In 2021 Tax Tips

Essential Guide To The Australian Taxation System

Are you an Australian citizen or resident? Do you own property, shares or receive income in Australia? If so, then you need to know about the Australian taxation system! 

This guide will provide an overview of the tax rates and deductions that apply to Australian taxpayers. So whether you’re a first-time taxpayer or just looking to brush up on your knowledge, read on for all the info you need.

This guide explains Australia’s taxation system basics, including who pays income tax, how to lodge a tax return, and what deductions and allowances you may be eligible for. It’s essential reading for anyone preparing their annual tax return

So whether you’re a first-time taxpayer or just want to make sure you’re taking advantage of all the available deductions, read on for a comprehensive guide to Australian taxation.

The Australian taxation system can be confusing for newcomers. This guide provides an overview of the main taxes and how they work to help understand the system easier. However, it’s important to note that this is only a general guide, and you should always speak to an accountant or tax specialist if you need specific advice. With that in mind, let’s get started! 

The first type of tax most people encounter is the income tax. This tax is paid on your earnings from all sources, including wages, salaries, dividends, interest and rent. The rate you pay depends on how much money you earn; it ranges from 0% to 45%, with lower earners paying a lower rate and higher earners paying a higher rate.

The Australian taxation system can be complex, so it’s important to understand how it works. In this guide, we’ll provide an overview of the main taxes you may be liable for and how to go about filing your tax return. We’ll also offer some tips for reducing your tax bill.

If you’re a foreigner, or even if you’re an Australian citizen but have never filed taxes in Australia before, it can be tricky to figure out how it all works. In this guide, we’ll outline the basics of the Australian taxation system and explain some of the key concepts you need to know to file your taxes. 

We’ll also provide information on what kind of tax-related paperwork you need to prepare and when exactly you need to submit your return. So whether you’re a first-time filer or just looking for a refresher course, keep reading for everything you need to know about the Australian tax system!

If you’re an Australian citizen or resident, you’re required to pay tax on your income and Capital Gains. However, the Australian taxation system can be confusing to navigate, so we’ll provide a guide to understanding how it works in this post. 

We’ll outline the different types of taxes you may be liable for, as well as some tax-saving tips to help reduce your taxable income. So whether you’re just starting in your working life, or nearing retirement, make sure you read our guide to the Australian taxation system!

Let’s get started!

Capital Gains Tax in Australia

The Australian tax system is generally designed to generate money for the Commonwealth government. It is collected by the Australian Taxation Office (ATO) and is used by the Government to help cover its expenditure. 

For individuals, the types of income taxed include a person’s salary or wages and financial gains made when a person sells certain types of assets. This is known as Capital Gains Tax or CGT. 

CGT is a double-edged sword in that it can either increase or decrease your tax bill, depending on whether you make a gain or a loss on the sale of the asset compared with what it originally cost you.

There are many different taxes in Australia; however, the main source of tax money comes from the taxation of income, which makes up about 75% of total taxable income.

1. Legislation

While Australian taxation law is set out in numerous Acts, the one which primarily governs CGT is the Income Tax Assessment Act 1997 (Cth). Accordingly, this Act is also referred to as ITAA97.

2. What is Capital Gains Tax?

If you buy shares, property, or other assets for one price and sell them for another price, the difference between the amounts is your capital gain or a capital loss.

If you receive more for your assets than you paid for them, you’ll have made a capital gain, and you may need to pay Capital Gains Tax on it.

3. When does CGT apply?

Under section 102-20 of the Act, CGT applies to gains or losses made when a CGT event occurs.

A CGT event is a transaction that results in a person making a gain or a loss when they dispose of a CGT asset. Most commonly, this is through the sale of an asset.

Section 102-5 of the Act defines what constitutes a CGT asset. A CGT asset is ‘any kind of property of legal or equitable right that is not property’.

THEREFORE, a CGT asset can be almost anything a person can own. This includes land, shares, and investment properties.

4. When does Capital Gains not apply?

There are some exceptions from what constitutes a CGT asset. For example, a loss or gain made when someone disposes of their main residence is exempt from CGT. 

