Guide To Australian Taxes
Do you have to pay taxes in Australia? What kinds of taxes are levied in Australia, and how much do they cost? This guide will provide an overview of the Australian tax system and answer some common questions about taxation in Australia.
We’ll also provide links to more detailed information on specific aspects of the Australian tax system. So if you’re wondering about your tax obligations in Australia, read on!
Although the Australian tax system may seem daunting at first, it is important to understand how it works to make the most of your finances.
This guide will take you through everything you need to know about Australian taxes, including who has to pay them and how they are calculated. So whether you are a first-time tax filer or simply want to brush up on your knowledge, keep reading for all the information you need!
If you’re an Australian resident, you’re legally obligated to pay taxes on your income. But what do you need to know about the tax system in Australia?
This guide will take you through everything from filing a tax return to the different types of taxes you may have to pay. By arming yourself with this information, you can be sure that you’re paying all the taxes that you owe – and nothing more.
Nobody likes paying taxes, but it’s a necessary evil. The good news is that the Australian tax system is relatively simple, and most people will only need to file a tax return once a year.
This guide will take you through the basics of Australian taxation so that you can understand your obligations and make sure that you’re paying the right amount of tax.
Do you have questions about what taxes you need to pay and how to go about paying them? This guide is here to help.
We’ll provide an overview of the different types of taxes in Australia, as well as information on registering for a tax file number and making tax payments. In addition, we’ve included some tips on reducing your taxable income.
Want to know about the different types of taxes in Australia? Wondering what you need to do to pay your taxes? This guide will tell you everything you need to know about Australian taxes, including how to file your return and which forms you need.
We’ll also cover some of the most common tax myths and misconceptions. So whether you’re a citizen or a foreigner living in Australia, this guide has got you covered!
If you’re an Australian citizen or resident, you’re obligated to pay taxes on your income and assets – no matter where they’re located. This guide will introduce you to the basics of Australian taxation so that you can understand what you need to do each year when tax time rolls around.
We’ll cover everything from what types of income are taxable to how to claim deductions and offsets. So whether you’re a first-time taxpayer or just looking for a refresher, this guide has everything you need to know about Australian taxes. So stay informed and lodge your return on time, every time!
If you’re an Australian taxpayer, it’s important to know what types of taxes you need to pay and how to file your tax return.
Depending on your income and personal circumstances, you may be required to pay income tax, capital gains tax, goods and services tax (GST), or some other type of tax. This guide provides a brief overview of the various Australian taxes and helps you understand when and how you need to file a tax return.
You must understand your tax obligations. This guide provides an overview of the different types of taxes Australians pay and explains how to file your tax return. It’s important to note that tax laws can change year to year, so be sure to consult a qualified accountant or tax specialist if you have specific questions.
Thanks for reading!
What Is Taxable Income?
Your taxable income can be minimised by reducing your assessable income or increasing your deductions.
For example, a negative gearing investment strategy relies on offsetting an investment loss (after deducting loan interest and other costs from your investment income) against other income. In this case, the investor increases their deductions to reduce their taxable income and tax payable.
Similarly, sacrificing some of your pre-tax income into super reduces your assessable income. Salary-sacrifice contributions are deducted when you are paid, which reduces your gross (assessable) income.
This, in turn, indirectly reduces your taxable income. Moreover, the super contribution (up to an annual cap of $27,500) is generally taxed at a concessional rate of 15% on the way into your super fund, instead of your marginal tax rate.
Income Tax Offsets, Levies And Surcharges
1. Low Income Tax Offset (LITO)
The Low Income Tax Offset (LITO) helps low-income earners who are Australian residents reduce their tax bills. Combined with the tax-free threshold of $18,200, LITO effectively allows you to earn up to $20,542 before any income tax is payable.
