In 2021 Tax Tips

Basics of Taxation in Australia

In Australia, taxation is a compulsory contribution to the Government to provide public goods and services. Therefore, it’s important to understand the basics of taxation in Australia so you can ensure you’re complying with the law and optimising your tax position. 

This blog post will outline key concepts such as taxable income, deductions, and exemptions. We’ll also provide an overview of the Australian tax system, including who is liable for tax and how much they pay.

Australia has a progressive income tax system, which means that high-income earners pay a higher percentage of their income in taxes than low-income earners. 

In this post, we’ll look at the basics of Australian taxation, including who is required to file a tax return, what types of income are taxable, and how tax rates are applied. We’ll also discuss some common deductions and exemptions available to taxpayers in Australia.

If you’re an Australian taxpayer, it’s important to understand the basics of taxation in Australia. This includes knowing how much tax you need to pay and what deductions you’re entitled to. In this blog post, we’ll outline the key aspects of Australian taxation so that you can stay compliant and maximise your tax refund.

As an Australian citizen, it’s important to understand the basics of taxation in Australia. This includes knowing about the different types of taxes that are levied, as well as how and when you’re required to pay them. In this article, we’ll provide a brief overview of the taxation system in Australia, so you can better understand your obligations as a taxpayer.

When it comes to taxation, Australia has some of the most complex laws globally. However, don’t let that scare you – our team of taxation experts are here to help make things easy for you. 

In this post, we’ll outline the basics of Australian taxation so that you can understand your obligations and entitlements. Then, stay tuned for more posts in our taxation series, where we’ll go into more detail about specific aspects of Australian tax law.

Are you an Australian resident? Do you earn income? If both these questions are yes, you need to know about Australia’s tax system! 

In this blog post, we’ll provide a basic overview of taxation in Australia, including what types of income are taxable and how much you can expect to pay in taxes. So if you’re curious about the ins and outs of Aussie tax law, read on!

Did you know that there are different types of taxes in Australia? There is income tax, company tax, goods and services tax (GST), stamp duty, land tax and more! In this post, we’ll look at the basics of taxation in Australia. Then, we’ll explain each type of tax and what you need to do to pay them.

Do you know the ins and outs of taxation in Australia? Here is a brief guide to the basics to help you get started. Taxation in Australia can be confusing, so it’s best to have a general understanding of what you need to do before you start filing your tax return. 

The Australian taxation system is based on self-assessment, which means that you are responsible for declaring your income and calculating your tax liability yourself. 

This guide will outline some of the key concepts that you need to know to file your taxes correctly. So, whether you are new to Australia or just looking for a refresher, read on for everything you need to know about taxation in Australia!

Let’s get started!

Administration Of Australia’s Taxation System

1. Self-assessment

Australian taxation is based on a self-assessment model, where taxpayers can lodge their tax returns.

Individuals and companies are required to lodge an annual ‘Income Tax Return’. In contrast, companies and other entities may have further requirements for GST and PAYG (see below, Withholding taxes).

The ATO reviews not every tax return in Australia. Instead, each taxpayer’s assessment of their income is taken to be true.

However, the ATO audits individuals’ and companies’ tax returns to ensure that taxpayers’ actual tax affairs are consistent with their self-assessment.

2. Withholding taxes

1. General

Withholding taxes are payable on several payment types at various flat rates depending on the payment in question.

The purpose of Australia’s withholding tax rules is to enable the efficient and timely collection of tax revenue on an ongoing basis.

The obligation to make a withholding rests with the ‘payer’ of funds, not the recipient. Under these rules, the payer must withhold an amount from certain payments it makes and then pays that amount to the ATO, usually in regular instalments throughout the year, depending on the entity’s size.

Withholding taxes are often paid where an Australian resident pays dividends, interest or royalties to a foreign entity. The withholding rate is typically set out in the relevant double tax agreement.

In addition, withholding taxes also apply concerning the failure to quote an Australian Business Number (ABN) or a Tax File Number (TFN) in various situations in which they are required (see below, Australian Business Numbers and Tax File Numbers).

2. Pay-as-you-go (PAYG)

Australia also has a ‘pay-as-you-go’ (PAYG) withholding tax regime. In the most common application of PAYG withholding, a business with employees must withhold an amount from salary or wage payments made to its employees.

The amount withheld broadly represents the income tax payable on that salary or wage and must be remitted to the ATO.

Further, an amount must be withheld from payments made to another business if it has not quoted its ABN when dealing with your business (see below, Australian Business Numbers and Tax File Numbers).

PAYG withholdings generally occur at a rate of 46.5% in this situation.

Australian Business Numbers and Tax File Numbers

An ABN is an identification tool used by businesses dealing with the ATO, other business and government agencies.

A business must have an ABN if required to register for GST (see above, Consumption taxes). However, all other businesses may choose whether to obtain an ABN.

However, suppose a business does not have an ABN. In that case, withholding taxes apply in its dealings with other businesses, effectively reducing the value of receipts from their other businesses (see above, Withholding taxes: PAYG).

As a similar identification tool, TFNs are used by individuals and organisations to help the ATO administer the Australian tax system.