The main residence is the address at which a person lives most of the time. This allows people to buy and sell their own homes without tax implications.

Losses or gains made on assets acquired before 20 September 1985 (when the CGT regime was implemented) are generally exempt from CGT.

Other possible CGT exceptions include:

  • Cars, motorcycles, or similar. These kinds of assets may be subject to state or territory capital gains tax, also known as stamp duty;
  • Collectable items that cost less than $500;
  • Decorations awarded for valour or bravery (unless they were purchased);
  • A real estate property that was the taxpayer’s main residence. Again, this kind of asset may be subject to state or territory stamp duty.
  • The compensation received for injuries;
  • An asset used to produce exempt income; and
  • Assets purchased for personal use are sold for less than $10,000.

5. How much Capital Gains Tax will I pay?

The amount of Capital Gains Tax you’ll pay depends on factors including how long you’ve owned the asset, what your marginal tax rate is, and whether you’ve also made any capital losses.

Your marginal tax rate is important because your capital gain will be added to your assessable income in your tax return for that financial year.

The length of time you’ve held your asset is relevant because if you’ve held shares for over 12 months, for example, you can usually get a 50% discount on your capital gain.

6. What is a CGT event?

Selling assets, such as shares or investment property or transferring them to someone else, triggers what’s called a ‘CGT event’.

The CGT event marks the point when you make a capital gain or incur a capital loss.

Other CGT events could include a managed fund in which your units distributes a capital gain to you.

7. Timing of events

The time at which a CGT event occurs will vary depending upon the type of asset. If, for example, the asset is purchased outright, the date of the purchase will be the relevant date for calculating CGT. On the other hand, if the asset is a house or land, the relevant date is when the parties enter into the purchase contract, not the settlement date.

8. What happens if I inherit assets?

A CGT event is generally only triggered when you sell inherited assets.

If the person who passed away bought the assets after CGT was introduced on 20 September 1985, then the person inheriting the assets will need to determine the cost base. Depending on the asset, the cost base could be:

  • The existing cost base of the deceased person who originally bought the assets; or
  • The market value of the assets at the time of death

If the person who passed away acquired the assets before 20 September 1985, then the person inheriting them is said to have acquired the asset at the time of death. In most cases, the cost base will then be the market value of the assets at that time.

9. What happens if I make a capital loss?

You’d make a capital loss on your assets if you sold them for less than you paid for them.

If you make a capital loss, you can reduce a capital gain in the same financial year.

If your capital losses are greater than your capital gains, or if you make a capital loss in a financial year in which you don’t make a capital gain, you can generally carry the capital loss forward and deduct it against any capital gains you make future years.

10. Complying with CGT requirements

People who acquire a CGT asset, such as an investment property, should keep all receipts and accurate records of any expenses, transactions, and repairs concerning the property. This will accurately calculate any capital gain or capital loss when the asset is sold later.

CGT can involve complex rules and calculations, such as when a person acquires a CGT asset as a gift, for less than its market value from a family member or friend, or when an investment property has been a person’s main residence for only part of the time they owned it. 

You should seek professional advice about your CGT obligations when such complications arise.

Making Superannuation Contributions

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1. It’s all about the tax

The key to understanding super contributions is remembering it’s all about what tax you pay. There are two main types of super contributions:

  • Concessional (before-tax) contributions
  • Non-concessional (after-tax) or personal contributions.

You may also receive contributions into your super account from the Australian Government if you meet certain eligibility criteria.

2. There are annual caps on your contributions

As there are tax benefits from holding savings in your super account, the Government has strict annual caps or limits on both your concessional (before-tax) and non-concessional (after-tax) contributions into super.

The caps are indexed, and any contributions you make over these annual limits are subject to the extra tax. The limits apply to the total of all your super accounts across different super funds.

Note: The general annual limits apply to a financial year (1 July to 30 June the following year) rather than a calendar year (1 January to 31 December the same year).