2. Low and Middle Income Tax Offset (LMITO)
The Low and Middle-Income Tax Offset (LMITO) is available to Australian residents with annual taxable income of not more than $126,000 in 2018–19 to 2021–22 financial years. LMITO will operate in addition to the LITO, and taxpayers may be entitled to receive both offsets up to and including the 2021–22 financial year.
3. Seniors and Pensioners Tax Offset (SAPTO)
There are two eligibility requirements for SAPTO:
1. You must have reached the Age Pension age and be eligible to receive it.
The Age Pension age in Australia currently depends on your date of birth. The minimum age is 66 years and six months; this will rise to 67 for all Australians from 1 July 2023.
2. You must pass a rebate income threshold test to determine your eligibility for a full or partial offset.
Your rebate income is the total of the following items:
- Your taxable income (if any)
- Your reportable employer super contributions (if any)
- Your deductible personal super contributions (if any)
- Your net financial investment loss (if any)
- Your net rental property loss (if any)
- Your fringe benefits (if any)
If you’re single, your total rebate income must be less than $32,279 to be eligible for the maximum tax offset of $2,230. After that, the SAPTO progressively reduces by 12.5 cents for every dollar over this amount, up to an income level of $50,119, where the offset cuts off completely.
For couples, your combined rebate income must be less than $57,948 to receive the maximum combined tax offset of $3,204. This amount progressively reduces to zero for combined incomes above $83,580.
If you are eligible for SAPTO, but your spouse is not, you may still be entitled to a partial offset.
4. Medicare Levy
Medicare gives Australian residents access to universal health care. It is partly funded by the Medicare levy, 2% of your taxable income. You pay this levy in addition to the tax you pay on your taxable income.
Your employer will generally withhold enough tax to cover the levy, but the ATO will determine the exact amount when you submit your tax return. The Medicare levy applies only to residents.
For 2020–21, you do not have to pay the Medicare levy if your taxable income is less than $23,226, and the amount of Medicare levy you pay will be reduced if your taxable income is less than $29,033.
Suppose you are entitled to the Seniors and Pensioners Tax Offset (SAPTO). In that case, you do not have to pay the Medicare levy if your taxable income is less than $36,705, and the amount of Medicare levy you pay will be reduced if your taxable income is less than $45,881.
Medicare levy surcharge
An additional Medicare levy surcharge (MLS) is payable if you earn above a certain income and don’t have adequate private health insurance. The MLS is calculated, depending on your surcharge income, at 1%, 1.25% or 1.5% of:
- Taxable income
- Total reportable fringe benefits
- Any amount on which family trust distribution tax has been paid
- Total net investment losses (e.g. negative gearing deductions)
- Reportable super contributions.
5. Lifetime Health Cover loading
A person who does not have private health (hospital cover) insurance on their Lifetime Health Cover base day (usually 1 July following the 31st birthday) but who later in life decides to take out private hospital cover will pay a 2% Lifetime Health Cover (LHC) loading on top of their premium for every year they are aged over 30.
The LHC loading also applies if a person over 30 cancels their private health insurance and then later decides to take out private health insurance again.
There is an exception, known as ‘days of absence’, which permits you to be without hospital cover for periods totalling 1,094 days (three years less one day) during their lifetime, without affecting their loading. This covers small gaps, such as switching from one fund to another.
However, if the total gap period exceeds 1,094 days, you will pay a 2% loading on re-joining private hospital cover. The loading increases by 2% for every year without cover after that. The LHC is removed after ten straight years of private health insurance cover.
The private health insurance rebate (see below) has not applied to the Lifetime Health Cover loading since 1 July 2013.
6. Private Health Insurance Rebate
The private health insurance rebate is an amount the government contributes towards private health insurance premiums.
The rebate can be claimed for premiums paid for a private health insurance policy that provides private patient hospital cover or combined hospital and available cover. The rebate is income tested, which means eligibility depends on your income.
What Is Tax-Free Threshold In Australia?
If you are an Australian resident taxpayer, the first $18,200 of income that you receive is tax-free. This is called the tax free threshold.
