitled to. Private expenses or any costs that your employer reimbursed cannot be claimed. Claiming what you’re not entitled to can lead to fines and a stressful audit by the ATO.
Top 6 Forgotten Tax Deductions
1. Tax Agent Fees Are Also A Tax Deduction
Did you use another tax agent to prepare and lodge your tax return last year? If you did, then you can claim the amount you paid last year – on this year’s return.
Simply put the amount you paid last year into the “Cost of Managing Tax Affairs” section on your tax return. The fees you pay for tax return help are always tax-deductible.
2. Union/Membership Fees Are Tax-Deductible
Are you part of a union? How about a membership body related to your profession? If you pay work-related union or membership fees, you can claim the total cost of these fees.
3. Claim Work-Related Car Expenses
If you are required to use your personal car for work-related reasons, apart from driving to and from work, you can usually claim fuel and maintenance costs as a tax deduction.
There are two methods for calculating this deduction – you can either keep a 12-week logbook (which generates numbers you can re-use for five years!) or the cents per kilometre method.
The ATO defines work-related kilometres as kilometres travelled in your car while you are earning your income.
To be eligible, you must be the car owner, and your travel must be part of your working day – e.g. driving between offices, special trips to the post office or bank (not including stop-offs on the way home) or moving from one job site to another.
Remember, you cannot claim trips between work and home unless you’re carrying heavy equipment for work or transporting heavy tools required to do your job.
Depending on your personal circumstances, either a logbook or the cents per kilometre may be a better method for you.
4. Claim Home Office Expenses
Do you ever find yourself working from home? How about checking and responding to your work emails in the evening or on the weekend? If you do, then you may be able to claim the cost of using your personal computer as a tax deduction.
The ATO allows employees who occasionally work from home to claim part of their home office expenses.
Even better, if you work entirely from home (either self-employed or as a home-based employee), you can typically claim the “occupancy cost” of your home office space as a tax deduction. These expenses can include software, equipment, furniture and a percentage of your rent/mortgage and electricity.
The details on this can get a bit complicated, so it’s a good idea to trust your accountant to help get it right. Just give them honest info, and they can take it from there to boost your tax refund.
5. Mobile Phone Tax Deduction
Using your personal phone to take and make work calls? Are you sometimes required to call clients or other staff members on your personal mobile phone?
If you answered yes, then you generally can claim the cost of these calls as a deduction on your tax return.
Remember, you can only claim the cost of your work-related calls and data use, not your entire phone bill. Therefore, it’s a good idea to keep a logbook or record (for at least one month) of when you use your personal phone to determine the average percentage of your calls that are work-related.
George pays $49 per month for his mobile phone plan. He estimates that 50% of his monthly phone calls are work-related. Therefore:
- 50% of $49 = $24.50 per month
- $24.50 x 12 = $294 per year
George can claim $294 on his tax return as a deduction for mobile phone expenses.
6. Internet Expenses
If you are required to work from home, and you have your internet connection in your name, then it’s likely you can claim part of your internet expenses as a deduction.
How? Simply calculate your monthly work use across one full month, then calculate the work-related portion as a percentage of the total household use.
Sally lives on her own and pays $60 per month for her internet connection in her name. She kept a log for a month and found that 40% of her home internet use is for work purposes.
- 40% of $60 = $24 per month
- $24 x 12 = $288 per year
Sally can claim $288 of Internet deductions on her tax return this year.
Please note: If you share the cost of the internet with a spouse, partner or housemate, you should only calculate the percentage of total internet cost that applies to you.
For example, if you live with your partner, it would be assumed, you each pay half of the bill. Therefore in the example above, Sally would only use 50% of the total Internet cost ($30 per month) in her expenses calculation as her partner would use the other 50% on their tax return.
Can You Still Claim your Handbag or Briefcase as a Tax Deduction?
The short answer is yes; you can claim your handbag as a tax deduction. But don’t go shopping just yet! There are some important things to keep in mind.
The basic rule for claiming a handbag or briefcase as a tax deduction must be directly connected with producing your income.
1. So, what are the rules when claiming your briefcase or handbag as a tax deduction?
There are no hard and fast rules about what is or isn’t allowed. But, thinking along a spectrum helps.
If the bag being transported back and forth from home to work each day is a small clutch that holds a phone, a few cards, and house keys, that will probably not cut it.
The same goes for a bag that holds a change of clothes for a gym session after work. Those items are not work-related, and therefore the bag that transports them is not an allowable deduction.
On the other end of the scale, think of an office worker who works in a “hot-desk” environment. Their work requires them to transport a laptop or tablet to and from work each day.
