In 2021 Tax Tips

A Guide to Taxation in Australia

Did you know that Australia has some of the most complex tax laws in the world? Trying to navigate your way through the Australian taxation system can be daunting, especially if you’re not familiar with it. 

In this blog post, we’ll provide a guide to taxation in Australia, including information on how to lodge a tax return, what deductions you may be able to claim and more. So if you’re looking for information on Australian taxes, you’ve come to the right place!

There is a lot of information to take in regarding taxation in Australia. This guide will provide an overview of the different types of taxes and how they apply to individuals and businesses. It is important to be aware of your tax obligations to ensure you are paying the correct amount and avoid any penalties. 

If you’re an Australian taxpayer, it’s important to understand the country’s tax system. This guide will provide an overview of taxation in Australia, including what you need to pay and how to do so. So stay informed and stay ahead of the game with this essential guide to Australian taxes!

In Australia, there are several different types of taxes that you may be liable for. This guide will help explain the most common taxes and ensure that you are paying the correct amount. By understanding your tax obligations, you can avoid costly penalties from the Australian Taxation Office.

Like most countries, Australia has a complex tax system that can be confusing for those unfamiliar with it. This guide will provide an overview of the Australian tax system and explain some of the key concepts that you need to know to file your taxes. 

We will also discuss some of the common tax deductions and tax credits available in Australia so that you can get the most out of your return.

No one likes paying taxes, but they are a necessary evil. Unfortunately, tax laws can be complex and confusing, especially for those unfamiliar with them. 

This guide provides an overview of the taxation system in Australia so that you can understand your obligations and responsibilities. However, it is by no means comprehensive, so please consult a qualified accountant if you have any specific questions.

Australia is a little different to other countries when it comes to taxation. So if you’re moving here or starting a new business, it’s important to know what you need to do to comply with Australian tax laws. This guide will explain the basics of taxation in Australia, including income tax, GST, and company tax. 

We’ll also tell you about your obligations as an Australian taxpayer and how to go about lodging your tax return. So, whether you’re a recent arrival or just thinking of starting a business in Australia, read on for all the information you need on Australian taxation!

There are a few things that everyone needs to know about Australian taxation, regardless of their citizenship or residency status. 

This guide provides an overview of the main types of taxes you might encounter in Australia, as well as some tips on how to reduce your tax bill. Whether you’re a student, working holidaymaker or permanent resident, it’s important to understand your tax obligations in Australia.

Let’s get started!

Taxation in Australia

Taxation in Australia is imposed by all three levels of government: federal, state and local. Some examples:

1. Federal

  • Income Tax (for individuals and corporations)
  • Goods and Services Tax (GST)
  • Superannuation Tax
  • Capital Gains Tax (CGT)
  • Fringe Benefits Tax (FBT)
  • Sales Tax
  • Customs and Excise Duty

2. State

  • Land Tax
  • Payroll Tax
  • Stamp Duty
  • Financial Institutions Duty (FID)

3. Local

  • Property Rates

Corporate Taxation in Australia

The corporate income tax is a tax on the profits of corporations. All OECD countries levy a tax on corporate profits, but the rates and bases vary widely from country to country. 

Corporate income taxes are the most harmful tax for economic growth, but countries can mitigate those harms with lower corporate tax rates and generous capital allowances.

Capital allowances directly impact business incentives for new investments. In most countries, businesses are generally do not immediately deduct capital investments. Instead, they must deduct these costs over several years, increasing the tax burden on new investments. 

This can be measured by calculating the per cent of the present value cost that a business can deduct over the life of an asset. As a result, countries with more generous capital allowances have tax systems that support business investment, which underpins economic growth.

Individual Taxation in Australia

Individual taxes are one of the most prevalent means of raising revenue to fund the Government across the OECD. Individual income taxes are levied on an individual’s or household’s income to fund general government operations. 

These taxes are typically progressive, meaning that the rate at which an individual’s income is taxed increases as the individual earns more income.

In addition, countries have payroll taxes. These typically flat-rate taxes are levied on wage income in addition to a country’s general individual income tax. 

However, revenue from these taxes is typically allocated specifically toward social insurance programs such as unemployment insurance, government pension programs, and health insurance.