If you earn less than $18,200 from all sources, you won’t pay tax. However, you will normally pay tax on the excess over $18,200.
The $18,200 tax-free threshold equates to:
- $350 a week
- $700 a fortnight
- $1,517 a month
When you start work for a new employer, you must complete a Tax File Number Declaration form. Then, you advise your new employer that you want to claim the tax-free threshold by answering “Yes” at question 9 ‘Do you want to claim the tax-free threshold from this payer?’
If you have more than one job and your combined income exceeds $18,200, you can only claim the tax-free threshold for one of those jobs (normally the higher paying one).
If you claim for both jobs, not enough tax will be deducted, and you will have a tax debt at the end of the year when you lodge your tax return.
Taxpayers with two or more income sources – beware of a possible tax trap caused by the tax-free threshold.
Some taxpayers with two or more jobs or other taxable income sources may be caught in an unintentional tax trap due to the tax-free threshold.
The tax-free threshold refers to how much you can earn in the financial year before you are liable to pay tax. For Australian residents, the tax-free threshold is currently $18,200, meaning the first $18,200 of your income is tax-free, but you are taxed progressively on income above that amount.
The tax-free schedule is due to stay at $18,200 until at least 2024–25.
The problem occurs even if the taxpayer and the employers do the right thing – as determined by the Australian Taxation Office (ATO) individual income tax rates.
The problem is caused as the first job attracts the tax-free threshold while the second and subsequent jobs are undertaxed. This means that taxpayers can be left with a tax bill at the end of the financial year.
Common tax-free threshold questions
1. Why is my refund lower than last year, or why do I have an incredible amount owing?
Since the tax-free threshold was raised to $18,200, you likely had less tax withheld by your employer (and therefore received more money for each pay), which has resulted in a smaller refund or a bill payable.
This is particularly the case for taxpayers with multiple jobs (and payment summaries). Even if each employer follows the ATO income tax rates properly to calculate tax withheld, the total tax paid on your income may not be enough to cover the tax payable because of the progressive tax rates.
2. What can I do to ensure this doesn’t happen to me again next year?
Have one of your jobs deduct a greater tax each pay period to cover the shortfall. Contact your payroll department to arrange this change. Your tax consultant can advise you of the shortfall amount per pay period based on this year’s tax.
Contact your nearest office and advise how much you have earned from each job and how much tax you have paid, and they can let you know any shortfall, and you can adjust what you pay as you go.
3. I cannot afford to pay my tax bill right now; what should I do?
We can defer your tax return for lodging until the due date next year. According to the ATO, you will need to finalise the tax return, and we will hold for lodgement in May or your due lodgement date.
Tax Offsets And Deductions
Tax offsets or credits reduce the tax payable on taxable income, but tax offsets should not be confused with deductions.
Deductions reduce a taxpayer’s assessable income, while tax offsets directly reduce the amount of tax payable.
What Is Included In Assessable Income?
Your assessable income must be declared on your tax return each year. It includes any of the following:
1. Employment income
This includes any income you receive for full-time, part-time or casual work. Examples of employment income are:
- Salary, wages, commissions, bonuses, parental leave pay and payments from a work-related insurance scheme (income protection, sickness/accident payments or worker’s compensation).
- You may receive any allowances from your employers, such as car, travel, clothing, laundry, meal, working conditions, or special duties/qualifications allowances.
- Any other income (like tips, awards or discounted employee shares).
- Any lump-sum payments, such as when you leave a job, are paid out for any unused leave.
- Any reportable fringe benefits you received above $2,000 over 12 months, such as using a company car for private purposes or having your employer cover some of your private expenses as part of a salary packaging arrangement. Even though you need to declare fringe benefits, you don’t pay tax on them. Instead, it’s used to determine your eligibility for any government benefits.
2. Super pensions and annuities
If you’re receiving a pension from your super fund, it may have three different components:
- A taxed element (where your fund has already paid tax)
- An untaxed element (where tax still needs to be paid)
- A tax-free element (where no tax is payable).