To protect their expensive piece of machinery, the worker purchases a backpack or modern handbag with a compartment specifically designed to protect laptop computers against damage.
That employee is far more likely to be able to claim the cost of their handbag as a tax deduction. Again, this is because there is a clear connection between the purpose of their bag and their work activities.
2. Keep Your Records in Order
The first step to claiming your handbag or briefcase as a tax deduction is to keep your receipt. Snap a photo or get an electronic copy of the receipt sent to your email.
If the bag costs above $300, you will need to depreciate it rather than claiming the amount in full on your next tax return. You can save that receipt right into your account, so you don’t forget to claim it in July.
The other simple rule to remember is that you must have spent the money yourself. So, for example, if an employer provides a company-branded laptop pouch free of charge or reimburses you for your purchase, then you can’t claim it as a deduction on your return.
3. Caution Required
The ATO has been very public in saying that it will be looking much more closely at work-related tax deductions. They say too many people claim deductions they are not entitled to.
This doesn’t mean you shouldn’t claim a handbag or briefcase as a tax deduction if you have a legitimate claim. But, if you’re not sure, always ask your tax agent for advice!
Tax Rules on Claiming Donations and Gifts
When you make a gift, you do not receive a material benefit in return for your payment. This is contrasted with a contribution (for example, purchasing a ticket to attend a fundraising dinner) where you receive a benefit in return.
For you to claim a tax deduction for a gift, it must meet these conditions:
- The gift must be made to a deductible gift recipient (DGR).
- The gift must truly be a gift. A gift is a voluntary transfer of money or property where you receive nothing in return.
- The gift must be money or property, which includes financial assets such as shares.
1. How much to claim
For gifts of money, you can claim a deduction where the amount of the gift is $2 or more. For gifts of property, there are different rules, depending on the type of property and its value.
You can claim the deduction in the tax return for the income year in which the gift is made.
Your receipt – which you will need to substantiate the deduction – should tell you whether or not you can claim a deduction.
If you used the internet or phone to donate $2, your web receipt or credit card statement could be used to substantiate the deduction.
If you donated through third parties, such as banks and retail outlets, the receipt they gave you is also sufficient. If you contributed through ‘workplace giving your payment summary shows the amount you donated.
2. Bushfire and flood donations
Make donations of $2 or more to bucket collections conducted by approved organisations for victims of natural disasters, such as bushfires, severe storms or flooding. You can claim a tax deduction for these contributions without a receipt, provided the total of these contributions does not exceed $10.
3. What you can’t claim
You can’t claim as a gift or donation anything that provides you with a personal benefit, such as:
- raffle tickets
- items such as chocolates and pens
- the cost of attending fundraising dinners, even if the cost exceeds the value of the dinner (but see below)
- payments to school building funds made, for example, as an alternative to an increase in school fees
If you attend a fundraising event, you may still be able to claim a tax deduction even though the payment you have made is not regarded as a gift for tax purposes.
You can claim a portion of your contribution to the event as a tax deduction if the contribution is for an eligible fundraising event, organised for a DGR and conducted in Australia, including fetes, balls, gala shows, dinners, performances and similar events.
If you contribute money (such as buying a ticket), you can only claim a deduction if the amount spent is over $150.
If you contribute property, the property must be valued at more than $150 (if purchased within 12 months of contributing) or $5000 (if purchased more than 12 months before the contribution).
In addition, the market value of the benefit received must not be more than $150 or 20% of the contribution made (whichever is less).
Fundraising events held by political parties are ineligible for this concession. If the contribution is made to a political party.
5. Political contributions
Political parties are not DGRs. However, in some circumstances, gifts and contributions made by individuals to political parties and independent candidates and members can be claimed as an income tax deduction.
To claim a deduction, contributions must be more than $2. The most you can claim is
- $1,500 for contributions and gifts to political parties and
- $1,500 for contributions and gifts to independent candidates and members.
Businesses can’t claim deductions for political contributions.
Ironing Out Laundry Expenses for Uniforms
The way you calculate your laundry expenses will depend on how you clean your uniform.
1. Some important details about laundry expenses
If you choose to use the “per load” method for your claim, we recommend you keep the details of:
- the number of times you washed your clothes during the year and,
- the types of clothes you included per load.
You must have written evidence (e.g. diary entries or receipts) if your claim for laundry is greater than $150 and your total claim for all work expenses is more than $300.
2. Did you receive a laundry allowance from your employer?
If you received an allowance from your employer for laundry expenses, you must include this on your tax return as it is considered part of your income.
You can still claim a deduction even if you have received an allowance, but you must claim the deduction for the amount you actually spent, not the amount of your allowance.