3. Concessional (before-tax) contributions

  • $27,500 regardless of age
  • If you have a Total Super Balance of less than $500,000 on 30 June of the previous financial year, you can roll forward any unused amount of your cap for up to five years to make a carry-forward contribution

4. Non-concessional (after-tax) contributions

  • $110,000 if your Total Super Balance is less than $1.7 million
  • $330,000 over three years if you are aged under 67 and using the bring-forward rule
  • Nil if your Total Super Balance is $1.7 million or more.

Need to know: From 1 July 2017 to 30 June 2021, the general annual concessional and non-concessional contributions caps were $25,000 and $100,000, respectively. The Total Super Balance cap was $1.6 million.

The bring-forward rule allowing larger super contributions for many years was only available if you were aged under 65. However, in June 2021, new legislation was passed to permit people aged 65 and 66 to use these types of arrangements.

Concessional (before-tax) super contributions: 5 main types

A 15% contributions tax is payable on all concessional super contributions when added to your super account, as these contributions come from your before-tax income.

1. Superannuation Guarantee (SG) contributions

SG contributions are the compulsory contributions made by your employer into your super account on your behalf as part of your total salary package. In 2021–22, the SG rate was 10% of your ordinary time earnings (OTE). This is currently set to rise slowly to 12% on 1 July 2025.

An employer must pay SG contributions for all eligible employees earning at least $450 per month. In addition, if you are under 18, you must also work more than 30 hours a week.

2. Award contributions

In some Employment Awards or Agreements, your employer may be required to make specified super contributions. These contributions are often for employees aged 18 but working less than 30 hours a week or those aged 75 or older who are not eligible for SG contributions.

These super contributions depend on the particular Employment Award or Agreement certified by an industrial authority like the Fair Work Commission.

3. Additional employer contributions

These are contributions made by an employer above the compulsory amount required by the SG legislation or Employment Award. They are generally paid to employees of large companies as part of their salary package or to some public sector employees.

4. Salary sacrifice

Salary-sacrifice contributions are an agreement you make with your employer to pay some of your before-tax salaries directly into your super account. 

At the start of the financial year, you decide how much you want your employer to pay into your super account each pay cycle before the income tax on your salary or wages is deducted.

By making a salary-sacrifice contribution, you reduce your taxable income and, potentially, how much tax you pay. 

This can be worthwhile if you earn over $18,200 a year, as instead of paying your higher marginal rate of tax on your salary or wages, you only pay 15% tax on your super contribution. 

(If your income and concessional contributions are over $250,000 in 2021–22, you may have to pay an additional 15% on some or all of your super contributions.)

Your employer is required to pay the amount you decide to salary sacrifice from your salary or wages on top of the 10% SG contribution they are required by law to pay. 

Legislation introduced from 1 January 2020 made it illegal for employers to use your salary-sacrifice contributions to reduce the amount of SG they were required to pay into your super account.

Salary-sacrifice contributions can be made up to age 67, but you will need to pass a work test if you are aged between 67 and 74. These contributions cannot be paid after age 75.

5. Personal contributions for which you claim a tax deduction

For many years, employees could not make this type of contribution to their super account. These contributions were only available to the self-employed, as they didn’t have an employer making super contributions on their behalf.

Since 1 July 2017, most people (whether self-employed or not) have been able to claim a full tax deduction for personal contributions they make into their super account until they reach the age of 74. If you are aged 67 to 74, however, you must meet the work test requirements to make these contributions and claim a tax deduction.

These contributions are subject to eligibility criteria and must not exceed the concessional (before-tax) contributions cap (see earlier in the article).

Suppose you wish to claim a tax deduction for a personal super contribution. In that case, you must complete the ATO’s Notice of intent to claim or vary a deduction for personal super contributions form and submit it to your super fund before lodging your income tax return for the financial year. This form is available to download from the ATO or your super fund’s website.

Non-concessional (after-tax) or personal voluntary contributions: 2 main types

When they are added to your super account, there is no 15% contributions tax payable on these super contributions, as you have already paid tax on the money. 

Suppose you wish to make a non-concessional contribution. In that case, the balance of all your super accounts at 30 June of the previous financial year must not exceed $1.7 million ($1.6 million from 1 July 2017 to 30 June 2021).