They apply to certain types of income such as salary, wages and some forms of investment income. While an individual doesn’t need to have a TFN, it is highly recommended that individuals obtain a TFN because if it is not quoted where required, income tax will be withheld from income earned at the highest marginal tax rate (see above, Withholding taxes: PAYG).

Australian Business Taxes

Taxes in Australia are administered and collected by the Australian Taxation Office (ATO) and, in some cases, state government revenue offices. As a result, businesses can save money by paying the correct amount on time and taking advantage of any tax concessions that they are entitled to.

The key taxes affecting businesses are Company (income) Tax, Capital Gains Tax (CGT) and the Goods and Services Tax (GST). These taxes are all set by the Australian Government.

Businesses can elect to make tax payments monthly, quarterly or annually.

1. Company tax

An Australian resident company is subject to company tax at a rate set by the Australian Government.

A non-resident company is taxed on its Australian income at the same rate as a resident company. However, taxable income and the tax rate may vary under limited circumstances, such as industry or business structure.

2. Capital Gains Tax

Capital Gains Tax (CGT) applies to any capital gain made through the disposal of assets. It is paid as part of income tax.

Foreign entities may be subject to CGT on assets acquired and used in carrying on a business in Australia. Businesses must keep records upon acquiring assets that may be subject to CGT in the future. Small businesses may also be eligible for CGT concessions under certain circumstances.

3. Goods and Services Tax

The Goods and Services Tax (GST) is a national, broad-based consumer tax on most goods and services sold or consumed in Australia.

Most businesses are required to register for GST with the Australian Taxation Office. Businesses that have paid for business supplies inclusive of GST are entitled to claim an equivalent input tax credit. Certain businesses may also be eligible for GST concessions.

4. Payroll Tax

Payroll tax is a state tax on the wages you pay to employees. It is calculated on the number of wages paid per month and must be paid if total Australian wages exceed the exemption threshold in the relevant state or territory. The payroll tax exemption threshold and the payroll tax rate varies between states and territories.

5. Other business taxes

Other Australian Government and state and territory government taxes may be relevant to certain business activities. This may include land tax and fringe benefits tax (FBT).

Businesses and investors should review these taxes to determine whether they apply in your particular case.

State and Territory taxes

1. State jurisdiction to impose taxes and duties

States and Territories in Australia generally have jurisdiction to impose a tax on various state-based transactions.

To fall within a state’s jurisdiction, transactions must generally be entered into or carried out within the borders of a particular State. Alternatively, they must connect to the particular State wishing to impose taxation on the relevant transaction.

States and Territories most commonly impose a tax on immovable property situated in that particular State and on various other state-based transactions such as car registration and employment.

Many State and Territory taxes and duties are not consistent throughout Australia, and therefore the laws applicable in each jurisdiction must be considered where relevant. However, the taxes and duties mentioned below indicate some common forms of state taxation.

2. Stamp duty

Stamp duty is imposed on certain transactions, such as transfers of property and dealings with shares in companies that are landholders. It is imposed on the acquirer in the relevant transaction, not the transferor.

The imposition of stamp duty is not consistent throughout the states, although it is generally imposed at either a fixed rate or at a rate that depends on the value of the transaction.

For example, New South Wales imposes stamp duty on transfers of land according to a sliding scale dependent on the value of the real property.

The cheapest valued properties attract stamp duty of 1.25%, with the rate progressively increasing to approximately 7% for the most expensively valued properties in New South Wales.

Similarly, Victoria charges duty on land transfers on the greater of the market value of, or the consideration paid for, the property.

For transfers occurring since 2008, stamp duty is then paid at a rate of 5.5% for high valued properties down to 1.4% for the cheapest valued properties.

It is important to consider stamp duty rules on a state-by-state basis whenever real property or business assets are acquired or transferred, as rates vary significantly. At the same time, certain transactions may receive concessions or exemptions.

finance and accounting concept. business woman working on desk

finance and accounting concept. business woman working on desk

3. Payroll tax

Payroll tax is imposed on employers whose annual wages paid to employees exceed a set amount determined by each state. The tax is generally between 3% and 7%.

Payroll tax is currently payable in New South Wales at a rate of 5.45% for businesses that pay more than $750,000 in annual wages. By comparison, Victoria sets its threshold annual wages level at $550,000 and its payroll tax rate at 4.9%.

4. Land tax

Individuals and other entities who own land in Australia over a prescribed value are liable to pay land tax annually on the combined value of all taxable land owned.

Again, the rate payable varies between states. In contrast, some states exempt certain classes of land such as one’s principal residence, land used for primary production (for example, farming) and land used by charities, religions and schools.

New South Wales and Victoria use progressive taxation scales about land tax. The minimum threshold land values above which land tax must be paid are $406,000 and $250,000 in New South Wales and Victoria.

Further, whilst the rate payable depends on the value of the land owned, the range of rates is 0-2% and 0-2.25% for the same states, respectively.

5. Motor vehicles duty

Motor vehicle duties are often payable when a motor vehicle is registered or transferred within a certain state. The purchaser pays the duty with the applicable rate of duty, generally depending on the type of car and the circumstances surrounding its transfer.