High marginal income tax rates impact decisions to work and reduce the efficiency with which governments can raise revenue from their tax systems.

If not included in the individual income tax, capital gains and dividend income are typically taxed at a flat rate.

Consumption Taxes in Australia

invoice bill paid payment financial account concept

Invoice Bill Paid Payment Financial Account Concept

Consumption taxes are charged on goods and services and can take various forms. In the OECD and most of the world, the value-added tax (VAT) is the most common consumption tax. 

Most consumption taxes either do not tax intermediate business inputs or provide a credit for taxes already paid on inputs, which avoids the problem of tax pyramiding, whereby the same final good or service is taxed multiple times in the production process. 

The exclusion of business inputs makes a consumption tax one of the most economically efficient raising tax revenue.

However, many countries fail to define their tax base correctly. Therefore, all final consumption should be taxed at the same standard rate to minimise distortions. 

However, countries often exempt too many goods and services from taxation or tax them at reduced rates, which requires them to levy higher standard rates to raise sufficient revenue. Some countries also fail to exempt business inputs properly. For example, states in the United States often levy sales taxes on machinery and equipment.

Property Taxes in Australia

Property taxes apply to the assets of an individual or a business. Estate and inheritance taxes, for example, are due upon the death of an individual and the passing of their estate to an heir, respectively. On the other hand, taxes on real property are paid at set intervals—often annually—on the value of the taxable property, such as land and houses.

Many property taxes are highly distortive and add significant complexity to the life of a taxpayer or business. Moreover, estate and inheritance taxes create disincentives against additional work and savings, damaging productivity and output. 

Financial transaction taxes increase capital cost, limiting the flow of investment capital to its most efficient allocations. Taxes on wealth limit the capital available in the economy, which damages long-term economic growth and innovation.

Sound tax policy minimises economic distortions. However, except for taxes on land, most property taxes increase economic distortions and have long-term negative effects on an economy and its productivity.

International Taxes in Australia

In an increasingly globalised economy, businesses often expand beyond the borders of their home countries to reach customers around the world. 

As a result, countries need to define rules determining how corporate income earned in foreign countries is taxed. International tax rules deal with countries’ systems and regulations to those business activities.

Tax treaties align many tax laws between two countries and attempt to reduce double taxation, particularly by reducing or eliminating withholding taxes. 

Countries with more partners in their tax treaty network have more attractive tax regimes for foreign investment and are more competitive than countries with fewer treaties.

Interacting with the Australian Tax System

Generally, under Australian law, residents are taxed on their worldwide income and capital gains from the disposal of most assets. However, foreign residents are taxed on their Australian sourced income and capital gains from the disposal of Australian taxable property.

The income tax law is contained in various acts of the Australian Parliament and in several double taxation agreements, Australia has with other countries.

The tax law is administered by the Australian Taxation Office, which has also issued extensive administrative guidance on obligations imposed by Australia’s taxation law. Further information on taxpayers’ obligations under Australia’s taxation laws is available on the ATO website.

The Australian Government expects foreign enterprises operating in Australia to meet all obligations imposed under the tax laws and cooperate with the Australian Taxation Office in a timely and complete manner. 

In addition to various provisions of the law which calculate tax liabilities and impose reporting requirements, the following areas will be particularly relevant to firms involved in cross border arrangements.

1. Transfer Pricing

Australia’s transfer pricing rules seek to ensure that an appropriate return for the contribution made by Australian operations is taxable in Australia. 

This is achieved by applying the internationally recognised arm’s length principle, which has been endorsed by the Organisation for Economic Co-operation and Development (OECD).

Under the arm’s length principle, businesses are required to enter into international dealings under terms and conditions similar to what independent parties acting truly independently would reasonably be expected to have done in comparable circumstances.

The Australian Taxation Office has tax rulings and other publications that assist a business in understanding and complying with its obligations under the transfer pricing rules. 

These publications can be found on the ATO website. In addition, guidance on transfer pricing and the arm’s length principle can also be found on the OECD website.

2. Thin Capitalisation

The thin capitalisation rules limit the number of debt deductions available to Australian operations of foreign entities investing in Australia and Australian entities investing overseas. A debt deduction is an expense an entity incurs in connection with a debt interest, such as an interest payment or a loan fee for which the entity would otherwise be entitled to claim a deduction.

