In 2021 Tax Tips

Australian Tax Basics Explained

Australia is a little different from other countries regarding tax. If you’re new to Australia or just need a refresher on the basics, this article will explain everything you need to know. 

We’ll cover topics such as income tax, GST, property taxes, and more. So whether you’re an expat about to file your first Australian tax return, or just curious about our system, read on for all the information you need.

In Australia, we have a progressive tax system. That means that the more money you earn, the higher percentage of tax you pay. So it’s important to understand how our tax system works to plan for your financial future. 

In this post, we’ll explain the basics of Australian taxation. We’ll cover income tax, PAYG withholding, Fringe Benefits Tax (FBT), and Capital Gains Tax (CGT). By understanding these concepts, you’ll be in a better position to make informed decisions about your finances.

Are you confused about your taxes? Don’t worry; you’re not alone. Australia has a complex tax system that can be tricky to understand. This blog post will explain some of the basics of Australian taxes. 

We’ll cover topics such as income tax, GST, and depreciation. By understanding these concepts, you’ll be in a better position to file your taxes confidently this year.

Do you need to file a tax return in Australia? What are the tax rates in Australia? What can you claim as a deduction on your Australian tax return? If these are questions you’re asking yourself, you’re not alone. 

Tax laws can be confusing, but don’t worry – we’re here to help! In this blog post, we’ll explain the basics of Australian taxation and walk you through the process of filing your tax return. 

So whether you’re a first-time filer or just looking for a refresher, read on for everything you need to know about Australian taxes. In this blog post, we’ll provide an overview of Australian taxation and go over the basics of filing your tax return.

Australians have to pay taxes on their income, no matter who they are or where they live. However, there are a few different types of Australian taxes, and it can be confusing to figure out how much you owe. 

This blog post will explain the basics of Australian taxation to understand what you need to do come tax time. Don’t worry – we won’t bombard you with too much information at once! 

We’ll break it down step by step to get a good understanding of the system. Stay tuned for more detailed posts on specific aspects of Australian tax law shortly.

Do you know your Marginal Tax Rate? Have you ever claimed a deduction? Australian tax can be confusing, but it doesn’t have to be. 

In this post, we break down the basics of Australian tax so that you can understand how it works and make sure you’re taking advantage of all the deductions and exemptions you’re entitled to.

Plus, we answer some of the most commonly asked questions about Australian tax. So whether you’re a first-time taxpayer or just want to brush up on your tax knowledge, read on for everything you need to know about Australian taxation!

If you’re an Australian taxpayer, it’s important to understand the basics of the tax system. This article explains how income tax is calculated, what deductions and allowances you can claim, and when you need to lodge a tax return. 

We also outline the different types of taxes that apply in Australia and provide some tips for reducing your tax bill. So whether you’re a first-time filer or just want to make sure you’re taking advantage of all the deductions available to you, read on for everything you need to know about Australian taxation.

Let’s get started!

Personal Income Tax in Australia

For most employees, personal income tax is paid by their employer. However, the employer generally subtracts the required level of tax out of an employee’s pay before it is received and remits this amount to the Australian Taxation Office (ATO).

Temporary residents are also required to pay tax on income earned in Australia, though at different rates to Australian residents.

Australian Tax Treaties

Australia has tax agreements with more than 40 countries. These tax agreements, or treaties, aim to prevent double taxation and promote cooperation between international tax authorities.

Individuals who are legal residents of a treaty country will be subject to the treaty’s conditions. In addition to bilateral tax treaties, some other international tax arrangements relate to specific industries or topics.

Commonwealth Taxes

1. Jurisdiction to tax

The Federal Government of Australia has jurisdiction to tax Australian residents on income from worldwide sources and non-residents on only Australian sourced income.

Australian legislation contains specific rules relating to residency to determine whether an individual or company is a resident for tax purposes.

Australia also has a system for determining whether an income amount is sourced in Australia or another country. Generally, income is sourced in the place of employment or the fixed place of business.

International transactions are often sourced according to where the relevant contract is made, although these broad rules often vary depending on the circumstances.

The risk associated with the residence and source rules is that one amount of income may be taxed in two different countries.

To avoid this, Australia has entered into many double tax agreements with other countries, which will prevail over domestic law to ensure that taxation is only imposed once on any given amount of income.

In addition, Australia also operates a system of foreign tax credits under which tax credits are given to Australian residents who pay foreign tax on foreign income.

These credits are then used to offset against Australian tax paid on the same amount, again ensuring income is only taxed once.

2. Taxes on income

Taxable income is generally an entity’s total assessable income less allowable deductions. If a loss is incurred, it may be carried forward to future years, provided the loss carry forward tests are satisfied.

Assessable income includes salaries, wages, income from business, interest, rent and dividends.