Depending on your age, you may need to declare both the taxed and untaxed elements as income in the financial year you receive the payments so that the ATO can determine your overall tax obligation (or refund).
If you’re receiving regular income from an annuity, it usually has taxable and tax-free components. You’ll need to declare the taxable components.
3. Government payments
If you’re receiving government payments like the Age Pension or carer payments, they must be declared on your tax return. Even though some government payments are tax-exempt, you must still declare them. That’s because they can affect your eligibility for other government benefits and tax offsets.
4. Investment income
This can include:
- The interest you receive from accounts you have with banks or other financial institutions.
- Share dividends or returns from managed funds
- Rent from an investment property
- Capital gains you make on the sale of an asset.
5. Business, partnership and trust income
Make a personal tax-deductible contribution to your super fund, up to the annual limit of $27,500. You can claim a tax deduction provided you complete an ATO form (or download a form from your super fund) send it to your super fund.
Your super fund will tax your contribution at the super concessional rate of 15% instead of your marginal tax rate.
When claiming any tax deduction, it’s important to keep records (for five years in most cases), so you can substantiate your claim if the ATO ever audits you.
6. Foreign income
If you’re an Australian resident for tax purposes, you must declare any foreign income you receive, even if it’s already been taxed overseas. This is because the ATO uses a system of credits and exemptions to work out if Australian tax is payable on any foreign income you’ve earned.
7. Crowdfunding income
If you’ve raised any income for a project or venture via crowdfunding, some of it may be taxable if you’re carrying on a business or other profit-making scheme.
Some of the seven types of assessable income listed above will be automatically provided to the ATO each year by your employer/s and financial institutions where you have money invested.
You might also receive other payments that aren’t included in your assessable income. Common examples include:
- Lump-sum payments from insurance policies, such as for total and permanent disability
- The tax-free component of any eligible termination payments you receive when you leave an employer
- Genuine redundancy payments (up to certain limits based on your length of service)
- Child support or maintenance payments.
What Deductions Are You Allowed?
Eligible deductions reduce your assessable income and, therefore, the amount of tax you have to pay. The most common deductions are:
1. Work-related expenses
- Vehicle and travel. You can claim vehicle and travel expenses if you incur them as part of carrying out your work duties. However, your employer isn’t reimbursed (for example, if you do deliveries using your vehicle). You can also claim any private costs of travelling between your employer’s different locations. However, you can’t claim the cost of travelling to and from work and your home.
- Clothing, laundry and dry-cleaning. You can claim for the cost of buying and cleaning work clothing provided the clothing falls into at least one of the following categories:
-It’s a compulsory uniform.
- Home office. If you regularly work from home, you can claim the cost for work-related home office expenses, including a portion of your home’s running expenses (like phone, electricity and internet costs) based on your dedicated work area, as well as any work-related equipment you buy.
- Phone and internet. If you’re paying for your own phone and internet connections and use them for work, you can claim the percentage related to work use.
- Overtime meals. If you get an overtime meal allowance as part of your employment conditions (which you must include in your assessable income), you can claim up to that amount as an expense if you’ve used it.
- Self-education. You can claim the cost of self-education expenses, such as costs associated with a course that leads to a formal qualification, provided they relate directly to your current employment. But you can’t claim repayments for any government assistance you receive to take a course (such as the Higher Education Loan Program).
- Tools and equipment. If you need to buy tools and other equipment to earn an income, you can claim a deduction for all or some of the cost, depending on the work-related and personal use percentage.
- Other work-related expenses. This includes items like income protection insurance premiums (but not if you hold and pay for the insurance inside your super fund), union fees and any personal costs associated with attending work-related seminars or workshops.
2. The cost of managing your tax affairs
You can claim the cost of managing your tax affairs, including the cost of advice for preparing and lodging your tax return and business activity statements (BAS).