1. Personal contributions from your take-home pay

These are contributions you choose to make from your after-tax salary or wages. Unfortunately, you can’t claim a tax deduction for these contributions.

Personal contributions can be made regularly from your after-tax pay or as a lump sum at any time throughout the year. You must have supplied your TFN to your super fund before it will accept personal contributions.

Your super fund can accept personal contributions if you are aged 67 and under, but you must pass a work test if you are aged 67 to 74. Generally, you cannot make personal contributions once you reach age 75.

2. Spouse contributions

If you are married or in a de facto relationship (including same-sex couples), you can make super contributions on behalf of your spouse. These contributions can be a tax-effective way to save for retirement, particularly if your spouse only works part-time or has a low income.

To be eligible, you must both be Australian residents when the contribution is made and not live separately permanently. 

For your contribution to be accepted by your spouse’s super fund, your spouse must pass a work test if they are aged between 67 and 74. Contributions cannot be made if your spouse has reached age 75.

In addition, your spouse must not have exceeded their non-concessional contributions cap in the year you contributed or have a Total Super Balance of $1.7 million or more in the financial year before you contributed.

Other types of super contributions: 3 main types

1. Downsizer contribution

finance and accounting concept. business woman working on desk

From 1 July 2018, if you are aged 65 or older and meet all the eligibility requirements, you may be able to make a downsizer contribution into your super account of up to $300,000 from the proceeds of selling your home (or up to $600,000 for couples.)

The ATO doesn’t classify downsizer contributions as non-concessional contributions, so they don’t count towards your annual non-concessional contributions cap (see earlier in the blog).

There is no work test for making downsizer contributions, and you don’t need to be under age 75.

Downsizer contributions can be made if your Total Superannuation Balance is over $1.7 million (from 1 July 2021), but this will impact the following financial year.

2. Government co-contributions

Under the co-contribution scheme, you receive a payment from the Government when you make voluntary (after-tax) super contributions into your super account. The amount of co-contribution you receive in your super account depends on your income and the size of your super contribution.

In the 2021–22 financial year, if you pass several qualifying tests and earn less than $56,112, you could receive a maximum co-contribution of $500, with the minimum amount paid to be $20.

The ATO calculates if you are eligible for a co-contribution payment and pays the amount directly into your super account. To receive a co-contribution payment, you must have provided your super fund with your tax file number (TFN).

3. Low-income super tax offset (LISTO)

LISTO contribution payments into your super account are designed to ensure low-income earners don’t pay more tax on their super contributions than they do on their take-home pay. 

These payments of up to $500 are made into your super account as a refund of part of the normal 15% contributions tax you paid on concessional (before-tax) contributions made into your super account.

If you earn $37,000 or less a year, you may qualify for a LISTO payment into your super account. LISTO payments are paid directly by the ATO into your super account.

What Tax Deductions Can I Claim?

The term ‘tax deduction’ in Australia refers to the amount of money claimable by a taxpayer to offset the amount of tax owed by the taxpayer. Most deductions will relate to employment or business activity, although allowances are also made for payments or donations made to, for example, charitable organisations.

For those which relate to business, a deduction is generally allowable ‘to the extent’ that the ‘loss or outgoing’:

  • is incurred because you are generating assessable income or
  • have to be incurred to carry on a business to generate assessable income.

1. Legislation

Australian taxation law is set out in numerous pieces of legislation. The two main Acts which deal with claiming tax deductions are:

  • the Income Tax Assessment Act 1936 (Cth) (‘ITAA36’), and
  • the Income Tax Assessment Act 1997 (Cth) (‘ITAA97’).

The main difference between these Acts and most other pieces of legislation is that the taxation Acts are written in a way that might be understood by people who are not lawyers or accountants. They use words like ‘you’ rather than ‘individual’ or ‘person’, as is the case for most other Acts.

2. What is ‘assessable income’?

To calculate a taxpayer’s taxable income, the taxpayer must subtract their allowable tax deductions from their assessable income (ITAA97 s 4-15).  