Deductions generally include expenses that have been incurred in the course of gaining or producing income, in addition to several specific deductions allowable under the legislation.

Deductions are not allowed for personal expenses or those of a capital nature. However, if certain conditions are met, companies and individuals can set off losses against other types of income.

3. Taxes on capital gains (Capital Gains Tax (CGT)

CGT is imposed on gains realised from the sale of assets, with special rules applicable to capital gains

 valuation.

The assets subject to CGT are very broad for taxation purposes and include tangible and intangible assets.

Certain assets such as motor vehicles, personal use assets and one’s main residence are subject to exemptions. At the same time, foreign residents are subject to capital gains on only a limited range of assets, such as real property.

Capital gains are included in taxpayers’ assessable income and taxed at each taxpayer’s applicable income tax rate (see below, Taxation of Individuals).

If the capital asset is held for longer than 12 months, Australian residents are entitled 50% discount for taxation purposes. The CGT rules have recently been amended so that non-residents can no longer access the 50% discount. Any capital loss incurred can be offset only against capital gains.

This guide aims to provide a broad introduction to Australia’s tax system framework. The Australian tax system is a mix of direct and indirect taxes levied by the Commonwealth and State governments, depending on the type of tax. 

The Commonwealth is Australia’s federal (or national) level government which can impose taxation on all Australian taxpayers.

Various tax incentives for capital investment and inbound investments to Australia may apply in certain circumstances for a limited period.

4. Taxation of individuals and business entities on income and capital gains

1. Individuals

According to the abovementioned rules, individuals are taxed on income and capital gains. As stated, both Australian resident individuals and non-resident individuals can be subject to income tax and CGT depending on the source of the income.

Australia uses a progressive tax scale system to tax individuals. Under this system, the rate of tax payable increases as taxable income increases.

Non-residents who come to Australia for work purposes and are treated as residents for tax purposes may also qualify to be ‘temporary residents’.

Temporary residents are subject to the same tax rates as residents and receive other tax concessions.

2. Companies

A company in Australia is a distinct and separate entity from its shareholders. Therefore, income received by a company is taxable to the company after applying residency and source rules similar to those that apply to individuals.

Unlike individuals, however, company profits are taxed at the flat rate of 30% regardless of the company’s level of income. However, the newly elected Liberal Party plans to cut the company tax rate by 1.5% from 1 July 2015, reducing the company tax rate to 28.5%.

Companies ‘ dividends paid to their shareholders are included in their assessable income and are subject to a ‘dividend imputation system’.

The purpose of this system is to pass on a ‘credit’ to shareholders for the tax that the company has paid on the profits from which dividends are paid.

This system, therefore, ensures that dividends are ultimately taxed at each shareholder’s applicable income tax rate. Access to credits, however, only applies to Australian resident shareholders.

A tax consolidation regime also applies for 100% owned group companies, allowing them to consolidate income for the entire group and ignore transactions within the group for income tax.

Consumption Taxes – the Goods and Services Tax (GST)

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wealth management concept, business man and team analyzing financial statement for planning financial customer case in office

GST is a broad-based consumption tax (similar to the Value Added Tax in other countries) imposed on selling most goods and services in Australia and those imported into Australia.

It is levied at a flat rate of 10%. Some supplies such as food, exports, education and health are excluded from GST. All consumers are required to pay GST when making a purchase.

Businesses or individuals carrying on an enterprise with an annual turnover of more than a specified amount are required to register for GST purposes.

These businesses may either be liable to the ATO or entitled to a refund each year depending on the balance of the amount of GST collected through sales compared to any tax credits received from GST paid on goods and services purchased in the course of carrying on their enterprise.

Tax on Investment Earnings

Investment earnings inside your super fund are taxed at a maximum rate of 15%. However, if your fund holds Australian shares with franked dividends, then your fund will pay less than 15% tax on those earnings. 

So anyone on a marginal tax rate above 15% will pay less tax on their investment returns in super than they would if they held the same investments outside super.

Capital gains on the sale of assets inside super are also taxed at concessional rates. If the investment has been held for more than 12 months, the fund only pays tax on two-thirds of the capital gain at a rate of 15%. 

That’s an effective capital gains tax of 10% (two-thirds of 15%). If you held the same investment outside super for more than 12 months, you would pay tax at your marginal rate on half the capital gain or an effective tax rate of up to 23.5% for people on the top marginal rate of 47% (including Medicare levy).

These tax rates apply to investment returns inside super during the accumulation phase. At the same time, you are working and accumulating savings in super to be used in retirement.

Once you start withdrawing your savings as a lump sum, income stream or a mixture of both, your super is said to be in the retirement phase, previously known as the pension phase. You generally pay no tax on investment income or capital gains from super pensions, but exceptions exist.