3. Gifts and donations
You can claim the cost of any charitable gifts or donations you make to ‘deductible gift recipients.’ However, you can’t claim a donation if you received a personal benefit in exchange for your gift or donation, even if it’s a ticket to win a prize.
4. Interest, dividend and other investment income deductions
Expenses associated with earning assessable interest, dividends, rent or other investment income (like bank fees, interest on money borrowed to buy shares that have provided you with dividends, or investment management fees).
5. Personal super contributions
If you make a personal tax-deductible contribution to your super fund, up to the annual limit of $25,000, you can y provided you complete an ATO form and send it to your super fund.
Your super fund will tax your contribution at the concessional super rate of 15% instead of your marginal tax rate.
When claiming any tax deduction, it’s important to keep records to substantiate your claim if the ATO ever audits you.
BAS service is defined in the Tax Agent Services Act 2009 (TASA) as:
- ascertaining or advising about the liabilities, obligations or entitlements of a client under a BAS provision; or
- representing a client in their dealings with the Commissioner of Taxation concerning a BAS provision; and
- It is reasonable to expect a client to rely on the service to satisfy liabilities or obligations or to claim entitlements under a BAS provision.
The term ‘BAS provision’ is defined in Income Tax Assessment Act 1997 as:
- Part VII (collection and recovery only) of the Fringe Benefits Tax Assessment Act 1986
- the indirect tax laws, including
-the goods and services tax (GST) law
-the wine tax law
-the luxury car tax law
-the fuel tax law, and
- Parts 2-5 and 2-10 in schedule 1 of the Tax Administration Act 1953 are about the pay as you go (PAYG) system.
The TASA also provides that the Tax Practitioners Board (TPB) may, by legislative instrument, specify that another service is a BAS service.
There are significant civil penalties for anyone providing BAS services for a fee or reward, or advertising BAS services, while unregistered.
Declaring Certain Services As BAS Services
We’ve registered the following legislative instruments that extend the scope of services that registered BAS agents can provide:
- Tax Agent Services (Specified BAS Services No.2) Instrument 2020 — this instrument, registered on 5 November 2020, allows BAS agents to provide certain services, including the superannuation guarantee (SG) and superannuation guarantee charge (SGC). This instrument repeals the Tax Agent Services (Specified BAS Services) Instrument 2016.
- Tax Agent Services (Specified BAS Services No.1) Instrument 2020— this instrument, registered on 15 April 2020, allows BAS agents to provide certain services under the Australian Government’s COVID-19 stimulus measures.
The legislative instrument — Tax Agent Services (Specified BAS Services No. 2) Instrument 2020 — allows BAS agents to provide the following additional services from 6 November 2020:
- services under the Superannuation Guarantee (Administration) Act 1992 to the extent that they relate to a payroll function or payments to contractors
- determining and reporting the SG shortfall amount and any associated administrative fees
- dealing with superannuation payments made through a clearinghouse
- completing and lodging the Taxable payments annual report to the ATO on behalf of a client
- sending a tax file number declaration to the ATO on behalf of a client
- applying to the Register for an Australian Business Number (ABN) on behalf of a client.
Types of services relating to the SGC
- Advising about an SGC liability, including calculating SGC and preparing the SGC statement
- Advising about the offsetting of late payments of superannuation contributions against the SGC, including completing the late payment offset election section of the SGC statement
- Representing a client in their dealings with the ATO relating to the SGC, including:
-lodging of SGC statements
-accessing the SG and SGC accounts in online services for BAS agents
-being an authorised contact for the SG and SGC account
-being an authorised contact for payment arrangements and requesting penalty remissions relating to the SGC account
-being an authorised contact for any audit or review activity undertaken by the ATO relating to the SGC.
COVID-19 Stimulus Measures
From 16 April 2020, BAS agents can legally provide advice and assist eligible businesses to claim their entitlements under the JobKeeper Payment and Cashflow support for business initiatives.
