Everything About Australian Taxes
The Australian tax system can be confusing for those unfamiliar with it. This blog post is designed to provide you with an overview of the Australian tax system so that you can better understand your obligations as an Australian taxpayer.
We will cover topics such as income taxes, GST, and capital gains tax so that you can be better prepared when it comes time to file your annual tax return.
Are you an Australian resident with income from wages, a business, or investments? If so, you’re obligated to pay taxes on that income.
This article will teach you everything you need to know about the different types of Australian taxes and how to pay them. So whether you’re a first-time taxpayer or just looking for a refresher, read on for all the details!
If you’re a foreign national working or living in Australia, it’s important to understand the basics of how Australian taxes work. This post will provide an overview of key concepts such as income tax, GST, and property taxes.
We’ll also talk about how to file your Australian tax return, so you can be sure to get all of the benefits you’re entitled to. So whether you’re a new arrival in Australia or just looking for a refresher, keep reading for everything you need to know about Australian taxes!
Did you know that the Australian tax system is one of the most complexes in the world? It can be confusing to know what you need to do regarding taxes, and it’s easy to make a mistake.
In this blog post, we’ll take a look at everything you need to know about Australian taxes. We’ll cover topics such as tax rates, deductions, and more. So if you’re looking for some help with your taxes, keep reading!
Even if you’re a seasoned pro in understanding taxes, Australian taxes are sure to give you a run for your money. In this blog post, we’ll take a comprehensive look at everything there is to know about Australian taxes – from what’s taxable and how to file your return to common deductions and credits.
Did you know that Australians have to pay taxes on their income, assets, and even some of their everyday purchases? Tax season is just around the corner, so if you’re unsure about what you need to do, now is the time to learn.
In this post, we’ll discuss everything you need to know about Australian taxes, including when they’re due and what forms you’ll need to fill out.
We’ll also provide a few helpful tips for making tax season a little bit easier. So whether you’re a first-time taxpayer or you’ve been filing your taxes for years, we promise that you’ll find something useful in this post!
If you’re an Australian taxpayer, it’s important to know about the different taxes you may have to pay. This blog post will give you a comprehensive overview of everything tax-related in Australia.
So whether you’re just starting as an adult taxpayer, or are simply looking for a refresher on your obligations, read on for all the information you need. We’ll cover income tax, Goods and Services Tax (GST), PAYG withholding, capital gains tax and more.
By the end of this post, you’ll be an expert on Australian taxes!
Let’s get started!
Your Taxable Income
1. Income that is taxable
Income that you must pay tax on includes money from:
- pensions and annuities
- most government payments
- capital gains
- some grants and payments
- income from trusts, partnerships or businesses
- foreign income
2. Income that is not taxable
You will not have to pay tax on:
- lottery winnings and other prizes
- small gifts or birthday presents
- some government grants and payments
- child support
- the tax-free portion of your redundancy payment
- government super co-contributions
Reducing The Tax You Pay
You may be able to reduce the amount of tax you pay if:
- you’re entitled to tax deductions or offsets, or
- you choose to salary package (salary sacrifice)
1. Tax deductions
Common tax deductions include:
- work-related expenses
- union fees
- charitable donations
- the cost of managing your tax affairs (for example, paying an accountant)
2. Tax offsets
Tax offsets, also known as rebates, directly reduce the amount of tax payable. They are applied after the tax has been calculated.
Common tax offsets include offsets for:
- low-income and middle-income earners
- taxpayers with an invalid relative
- pensioners and senior Australians
- the taxable portion of a superannuation income stream
Salary packaging is when you ‘package’ your income into salary and benefits. It is sometimes known as ‘salary sacrificing’. For example, you may arrange to receive less salary in exchange for superannuation or car payments.
If you reduce your salary in this way, you can reduce your taxable income. However, the items or services you get through salary packaging cannot be claimed as a deduction.
1. How salary packaging works
Salary packaging is when you arrange to receive less income after-tax in return for your employer paying for benefits out of your pre-tax salary. The benefits could be things like a car or a phone.