From 1 July 2017, investment returns on the assets underlying a transition-to-retirement (TTR) pension are taxed at 15%, just as they are in a super accumulation account. Previously they were tax-free. However, these earnings are still exempt if you are over age 65.

Other Taxes And Levies

1. Fringe Benefits Tax (FBT)

FBT is imposed on the value of non-cash benefits provided by employers to employees.

Generally, benefits must be connected to the employee’s employment to be taxable, although certain fringe benefits are either specifically subject to FBT or expressly excluded under Australian law.

FBT is levied on the benefits provider at a flat rate of 46.5% and may be deductible against the employer’s taxable income.

2. Medicare Levy and Medicare Levy Surcharge

Medicare is Australia’s public health insurance scheme. It operates by receiving contributions through the Medicare Levy and the Medicare Levy Surcharge, taxes imposed on Australian residents’ taxable incomes.

The Medicare Levy is imposed at a flat rate of 1.5% of an individual’s taxable income, although exemptions may be given to low-income earners and foreign residents.

The Medicare Levy Surcharge is an additional flat rate of between 1-1.5% imposed on high-income earners who do not have private hospital insurance.

3. Superannuation tax – the Superannuation Guarantee Charge

In Australia, every employer must pay a minimum level of superannuation (known as the superannuation guarantee) to its employees to ensure that workers have money set aside for their retirement.

In the 2013-14 income tax year, the superannuation guarantee rate increased from 9% the previous year to 9.25% of each individual’s employment earnings. 

With amendments recently coming into effect, the minimum rate will increase progressively over the next six years until it reaches 12% from 1 July 2019 onwards.

Suppose an employer fails to provide the minimum level of superannuation. In that case, they become liable to pay the Superannuation Guarantee Charge (SGC), which includes the amount of the shortfall in superannuation payments plus interest and administrative charges.

However, in practice, most companies will contribute the minimum level of superannuation to avoid the SGC.

Also, there are statutory limits to how much employers or employees can contribute to superannuation funds. A penalty charge may apply if contributions are made more than these limits.

4. Luxury car tax

The luxury car tax is a flat rate of 33% imposed when a luxury car is sold or imported into Australia. Certain rules specify what amounts to a luxury car and what circumstances it will attract the luxury car tax. However, it generally applies to cars valued over approximately $60,000 or $75,000, depending on the vehicle’s fuel consumption.

Tax-Free Threshold

1. What does “tax-free threshold” mean?

The tax-free threshold is like an un-taxed “starting amount” for your personal income or earnings.

If your total income is less than the tax-free threshold, you don’t have to pay any income tax to the ATO.

The ATO’s definition of your “income” is the total of any money you earned from all jobs and other sources. This includes interest you received for bank savings plus income from any investments. Your income also includes any consulting, contracting or side jobs.

If you earned less than the tax-free threshold, but some taxes were deducted or withheld from your income, you will probably get back all of the tax that was deducted, in your tax refund, after you lodge your tax return.

2. Do I need to lodge a tax return?

If you earn less than the tax-free threshold, generally, you won’t pay income tax to the ATO. You neither lodge a tax return, but some fine details are explained below in examples 1 and 2. 

Sometimes you may need to lodge a tax return to get back some paid tax money. However, even if you don’t lodge a tax return, you must send the ATO “non-lodgement advice”.

If you earn more than the tax-free threshold, you must lodge a tax return. Your income tax is calculated on how much money you made above the tax-free threshold. 

The amount of tax you pay is not calculated by a simple percentage – it is a more complex mathematical formula set out by the ATO, but it works in a fairly simple way.

3. Tax-free threshold – Examples

Let’s break down the tax-free threshold with some examples. These three common cases help show whether or not you need to lodge a tax return. 

Plus, for people who don’t need to lodge a return, the ATO still has a requirement that you lodge a “Non-Lodgement Advice”, and we’ll cover that down below. 

Example 1

You earned more than $18,200

You must lodge a tax return.

If during the past financial year your taxable income was more than $18,200, you are required to lodge a tax return.

Example 2

Tax-mouse-papers

You earned less than $18,200, but paid tax on your income

You must lodge a tax return to get back the taxes you paid.

Even though you earned under the new tax-free threshold, you should lodge a tax return as you paid tax on your income during the year.

In this situation, you may likely get all of the tax you paid throughout the year back after you lodge your tax return.

Want that money in your account as soon as possible?

Example 3

You earned less than $18,200 and paid no tax on your income

You might not need to lodge a tax return.

Good news! If you earned less than $18,200 AND you didn’t pay any tax on this income, then you may not be required to lodge a tax return this year.

If you fall into example 3, you won’t need to lodge a return in most cases.