Therefore, if your allowance was $200 for the year, but your laundry and uniform expenses only amounted to $150, you would claim $150. On the flip side, if your allowance was $200 for the year, but your expenses were $250, you would claim the full $250.
Easy Ways to Reduce Your Taxable Income in Australia
You’re guaranteed two things in life – death and taxes. While taking care of your physical and mental health can lead to a longer, healthier life, financial planning and strategising can reduce your tax liabilities.
Everyone wants to pay less come tax time. For those looking into debt consolidation and credit repair, learning how to reduce your taxable income can keep more money in your pocket and help you pay off your debts faster.
1. Use Salary Sacrificing
For those trying to learn how to save tax in Australia, salary sacrificing is one way to do it. This is also called “salary packaging,” and it works a few different ways.
With salary sacrificing, a taxpayer would put some of their pre-tax income toward a benefit before taxing. Some of the most common salary sacrifice benefits are motor vehicles and superannuation.
So, an employee would forgo part of their pre-tax paycheck before they get it. For example, they could use salary sacrificing to pay for a new car, computer, insurance, rent payments, mortgage payments, and other benefits.
These benefits are also referred to as “fringe benefits“. They can save Australians thousands of dollars in taxes every year, with a few exceptions.
For one thing, there is a limit on what can be salary sacrificed, also called salary packaged. Also, Fringe Benefits Tax, or FBT, can impact the types of benefits your employer offers. For example, employers will offer to salary package a car as a novated lease.
This is an agreement between your employer, you, and a financer and is one way to get access to a new car while reducing your taxable income. Of course, if you want to increase your refund this year, you could also consider salary packaging your superannuation too.
2. Keep Accurate Tax and Financial Records
The ATO is far more likely to ask many questions about your tax deductions than they were a few years ago. If they ask about your deductions, you’ll need to show them receipts for tax deduction claims.
Unfortunately, not having a sound filing system can cause a lot of headaches for your tax time. This is because so many Australians miss deductions they can legally claim because of a lack of sound record keeping. If you make this mistake, the ATO will keep your hard-earned money that should have stayed in your pocket.
Many people wonder if they have to keep track of every single deduction. But the best thing to do when it comes to claiming deductions and satisfying the ATO is to keep track of the deduction receipts. This will make it easier for you to remember what you can claim. Record-keeping doesn’t have to be complicated.
Dedicate ten minutes of your time each week to download statements and update your logbooks. Make sure you keep all your receipts in a conveniently accessed, organised, and easy-to-use file folder or filing cabinet.
Keeping accurate tax records will save you a lot of time searching for everything at the end of the fiscal year, and best of all, you’ll be able to claim your deductions and ultimately pay less in taxes.
3. Claim ALL Deductions
If you spend any money on anything related to earning income, you’ll want to claim it. Be sure you declare all deductions possible to pay less tax in Australia. Even things that may seem small and insignificant can add up to huge savings at the end of the financial year.
For example, if you purchased something that is used for work, but you also sometimes use it during your time off the clock, you can still claim the money you spent on it as a work-related tax deduction.
If you’re unsure whether or not you can claim a specific item as a work-related tax deduction, keep the receipt of purchase and ask your tax agent when you file. It’s always better to hang on to receipts and not be able to claim the item than to toss the receipt and miss out on tax savings.
4. Feeling Charitable? How to Pay Less Tax with Donations
Every donation you make to a registered charity greater than two dollars is considered tax-deductible. After donating, the organisation should send you a receipt. Make sure to file that away for tax season.
Once tax time rolls around, add your charitable receipts and enter that into the “charity donations” section in your tax return.
But remember that donations do not come back via a tax refund. Instead, the monetary gift amount is reduced from your total taxable income, meaning you’ll get back a percentage of the donation.
5. Minimise your Taxes with a Mortgage Offset Account
If you have a home loan, a mortgage offset account lets you offset your non-deductible interest on the home loan with interest on the standard, taxable earnings of money in a deposit. With this arrangement, taxpayers can create a savings account with their lender.
But instead of paying interest on the entire amount of the home loan, taxpayers are charged interest on the loan, minus the money in the savings account.
6. Add to Your Super (or Your Spouse’s) to Save Tax in Australia
Concessional super contributions are taxed at a rate of 15 per cent once they enter a super fund. This is different than if they were taxed at a marginal rate, which is sometimes as high as 49 per cent.
What are the different types of concessional contributions you can make? For example, you can make the following concessional contributions to lower your taxes:
- Salary sacrificing
- Personal deductible contributions
There is no income tax limit on salary sacrifices. Self-employed taxpayers or unsupported taxpayers can make contributions to their supers and also claim a full tax deduction.