For example, you might package a salary of $100,000 so that you receive:
- $85,000 as income
- $15,000 car as a benefit
This reduces your taxable income to $85,000. You can benefit as you may pay less income tax.
You need to arrange your salary package before you get paid. You can’t package your salary after you’ve earned it.
Salary packaging is usually more effective for people on the middle to high incomes. However, you may want to get professional tax advice to determine if salary packaging is right for you.
2. What you can salary package
You can salary package benefits you would normally pay for with your after-tax income, such as computers, cars, child care or super. But it depends on what your employer offers, and you may have to pay tax.
Most employers will offer salary sacrifice for super to all employees but may restrict who can package other benefits.
Benefits fall into three categories: fringe benefits, exempt benefits and super.
1. Fringe benefits
Fringe benefits can include:
- salary sacrifice for a car
- health insurance
- loans (usually for a car)
- school fees
- childcare fees
- other personal expenses
Your employer pays fringe benefit tax (FBT) on these benefits.
2. Exempt benefits
Exempt benefits include:
- portable electronic devices
- computer software
- protective clothing
- tools of the trade
Your employer will not have to pay fringe benefits tax on these.
Putting some of your pre-tax income into super benefits you and your employer. Your super fund will tax these contributions at 15% — the same as your employer’s contributions.
For most people, this will be lower than their marginal tax rate.
How Superannuation Is Taxed
Superannuation in Australia has its critics for, among other things, its fees, complexity and constant government tinkering with the rules.
But even the critics would agree that super remains the most tax-effective investment vehicle for your retirement savings.
And deliberately so. The relatively light taxation of super is the government’s carrot to encourage Australians to lock their savings away for three decades or more during their working lives.
The combination of concessional tax rates, time and compound interest is what makes super such a powerful vehicle to grow your retirement savings.
The system is designed to:
- Have lower (concessional) tax rates for contributions you and your employer make into your super fund and earnings on investments inside your fund
- Generally provide you with tax-free withdrawals in retirement (once you reach your preservation age and meet a condition of release).
Super can only be accessed early (before your preservation age) in specific circumstances (such as if you face severe financial hardship, become permanently disabled or are diagnosed with a terminal illness).
While the taxation of super is attractive, it is also complex. That’s why it’s generally worthwhile seeking independent professional advice based on your circumstances.
However, it’s still important to have a general understanding of how super is taxed in Australia to guide your decision-making and savings strategies.
1. How super is taxed at different stages
There are three stages when super can be taxed:
- On the way in, when your contributions enter your fund
- Inside the fund, on earnings from your investments
- On the way out, when you withdraw benefits (though these are generally tax-free if you’re over 60).
1. Tax on superannuation contributions
Superannuation contributions are generally taxed at the concessional rate of 15%. However, the tax payable depends on the type of contribution you make and your earnings.
2. Tax on super fund investment earnings
Your super fund investment earnings (interest, dividends, and rental income) are generally taxed at 15% in the accumulation phase. At the same time, you make contributions to your fund, less allowable tax deductions or credits, such as franking credits from Australian shares under the dividend imputation system.
Franking credits are for tax a company has already paid. Super funds (including self-managed super funds) can use these credits as an offset against their taxable income.
In addition, all Australian super funds are liable to pay capital gains tax on any capital gains made on the sale of capital assets such as shares or property.
The capital gain is the difference between the asset’s selling price and its cost base. This gain is taxed at 10% if the asset is held for longer than 12 months. Capital gains made on the sale of assets held for less than 12 months are taxed at 15%.
3. Tax on accessing your super
When the time comes to start drawing down your super, benefits can be paid as a lump sum, an income stream, or a combination of both. As mentioned earlier in this article, this generally only happens once you reach your preservation age and meet a condition of release. If you’re aged over 60, withdrawals are generally tax-free.