‘Assessable income’ comprises ‘ordinary income’ and ‘statutory income’ (ITAA97 s 6-1(1)).

Ordinary Income

There is no definition of ‘ordinary income’ in the Act. Still, it is generally taken to mean payments most people would normally think of as income, such as salary or wages, income produced from running a business, or rent payments, interest, and dividends.

Whether a payment is ‘ordinary income’ is determined by reference to ‘the ordinary concepts and usages of mankind’ unless the legislation indicates a contrary intention. Some of the factors which will be considered in determining whether an amount of money is ordinary income include:

  • whether there is a connection with the taxpayer’s earning activity (from employment or business)
  • whether the payment reoccurs or is a one-off payment, and
  • whether it has come as a benefit to the taxpayer as ‘income’.

Generally, a taxpayer’s income will be their salary and wages derived from personal exertion or services provided or income derived from a business operated by the taxpayer.

Statutory Income

Statutory income’ refers to specific categories of income. These categories are set out in division 15 of the ITAA97 and include:

  • allowances related to employment or services
  • payments for returning to work
  • transfer payments for accrued leave
  • bounties or subsidies
  • profit-making undertakings or loans
  • royalties, or payments to a society that collects copyright
  • payments received for repairs under a lease obligation
  • insurance or indemnity payments relating to the loss of assessable income
  • interest accrued on overpayments or early payments of tax
  • the provision of mining, quarrying and other related information
  • amounts paid under forestry agreements or forestry managed investment schemes
  • amounts paid for work in progress
  • some amounts paid under funeral policies or scholarship plans
  • car expenses which are reimbursed, and
  • bonuses received.

3. What tax deductions are allowable?

A deduction related to business is allowable as far as the payment or loss:

  • is sufficiently related to earning assessable income, or
  • had to be incurred for a business to generate assessable income.

To determine whether a payment or loss is sufficiently related to your earning, it must be:

  • connected to the taxpayer’s scope of employment as an employee (the first limb), or
  • a necessary expense for the taxpayer’s business (the second limb).

You cannot claim a deduction when the payment or loss is incurred for domestic purposes.

Example 1: If the taxpayer is a personal trainer, they cannot claim a magazine subscription about computer hardware because they use a computer. 

The expense must be within the scope of the taxpayer’s earning activity. Here the earning activity is providing fitness training. However, it may be possible to claim a set of weights that are used solely in providing personal training services.

Where an expense has a dual purpose, such as if it has been incurred to gain assessable income AND for personal use, you can only claim the portion of the expense related to earning your income.

Example 2: A taxpayer travels to attend a conference related to their employment, incurring costs for travel, accommodation and food. 

If the taxpayer only has to attend the conference for a couple of hours each day and spends the remainder of the time sightseeing or on personal matters, the amount claimed as a tax deduction will have to be apportioned appropriately to reflect the percentage was for employment purposes.

4. Are there exemptions?

Section 8-1(2) of the ITAA97 sets out four exemptions that mean a payment or loss cannot be claimed as a tax deduction. Payments or losses will not be deductible where it is:

  • a capital gain, or an asset which is purchased for later resale to make a profit, such as a house
  • private or domestic
  • incurred in gaining or producing exempt income, or
  • declared to be non-deductible in the legislation.

What Is The Tax-Free Threshold? 

group of business people analysis with marketing report graph, y

Group of business people analysis with marketing report graph, Young specialists are discussing business ideas for new digital start up project.

The tax-free threshold is the amount of income a person can earn before they are required to start paying tax. The tax-free threshold currently sits as $18,200 of annual income for Australian taxpayers. This equates to $350 per week, $700 per fortnight and $1,517 per month. 

Taxpayers can claim the tax-free threshold to minimise the amount of tax that is withheld during the year.

1. Who can claim the threshold? 

The tax-free threshold is only available to Australian residents for tax purposes. If you aren’t an Australian resident, you will be required to pay tax on every dollar you earn while working in Australia. 

Many people may become a resident for tax purposes part way through the year or leave partway to remain outside of Australia. 