The rules apply when the entity’s debt-to-equity ratio exceeds certain limits. Three alternative limits may be available to an entity in any given situation, a safe harbour test, a worldwide gearing test and an arm’s length debt test. 

Broadly under the safe harbour test, where the debt exceeds 60 per cent of the net value of the Australian assets (this threshold is higher for certain financial entities), a portion of the debt deductions may be disallowed. In addition, the thin capitalisation rules affect both Australian and foreign entities that have multinational investments, subject to certain exemptions.

Suppose an entity is affected by the thin capitalisation rules. In that case, the Thin Capitalisation part of the International Dealing Schedule (IDS) must be completed regardless of whether any debt deductions are disallowed. Therefore, the IDS is lodged simultaneously as the tax return.

Further information on the thin capitalisation rules is available on the ATO website.

3. Private Equity

Australia’s tax law includes anti-avoidance rules. These rules could apply to private equity investment arrangements designed to avoid Australian tax becoming payable on investment gains. 

Of particular concern to the Australian Taxation Office are arrangements featuring holding companies that have no obvious commercial purpose and which appear to exist only to attract the operation of international tax treaties.

The Australian Taxation Office has published several tax determinations relevant to foreign private equity funds disposing of Australian investments. These can be found on the ATO website.

4. Capital Gains Tax

Australia’s capital gains tax (CGT) regime imposes an income tax liability on a foreign resident about any gains on the disposal of Australian taxable property.

Australia’s domestic regime is consistent with international practice, reflected in the OECD Model Tax Convention.

Broadly, Australian taxable property includes direct or indirect interests in Australian real property and an Australian permanent establishment’s business assets (other than Australian real property).

Previously, foreign residents with a capital gain (for example, from the sale of an investment property) were eligible for a CGT discount of 50 per cent. However, from 8 May 2012, the 50 per cent CGT discount for capital gains made by non-residents was removed. 

However, a partial discount may apply for assets purchased before this date. Further information can be accessed on the ATO website. Foreign residents (individuals or entities) affected by these CGT rules must comply with Australian tax obligations.

Under the foreign resident capital gains tax withholding regime, where a foreign resident disposes of residential or other certain Australian property above a specified threshold, the purchaser of that property is required to withhold and remit a percentage of the purchase price to the Australian Taxation Office. Further information is available on the ATO website.

Guidance regarding ‘CGT rules – foreign residents, temporary residents, changed residency status’ can be found on the ATO website searching for foreign residents, temporary residents, changed residency status.

Information concerning the lodgment of an Australian tax return can be found on the ATO website searching for ‘foreign residents and tax returns’ or ‘foreign companies lodging tax returns’.

5. Tax Transparency Code

The Tax Transparency Code (TTC) is a set of voluntary principles and minimum standards to guide businesses’ disclosure of tax information. 

It is designed to encourage greater transparency within the corporate sector, particularly by multinationals, and enhance the community’s understanding of its compliance with Australia’s tax laws.

Large and medium-sized businesses are encouraged to disclose their tax affairs publicly, highlight those who are paying their fair share and encourage all businesses not to engage in aggressive tax avoidance. 

Large businesses are particularly encouraged to take the lead to become more transparent and help educate the public about their compliance with Australia’s tax laws.

What Is The Tax-Free Threshold In Australia?

The tax-free threshold is a certain amount of money you can earn each financial year without having to pay any tax on it. 

According to the Australian Taxation Office (ATO), the tax-free threshold is $18,200. So if you’re an Australian resident, the first $18,200 of your annual income is completely tax-free.

The $18,200 tax-free threshold is equivalent to:

  • $350 a week
  • $700 a fortnight
  • $1,517 a month

Australia has what’s known as a progressive tax system where the more you earn, the more tax you pay.

Unfortunately, if you’re not an Australian resident, you cannot claim the tax-free threshold. Instead, you will have to pay tax on every dollar of income you earn in Australia.