The legislative instrument, Tax Agent Services (Specified BAS Services No.1) Instrument 2020, declares the following services to be a BAS service:
- a service under the Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020
- a service under the Coronavirus Economic Response Package (Payments and Benefits) Act 2020
- service under any rules that the Treasurer may, by legislative instrument, make under section 20 of the Coronavirus Economic Response Package (Payments and Benefits) Act 2020
- service under any legislative instrument made under subsections(b) and (c).
This Legislative Instrument also allows registered BAS agents to legally provide services under the JobKeeper Payment extension rules and the JobMaker Hiring Credit rules.
1. I am covered by private health insurance and will be turning 65 this year. Will my premium be reduced?
Taxpayers who take out private health insurance can claim a percentage of the premium as a tax offset. This can be taken as a reduced premium, a cash refund from Medicare or claimed through the tax return at the end of the income year.
From 1 April 2005, premiums for health insurance policies covering people over 64 years have attracted a higher tax offset. If the eldest person covered by the policy is aged 65 or above, the offset increases to 35%. The eldest person covered by the policy is 70 years or over; the offset increases to 40%.
However, from 1 July 2012, the ATO introduced income testing against three income tier thresholds. Therefore, you may receive a lesser percentage of the tax offset depending on your income.
2. How long do I have to keep my tax documents?
You must keep all the records, receipts and other documentation you have used to prepare your tax return. If you are claiming deductions, you must keep written evidence to verify your claims for those deductions.
If you are an individual, you must keep proper records relating to your tax affairs for at least five years from the date you lodged your tax return.
If you are a small business, you must keep proper records relating to your tax affairs for at least five years from when the business record is prepared, or the transaction is completed, whichever occurs later.
If you are involved in a dispute with the Commissioner (an audit, for example), the five years are extended.
If you use information from your records in a later tax return, you may have to keep records for longer. So, if you carry forward a tax loss, you must keep the records until the end of any review period for the income tax return in which the loss is fully deducted.
Suppose you own an asset subject to capital gains tax on disposal. In that case, you will need to keep records covering the entire period of ownership until five years after lodgment of the tax return recording the disposal of the asset.
3. I have had a large pay rise and am worried that I will have to pay the Medicare Levy Surcharge. Is there anything I can do?
The Medicare levy surcharge is payable where your income is over a threshold amount, and you do not have adequate private hospital insurance.
The threshold amount for a single taxpayer is currently $90,000, and for families with up to one dependent child, it is $180,000. If your income for surcharge purposes exceeds the appropriate amount and you do not have private hospital cover, you will pay the surcharge.
Income for surcharge purposes includes your taxable income, exempt foreign employment income, investment losses, as well as reportable fringe benefits and reportable superannuation contributions.
The private health insurance rebate and the Medicare levy surcharge are income tested against three income tier thresholds. As a result, higher-income earners will receive fewer private health insurance rebates. If they do not have the appropriate private patient hospital cover level, the Medicare levy surcharge may increase.
4. I have come to Australia temporarily to fulfil a two-year contract with a local company. During the year, I took out an Overseas Visitors Health Policy. Will I have to pay the Medicare levy surcharge?
You are a temporary resident and, if your income for surcharge purposes is over the appropriate threshold amount, you will be liable to pay the Medicare levy surcharge. Unfortunately, the policy you have is insufficient to provide you with an exemption from the levy.
5. I have just left school and am about to start my first job. My new employer has asked for my tax file number. How do I apply for one?
Suppose you are an Australian resident for tax purposes, 16 years old or older, and can attend an interview at one of the participating Australia Post retail outlets. In that case, you can apply for a TFN on the web.
Otherwise, you will need to complete a paper Tax file number – application or enquiry for individuals (NAT 1432) form. You can get a copy of this form by phoning the ATO on 1300 720 092, online ordering or from one of the ATO shopfronts or selected newsagents.
Provided you have applied for a tax file number; you have 28 days to quote your tax file number to your employer.