However, you may still need to lodge a tax return if you:

  • are entitled to the private health insurance rebate
  • had a reportable fringe benefits amount on your PAYG Summary
  • had a reportable employer superannuation contribution on your PAYG Summary
  • made a loss or can claim a loss made in a previous year
  • were an Australian resident for tax purposes, and you had exempt foreign employment income plus $1 or more of other income

Does example 3 apply to you?

If you don’t need to lodge a tax return this year, you should still lodge a ‘Non-Lodgement Advice’.

4. What is Non-Lodgement Advice?

Don’t need to lodge a tax return this year? That does not mean you can just forget about it – you can’t ignore the ATO. You need to submit a non-lodgement advice instead. This document explains to the ATO that you do not need to lodge this year and ensures they don’t list you as having an outstanding return that still needs to be lodged.

Other Considerations When Trading Between Australia And Other Countries

1. Transfer pricing

Australia has transfer pricing rules that need to be considered where goods or services are bought or sold between Australia and other countries.

The transfer pricing rules have particular relevance to transactions between related parties in a corporate group for the supply of goods, services, or finance that are not priced on terms comparable to those charged between parties transacting at arm’s length.

Suppose an international transaction does not occur at arm’s length or is not supported by an acceptable pricing methodology. In that case, market prices may be substituted into the transaction for Australian taxation purposes to ensure an appropriate level of tax is paid.

For an intra-group cross-border transaction to be deemed to have occurred at arm’s length, the Australian Taxation Office (ATO) requires that companies appropriately document the transaction itself and the pricing methodologies used when entering into the transaction.

Other factors that may be taken into account by the ATO include, amongst other things, the commercial justifications for the transaction, any applicable review processes and whether any alternatives were considered.

2. Customs duty

Customs duty is imposed on goods imported into Australia. The rate of customs duty is generally around 5% of the ‘customs value’ of goods, although this often changes depending on the type of good imported.

The customs value of a good is determined as a question of law, taking into account the type of good, its country of origin and the purpose of its import into Australia.

Customs duty is payable when the relevant goods enter Australia. The specific duty rules that apply will depend on how the goods are classified by the Australian Customs Service and may be altered by Tariff Concession Orders or Free Trade Agreements.

The rules applying to customs duty in Australia are complex, and importers should seek advice on a case-by-case basis.

3. Excise duty

Excise duty is imposed on alcohol, tobacco, fuel and petroleum products produced or manufactured in Australia.

Suppose these products are imported into Australia rather than produced or manufactured in Australia. In that case, customs duty applies to their importation comparable to the excise rate (see above, Customs duty).

Excise duty is paid by either the manufacturer or distributor at a flat rate. However, the applicable excise rates may increase to reflect inflationary changes twice a year.

In addition, a licence is generally required to undertake activities concerning excisable goods.

FAQs

1. I have been backpacking around Australia on a temporary working visa picking up a few temporary jobs. Some employers deducted tax. Will I get this all back when I put in a tax return?

You would be considered a non-resident for tax purposes because you have not settled in any one place and established a home during your stay in Australia. 

You may not get all your taxes back when you lodge a tax return because you will be charged non-resident tax rates. This means that you have to pay tax on every dollar of your taxable income. You will not have to pay the Medicare levy, though.

2. What is the difference between resident and non-resident tax rates?

Non-residents pay tax on Australian source income. They pay tax on every dollar of taxable income as declared on their tax return but do not pay Medicare. This is because residents have to declare all income earned in and out of Australia. 

A tax-free threshold of $18,200 (for the 2014 year) is available to them, and a resident may be entitled to claim some tax offsets (rebates) that are not available to non-residents. However, depending on their income, a resident may also have to pay the Medicare levy and Medicare levy surcharge.

3. I am three years behind in lodging my tax returns. Will I get into trouble?

You should lodge your outstanding tax returns as soon as possible and before the Australian Taxation Office takes any action to have you lodge these tax returns. Once they have begun any action, it could result in a court conviction. 

The ATO may charge a penalty of $170 for every 28 days that the return is outstanding. The maximum penalty is $850, even if you are due a refund. In addition, the ATO will charge interest. This is called the general interest charge and is levied on any outstanding monies. 

4. Can you complete my tax return if I miss a PAYG Payment Summary (group certificate)?

Your return can be completed using the details from a copy of the PAYG Payment Summary, a letter from your employer detailing the information on the PAYG Payment Summary or by reviewing your payslips for that period. 

If you cannot obtain the payment summary details from an employer, a Statutory Declaration would need to be completed. The detail from your PAYG Payment Summary may also be accessible by your tax consultant on the ATO Portal. 

5. I received an additional PAYG Payment Summary (group certificate) after completing last year’s tax return. Can I put it in this year’s return?

No, you cannot do that. A PAYG Payment Summary from a past year cannot be included with the current year’s tax return as the income was not earned in the current year. It can only be included in return for the year it relates. You will need to submit an amendment to last year’s tax return. 

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