1. What counts as income?

The ATO defines income that must be declared for tax purposes as:

  • Employment income
  • Super pensions and annuities
  • Government payments and allowances
  • Investment income (including interest, dividends, rent and capital gains tax)
  • Business partnership and trust income
  • Foreign income
  • Other income including compensation and insurance payments, discounted shares under employee share schemes, and prizes and awards

You also need to declare any money or earnings you receive from:

  • Crowdfunding
  • The sharing economy and tax
  • Personal services income relating to labour-hire payment

2. How to claim the tax-free threshold

Claiming the tax-free threshold is easy. When you start a new job, your employer will give you a tax file number declaration form to fill out. 

To claim the tax-free threshold, all you have to do is answer ‘yes’ to question 9 – ‘Do you want to claim the tax-free threshold from this payer?’ The same applies if you’re on Centrelink payments.

Your employer won’t automatically calculate how much tax you owe using the tax-free threshold for you, so you must claim it on your tax file number declaration form every time you start a new job.

3. Can I claim the tax-free threshold if I have more than one job?

If you have more than one job or receive a taxable pension or government allowance on top of a regular part-time job, it’s advised only to claim the tax-free threshold for one of those jobs. 

According to the ATO, “if you have more than one payer at the same time, we generally require that you only claim the tax-free threshold from the payer who usually pays the highest salary or wage”.

Your other income streams will then be taxed at a higher ‘no tax-free threshold’ rate. This reduces the chances of you winding up with a big tax bill at the end of the financial year because you could be overtaxed, but you will receive this money back in your tax refund at the end of the financial year anyway.

If you’re certain that your total annual income from all your jobs will be $18,200 or less, you can choose to claim the tax-free threshold from each payer. 

However, if your total annual income later increases above $18,200, you’ll have to give one of your employers a withholding declaration to stop claiming the tax-free threshold from them.

On the other hand, if your income is over $18,200 and too much tax is withheld, you can apply to reduce the amount of tax withheld from your payments, so you receive extra pay during the year rather than receiving a big tax refund at the end of the year. 

To do this, you’ll have to complete and lodge a PAYG withholding variation application with the ATO.

One trap that people with multiple incomes can find themselves in is claiming the tax-free threshold for one job, and the subsequent jobs/incomes are undertaxed, meaning they’re left with a tax bill at the end of the year. 

To avoid this, the ATO says you can “ask one or more of your payers to increase the amount they withhold from your payments”.

4. What happens if I don’t claim the tax-free threshold?

If you don’t claim the tax-free threshold, you’ll have to pay tax on your total earnings regardless of how much money you make (yep – even if it’s less than $18,200).

Some people purposely elect not to claim the tax-free threshold as a ‘tax-free threshold savings strategy’, which means they’re paying more in tax during the year but are pretty much guaranteed to receive a bigger tax refund at the end of the year. 

Those who aren’t very good at saving money like to use this as a means of forced savings, but it does mean you’re financially worse off during the year as your take-home pay will be smaller.

How Super Is Taxed

asian accountant working and analyzing financial reports project

Taxes apply to your super contributions, investment earnings and withdrawals. Understanding how these taxes are applied can help ensure you’re not paying more tax on your super than you need to.

1. Tax on super contributions

When you or your employer contribute to super before tax, you’ll pay super contributions tax on those contributions. The amount of superannuation tax you’ll pay depends on:

  • whether you’ve supplied your Tax File Number or not (securely supply your TFN)
  • your total annual income
  • whether you’ve stayed within the contribution caps.

2. Before-tax contributions

Before-tax contributions are also known as concessional super contributions. They’re super contributions you or your employer make from your before-tax income.

Before-tax contributions include:

  • employer contributions (and any insurance costs or administration fees they pay for you)
  • salary sacrifice contributions you make, and
  • any after-tax contributions you make and claim a tax deduction for

You can contribute a total of up to $27,500 (concessional contributions cap) before tax each financial year from 1 July 2021.

Before-tax contributions are generally taxed at 15% unless you:

  • earn more than $250,000 p.a.*
  • haven’t given your TFN to your super fund
  • go over the concessional contributions cap.

In the above situations, extra taxes may apply.