If you access your super before turning 60, the amount of tax you pay will depend on:
- Whether you have reached your preservation age (for example, you might be accessing your super early due to satisfying an ATO-approved condition of early release)
- Whether you choose to receive your payment as an income stream or lump sum
- The components of your payment (that is, whether it contains a tax-free component, a taxable component, or both).
If you choose to withdraw a super lump sum before you reach your preservation age, it will either be taxed at 22% (including the Medicare levy) or your marginal tax rate, whichever is lower.
If you choose to withdraw a lump sum after reaching your preservation age and before turning 60, you can withdraw the taxable component of your super up to the low-rate cap ($225,000 in 2021–22) tax-free.
Any amounts you withdraw above this cap will be taxed at 17% (including the Medicare levy) or at your marginal tax rate, whichever is lower.
Your super balance will be paid to your nominated beneficiary when you die. The tax payable depends on whether:
- They are a dependant of yours or not
- The death benefit is paid as a lump sum or an income stream
- The benefit contains a taxable component or not.
Lodging A Tax Return
1. Lodge online with myTax
You can lodge your return using myTax, the ATO’s free online tool. You need a myGov account linked to the ATO to lodge online. Returns lodged this way are usually processed within two weeks.
Lodging with myTax is easy and free. Most information from employers, banks, government agencies and health funds will be automatically included in your tax return by late July.
You just have to check the information is correct, enter any income that isn’t there, add any deductions you have, and then submit. MyTax will then calculate your tax for you.
2. Declare all your income
Most of the information about your income will be pre-filled from details the ATO receives from your employer and financial institutions. There may be other income you need to add yourself.
Common types of income that must be declared include:
- employment income
- government payments
- super pensions and annuities
- investment income (including interest, dividends, rent and capital gains)
- income from the sharing economy (for example, Uber or Airbnb)
- compensation and insurance payments
- foreign income
3. Claim your tax deductions
Tax deductions reduce your taxable income. As a result, you get back some but not the full cost of the tax-deductible item or service you are claiming.
You’re entitled to claim deductions for some expenses.
1. Work-related expenses
To claim a deduction for work-related expenses:
- you must have spent the money yourself and weren’t reimbursed
- the expense must be directly related to earning your income
- you must have a record to prove it (usually a receipt)
If the expense was for both work and private purposes, you could only claim a deduction for the work-related portion.
If your expenses meet these criteria, here’s a list of the things you may be able to claim.
Car and travel expenses — If you use your car for work, you may be able to claim a deduction. However, this does not include the normal cost of travel between work and home.
Clothing, laundry and dry-cleaning expenses — To claim the cost of a work uniform, it needs to be unique and distinctive. For example, it contains your employer’s logo. You may also be able to claim a deduction for occupation-specific clothing, like chef’s chequered pants or protective (‘hi-vis’) clothing that is required to meet safety standards.
Self-education expenses — If the study relates to your current job, you can claim course fees, student union fees, textbooks, stationery, internet, home office expenses and professional journals.
Tools and other equipment — You can claim a deduction if you buy tools or equipment to help earn your income. If the equipment or asset costs $300 or more, the full amount is not immediately deductible. Instead, you will need to claim the costs back over several years.
2. Investment expenses
You may be able to claim the cost of earning interest, dividends or other investment income.
- interest charged on money borrowed to invest
- investment property expenses
- investing magazines and subscriptions
- the money you paid for investment advice
3. Working from home expenses
If you’re an employee who works from home, you may be able to claim a deduction.
For the 2020-21 income year, there are three ways you can choose to calculate your working from home deductions, depending on your circumstances:
- temporary shortcut method (available between 1 July 2020 and 31 July 2021)
- fixed-rate method
- actual cost method
4. Other deductions
Other items you can claim include:
- union fees
- the cost of managing your tax affairs
- income protection insurance (if it’s not paid through your super fund)
- personal super contributions you paid to your super fund
- gifts and donations to organisations that the ATO endorses as deductible gift recipients
Keep receipts using the myDeductions tool in the ATO app and make it easier to do your tax return. myDeductions allows you to record deductions, including work-related expenses, gifts and donations, interest and dividends. It also lets you store photos of receipts and record car trips.