7. Get Private Health Insurance
You should only do this if it makes sense. For example, if you don’t carry private hospital insurance, but you’re single and make more than 90,000 dollars a year, or you’re a family and make more than 180,000 dollars per year, you will pay a minimum of one per cent Medicare Levy Surcharge.
The Medicare Levy Surcharge is also collected on top of a mandatory two per cent Medicare Levy that most taxpayers have to pay anyway.
Basic, private healthcare plans can cost less than the one per cent of Levy Surcharge on your gross income, which would be less than the Medicare Levy you’d pay without insurance.
For some people, private healthcare might be worth it to lower your taxes. Depending on your needs and medical history, it might also be worth it for the often shorter wait times you’ll get with private healthcare.
8. Minimise Capital Gains and Minimise Taxes
Any significant assets sold in a given financial year, such as shares, or property, are subject to a capital gains tax. If the investment has been held for at least one year, you’ll be charged a 50 per cent capital gains tax on top of your marginal tax rate.
Capital gains taxes have to be paid in the year they are realised. However, losses can be carried forward, but not back. Taxes payable within the financial year can also be decreased if you prepay deductible interest.
On investments, you can prepay expenses up to twelve months in advance. So, interest on investment loans and management fees can be claimed this financial year. If you have a substantial tax liability from the sale of an asset this fiscal year, prepaying can help you save money on taxes.
When it comes to taxes and property, another tax exemption from Capital Gains Tax is if your property is your principal place of residence or PPOR.
You can claim the principal residence exemption from Capital Gains Tax for your house. To get it, you’ll need to have lived in the house, or the property must have a dwelling on it that you live in. Learn more about how to reduce Capital Gains Tax for property used for business and investment purposes.
9. Prepay Expenses
If you pay for some income-related expenses in advance, it can reduce your taxable income by moving your deductions forward to the next financial year.
This will give you a higher tax refund. All prepaid expenses need to be less than a thousand dollars or meet the 12-month rule for prepaid expenses.
The 12-month rule lets you claim a deduction as a prepaid expense if the service doesn’t exceed twelve months and stops in the next financial year.
10. Delay Income
Learn how to reduce tax with this neat little trick. You can defer receiving income until the 30th of June, which will help you avoid paying taxes in the current financial year.
11. Don’t Include Non-Taxable Income
The ATO considers some income that is exempt or non-taxable, and you don’t want to include it on your tax return. But, certain exempt income could be taken into account when tax losses of earlier income years are calculated.
You can deduct some income and the adjusted taxable income of any dependents you have. Exempt or non-taxable income includes the following:
- Some Australian Government pensions, including disability support pensions from Centrelink to those who are younger than pension age
- Some Australian Government payments and allowances, e.g., the childcare subsidy and carer allowance
- Overseas pay and allowances for Federal Police personnel and Australian Defence Force
- Australian Government education payments, including allowances for students younger than sixteen
- Specific scholarships, awards, and grants
- Lump-sum payments from the surrender of an insurance policy, mortgage protection, or as payment for a terminal illness or work-related injury
12. Make Use of Offsets
Tax offsets, also known as tax rebates, can reduce your taxable income if you meet certain eligibility requirements. While, in theory, these offsets could reduce your tax bill to zero, they won’t get you a tax refund. Income tests are some of the most common tax offsets.
13. Meet ATO Deadlines
If you register with a tax agent, tax returns can be lodged as late as May of the next financial year if you aren’t in dispute with the Tax Office.
But for everyone else, all returns must be lodged by the 31st of October. Meeting all ATO deadlines can help you avoid conflicts and penalties. Self-lodgers with simple finances and circumstances typically submit their taxes online with the Tax Office.
The account will be populated with your previous year’s return and any information provided from your bank, workplace, government agencies, etc. The Tax Office collects this information until the beginning of August, so you’ll want to wait until after that to lodge online.
14. Follow the Rules
Paying taxes can indeed be a painful experience, but fudging the numbers and breaking the rules will set you up for trouble down the road.
Taxpayers who have tried to make deductions that weren’t true have gotten into hot water with the ATO. As a result, the ATO will investigate large and sometimes small tax deduction claims that look suspicious.
15. Use a Tax Agent
A professional tax agent can save you a lot of time when it comes to lodging your taxes. They also have inside knowledge and industry expertise on taxes and refunds. By hiring a tax agent to help you with your taxes, you’ll get the largest tax refund possible without running afoul of the ATO.
If you’re learning more about credit repair and trying to reduce debt, lowering your taxable income and getting a refund at tax time can keep more money in your account. Instead of giving that money to the taxman because you didn’t know what deductions you could take, you can use that refund to pay off debts and rebuild your credit faster.