If you go over your concessional contributions cap

The excess contributions will get taxed at your marginal tax rate, plus the Medicare levy. You can withdraw up to 85% of your excess contributions. But they will still be taxed at your marginal tax rate (plus Medicare levy), less a non-refundable tax offset of 15%. Any excess before-tax contributions not released count towards your after-tax contributions cap.

What if my employer doesn’t allow salary sacrifice?

If you can’t salary sacrifice, you can contribute after-tax and claim a tax deduction. After-tax contributions, you claim a tax deduction for being treated like before-tax contributions. However, the concessional contributions cap applies.

3. After-tax contributions

After-tax contributions are also known as non-concessional super contributions. They’re super contributions you make from your take-home pay. You can only make after-tax contributions if we have your TFN.

After-tax contributions are only taxed if you go over the non-concessional contributions cap. Extra taxes apply to any amounts over the cap unless you withdraw them and 85% of the earnings are attached to them.

The non-concessional contributions cap is $110,000 from 1 July 2021. This is the maximum you can contribute after-tax to super each year.

Tax on Investments

Your super investment earnings are generally taxed at 15% while you’re working.

Taxes get deducted from investment earnings with any applicable fees. They’re deducted before determining the final net investment earnings credited to your account.

Your investments aren’t taxed if you’re retired and in a Choice Income account. 

Tax on Withdrawals

Super withdrawals get divided into tax-free and taxable components. This depends on whether your contributions made were after-tax or before-tax contributions.

The amount of tax applied to your withdrawal differs depending on:

  • your age
  • whether the component you’re withdrawing is taxable or tax-free, and
  • if you take your payment as a lump sum or income stream.

Tax on death benefit payments

Taxes may also apply when you make a death benefit withdrawal.

FAQs

1. I have to buy tools and equipment for my job. What can I claim on my tax?

You can claim expenditure incurred in replacing, insuring and repairing tools of the trade that you use for earning your income. However, if the cost of any item is more than $300, it will have to be depreciated (i.e. claimed over its useful life). 

The amount you can claim will depend on what receipts you have kept and to what extent you use them for income-producing purposes. If you are in a situation where you are wondering what you can claim without receipts, you can claim less than $300 without proof of purchase.

2. My job requires me to keep my knowledge up to date, and I buy books and journals. Can I claim them all?

If technical books, trade books or journals are necessary to fulfil your job function efficiently, the cost of their purchase is tax-deductible.

3. Can I claim a deduction for sun protection items?

A deduction is available for outdoor workers who buy sunscreen lotion, sunglasses and hats for use at work. However, the claim must be substantiated and apportioned for private use.

4. I have a job which requires me to be on the road a great deal, and I have to use my car. What do I need to do to claim a tax deduction for my car?

There are two different methods for claiming work-related motor vehicle expenses, and each has different record-keeping requirements.  

To use the method that ensures you the best claim, it is advisable to keep a logbook and all receipts for expenses (e.g. insurance, registration, repairs, services, tyres, etc.). However, you do not have to keep receipts for petrol as we can work that out for you using an average yearly formula. 

Your logbook should be kept for a minimum of 12 consecutive weeks, and generally, it will be valid for five years unless there are significant changes in your circumstances. You also need to keep the opening and closing odometer readings for each year. 

You don’t need to use the same claim method each year. Instead, the choice of method should be based on which is more favourable to you and which you have the appropriate records for. 

If you don’t have a current logbook or have not retained all receipts, you will be limited in which method you can choose. However, you cannot claim any car expenses if your car is salary packaged.

5. I am expected to maintain a well-groomed appearance at work. Can I claim these as tax deductions?

Expenditure on personal grooming and haircuts are generally not deductible. However, there are exceptions for some taxpayers involved in the performing arts field.

6. My employer expects me to wear specific clothing for work? What would I be able to claim on my tax?

Compulsory uniforms are generally deductible if they identify you as an organisation or employee in a specific occupation. 

A requirement to simply wear particular colours is not enough to make the clothing deductible (for example, a waiter is required to wear black and white clothing), nor is a requirement to wear a store’s brand of clothing (they are still conventional clothing and not tax-deductible). Corporate wardrobes are also deductible if certain conditions are met. 

The uniform design must be registered with AusIndustry. If the clothing is deductible, you may also claim maintenance costs (laundry, dry cleaning, and repairs).

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