4. Get help from a registered tax agent
If you want to use a professional to do your tax return, make sure you use a registered tax agent. You can check if the accountant or agent is registered on the tax practitioner register.
Most registered agents have special lodgment schedules and can lodge returns for their clients later than the 31 October deadline.
Whichever way you choose to lodge your tax return, remember you are responsible for the claims you make. So make sure your deductions are legitimate, and you include all your income before you or your agent lodges your return.
1. I am an overseas student who has recently arrived in Australia to study and would like to know how to obtain a tax file number.
If you are an overseas student living in Australia and have had your visa amended to allow you to work, you can apply for a tax file number (TFN) on the internet.
You will not need to provide proof of identity because the ATO will compare your personal and travel document details with those held on the Department of Immigration and Citizenship (DIAC) system.
Provided the matching process is successful, a TFN will be mailed to the Australian address you provided on the application. This internet service is also available to work holidaymakers, New Zealanders who get a visa on arrival, and permanent migrants.
2. How can I reduce my tax bill?
One of the ways you can reduce the tax you pay is by salary sacrificing in return for employment-related benefits. The advantage of salary sacrificing is that your benefit is purchased with pre-tax dollars. Find out more information and tips on salary sacrificing.
3. Is it a good idea to salary sacrifice into superannuation to reduce my tax bill?
If your salary sacrifice in superannuation, this will attract a contributions tax of 15%. If your contributions exceed the threshold for that year, you will be taxed at a higher rate.
With the new tax-free threshold, as you are paying 19 cents in the dollar (plus Medicare) for any amount you earn over $18,200, this is greater than the 15% payable in contributions tax.
However, any amounts sacrificed into superannuation will now also be taken into account for the new income tests that determine liability to pay the Medicare levy surcharge and the entitlement to claim dependent tax rebates and pensioner tax offsets.
From 1 July 2012, if you have gone over your concessional (before-tax) contributions cap by $10,000 or less, you may receive a once-only offer to have the excess concessional (before-tax) contributions refunded to you and assessed at your marginal tax rate, rather than pay excess contributions tax.
From 1 July 2014, the concessional (before-tax) contributions cap will be indexed in line with average weekly ordinary time earnings (AWOTE), in increments of $5,000.
4. I have started a second job. Is there anything that I need to do so that I don’t end up with a tax bill at the end of the year?
Some people with two or more jobs or other taxable income may be caught in an unintentional tax trap due to the newly increased tax-free threshold. The problem occurs even if the taxpayer and the employers do the right thing – as determined by ATO tax PAYG scales.
The first job attracts the tax-free threshold, while the second and subsequent jobs are taxed in line with the progressive tax tables supplied by the ATO. As a result, it causes taxpayers to be, in effect, under-taxed on their ordinary earnings, which can result in a tax bill at the end of the financial year.
5. I am in Australia because I have a two-year contract with a local employer and have a temporary working visa. I have been told that I am classified as a temporary resident. Why is this important?
Since 1 July 2006, there has been a separate category for temporarily living in Australia. A permanent resident is generally taxed on all income in and out of Australia, but a temporary resident is exempt from paying tax on certain income classes.
People who exhibit the behaviour of a ‘resident’ and hold a temporary visa granted under the Migration Act of 1958 will be taxed at resident rates. Temporary residents may also be liable to pay the Medicare levy unless they can apply for an exemption.
Where To Get Help With Tax
Individual income tax can be complex, and everyone’s situation is different.
If you want to get professional advice, consider choosing an accountant to help manage your tax and lodge your tax return.
ATO’s Tax help program
If you earn $60,000 or less, you may be eligible for the ATO’s Tax Help program. Tax Help is a free and confidential service that runs from July to October.
The ATO’s trained volunteers help people lodge their tax returns online, by phone or in-person from Tax Help centres located around Australia.
If you are not eligible for Tax Help, the National Tax Clinic program may be able to help you instead.
You can also ask general questions about tax through the ATO Community.