In these instances, the threshold would be at least $13,464. The remainder of the standard threshold is then prorated relative to the number of months worked in Australia.

This can be calculated using the following equation:

$13,464 + $4,736 (the remainder of the standard tax-free threshold) x (the number of months worked in Australia as a resident ÷ 12).

2. How do I claim the tax-free threshold? 

Claiming is simple. Your employer will provide you with a Tax File Number Declaration form to complete when you start employment. 

To claim, all you need to do is check ‘yes’ to questions number 8, “Do you want to claim the tax-free threshold from this payer.” 

Once you earn more income than the threshold, you will pay tax on the excess.

3. What happens if I have two employers?

Many Australian taxpayers have more than one income. This may be due to having multiple jobs or receiving a taxable government allowance such as JobSeeker. 

In these instances, you usually request that you only claim the threshold through the payer from who you generally receive the highest income.

This means that the second payer will withhold tax at a higher rate and for every dollar you earn. This also applies to any additional sources of income. You minimise the risk of accruing debt with the ATO by doing this.

In some cases, the total amount of tax withheld from all your sources of income will be more or less than what you are required to pay. When this happens, the amounts withheld will be credited to you when you submit your tax return. 

FAQs

1. I need a telephone for making and receiving business calls and would like to know what I can claim.

Installation costs are not deductible. However, part of the rental costs is deductible, where a taxpayer must make calls from home. In addition, call costs would be deductible, and a log of calls must be kept for a minimum of 4 weeks. Mobile phones are claimed in the same way.

2. This year I bought a laptop and a new mobile phone which I need for my work. Can I claim the cost of these on my tax return?

Items like this that you buy for use in your job can be claimed in your return. However, since the cost of these items is most likely to be more than $300 each, you will not be able to claim the full cost in one year.

It will be necessary to spread your claim over the useful life of the items (depreciation), and only the work-related proportion is claimable. You should keep a log of work-related use for at least four weeks for each item to determine the proportion that you can claim.

3. I recently bought an iPad and used it for work. Will I be able to claim a tax deduction for the cost?

The ATO has confirmed that the iPad will be treated as the equivalent of a laptop. Therefore, a claim could be made if it is used to produce assessable income (i.e. for work-related activities). 

Any claim will have to be adjusted where there is private use, and if the iPad cost more than $300, the work-related proportion would have to be depreciated over its useful life. Therefore, you should keep a log of work-related use for at least four weeks to determine your claim proportion.

4. I have had to pay for child care during the year. Is this claimable on my tax return?

Child care expenses are not claimable as a tax deduction. However, eligible taxpayers may claim the Child Care Tax Rebate (CCTR) through the Family Assistance Office.

5. I buy tea towels from a charity each year when they ring me. Can I claim this as a deduction?

You cannot claim a deduction for this because it is not a donation to the charity; rather, you are receiving something for your money. Buying an item from a charity does not make your purchase tax-deductible. The same applies to the purchase of raffle tickets. Only donations to registered charities are tax-deductible.

6. Is there a limit on how much I can claim as a tax deduction each year?

There is no limit on the amount claimed each year, provided the expenses are necessarily incurred in earning your income. The expenditure must be work-related, and you may need receipts to substantiate the expenditure. 

Keeping incomplete, incorrect or no records at all may be limiting your ability to claim deductions. But, again, the advice can be obtained from a registered tax agent.

7. Is a credit card slip acceptable as a receipt?

Provided it gives full details of the supplier and date of purchase; the tax office would accept a credit card slip as proof of purchase. In addition, taxpayers can make a notation on the document indicating the type of purchased goods. 

Many taxpayers use the internet to purchase or pay for their work-related expenses. So the ATO will also accept Bpay or email receipts provided they contain the necessary information: date, supplier, nature of the goods and the amount.

8. How long do I need to keep my receipts?

Documentary evidence should be kept for five years from the date of lodgement of the tax return in which the claims are made. If you are depreciating an asset, the receipt should be kept until the item is fully depreciated (even if over five years).

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