Tax and Super

How much tax you pay on your super contributions and withdrawals depends on:

  • your total super amount
  • your age
  • the type of contribution or withdrawal you make

If you inherit someone’s super after they die, the person’s super fund pays you a super death benefit. Unfortunately, you may have to pay tax on some of these benefits.

Because everyone’s situation is different, it’s always best to get advice about tax matters. Contact the Australian Taxation Office (ATO) or a financial adviser.

1. How super contributions are taxed

Money paid into your super account by your employer is taxed at 15%. So are salary-sacrificed contributions, also known as concessional contributions

There are some exceptions to this rule:

  • If you earn $37,000 or less, the tax is paid back into your super account through the low-income super tax offset (LISTO).
  • If your income and super contributions combined are more than $250,000, you pay Division 293 tax, an extra 15%.

You don’t pay any contributions tax if you make contributions from your after-tax income — known as non-concessional contributions.

See tax on contributions on the ATO website for more information about how much tax you’ll pay on super contributions.

To avoid paying extra tax on your super, make sure you give your super fund your Tax File Number.

2. How super investment earnings are taxed

Earnings on investments within your super fund are taxed at 15%. This includes interest and dividends, less any tax deductions or credits.

3. How super withdrawals are taxed

The amount of tax you pay depends on whether you withdraw your super as:

  • a super income stream, or
  • a lump sum

Everyone’s financial situation is unique, especially when it comes to taxes. Make an informed decision. We recommend you get financial advice before you decide to withdraw your super.

4. Super income stream

A super income stream is when you withdraw your money as small regular payments over a long period.

If you’re aged 60 or over, this income is usually tax-free.

If you’re under 60, you may pay tax on your super income stream.

5. Lump sum withdrawals

If you’re aged 60 or over and withdraw a lump sum:

  • You don’t pay any tax when you withdraw from a taxed super fund.
  • However, you may pay tax if you withdraw from an untaxed super fund, such as a public sector fund.

If you’re under age 60 and withdraw a lump sum:

  • You don’t pay tax if you withdraw up to the ‘low rate threshold’, currently $225,000.
  • If you withdraw an amount above the low rate threshold, you pay 17% tax (including the Medicare levy) or your marginal tax rate, whichever is lower.

If you have not yet reached your preservation age:

  • You pay 22% (including the Medicare levy) or your marginal tax rate, whichever is lower.

6. When someone dies

When someone dies, their super is usually paid to their beneficiary. This is called a super death benefit.

If you’re a beneficiary, the amount of tax you pay on a death benefit depends on:

  • the tax-free and taxable components of the super
  • whether you’re a dependent for tax purposes
  • whether you take the benefit as an income stream or a lump sum

FAQs

1. My father has died. Do I need to complete a tax return for him?

It is necessary to complete a tax return to the date of death if a return has been lodged in past years. This return, marked final, must show all income received to the date of death.

2. I usually lodge my return but will not get it into the tax office by October 31 this year. What can I do to avoid getting into trouble with the tax office?

If you owe tax and lodge your return late, any amount owing will be payable on November 21 this year, and a general interest charge will be calculated from then until payment is made. 

The ATO may charge a penalty of $170 for every 28 days that the return is outstanding. Unless you use a registered tax agent, you have to lodge your return from July 1 until October 31.

3. I have been married for a year. What effect does this have on the tax returns that my wife and I have to lodge?

If you married during the year, you might be eligible to claim a reduction in Medicare based on your income. However, you will need to know your spouse’s income before and after marriage. If your spouse has earned income during the year, they will also have to lodge their tax return

On both of your returns, you will be required to disclose information about the other partner so that any entitlements you may have to certain family tax benefits can be calculated correctly.

Some taxpayers may be eligible for the Invalid and Invalid Carer Tax Offset. For example, suppose your spouse is genuinely unable to work because they are invalid or care for an invalid. In that case, you might qualify for the Invalid or Invalid Carer Tax Offset. The invalid must be receiving a Government disability payment to qualify.

4. I have been receiving fortnightly payments of the Family Tax Benefit all year. Do I still have a deadline for lodging my tax return?

You have 12 months after the end of the year to lodge your tax return so that the FOA can check that you have been receiving the correct amount. If you overestimate your income, you will receive a top-up payment, but they will require the overpayment to be paid back if you underestimate your income.

For example, for payments received during the 2019-20 income year, you will be required to lodge your 2020 tax return by June 30 2021. In addition, if you have a partner, their tax return will also have to be lodged by that date. 

Failure to meet the deadline could stop your payments and the repayment of amounts already received. If the tax office does not require you to lodge a tax return, you should notify the Family Assistance Office.

5. How do I know if I’m eligible for the Family Tax Benefit?

The Family Tax Benefit helps with the cost of raising children. It is therefore available for those who:

  • have a dependent child or secondary student younger than 20 years of age who is not receiving a Government benefit such as Youth Allowance
  • provides care for a child at least 35% of the time
  • meets an income test

This is the basic eligibility for the FTB, but if you would like further information, head to the Department of Human Services website.

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