In 2021 Tax Tips

Tax 101: Understanding Tax In Australia

If you’re an Australian taxpayer, it’s important to understand the basics of the Australian tax system. This includes knowing how much tax you need to pay, what types of income are taxable, and what deductions and allowances you may be entitled to. 

In this blog post, we’ll provide a basic overview of the Australian tax system so that you can better understand your obligations as a taxpayer. Stay tuned for more detailed posts in the future!

There’s no doubt about it – tax is complicated. And when it comes to understanding your taxes in Australia, there’s a lot to take in. 

But don’t worry, we’re here to help! In this post, we’ll break down everything you need to know about Australian tax, from what counts as taxable income to how you can claim deductions. So if you’re looking for a crash course in Australia’s tax system, you’ve come to the right place!

Are you an Australian citizen or permanent resident and wondering about your tax obligations? Do you have a part-time job in addition to your full-time job and aren’t sure if you need to declare the income? 

Or maybe you’re starting a small business and want to know what deductible expenses you can claim. In this blog post, we’ll take you through some of the basics of Australian taxation so that you can understand your tax responsibilities. We’ll also answer some common questions about taxes in Australia.

No matter how long you’ve been living in Australia, it’s likely that there are still a few things about the country’s tax system that you don’t know. But don’t worry – we’re here to help! In this blog post, we’ll give you a basic introduction to Australian taxation so that you can understand what you need to do come Tax Time.

Are you a recent arrival in Australia, or are you looking to establish residency here? Either way, you must familiarise yourself with the country’s tax system. In this post, we’ll take a look at the basics of Australian taxation, including who has to pay taxes, what kind of income is taxable, and how your tax bill is calculated. 

We’ll also discuss some of the common tax deductions and credits available in Australia. So whether you’re just getting started or you’re looking for ways to reduce your tax bill, read on for everything you need to know about paying taxes in Australia.

Are you baffled by your payslip every month? Do you know how much tax you should be paying and what it goes towards? If not, don’t worry – you’re not alone! Australia has a complicated taxation system, and it can be hard to figure out how everything works. 

In this blog post, we break down the basics of Australian tax so that you can better understand your payslip and start planning for your future finances. 

With so many different rules and regulations, it can be tough to keep track of everything. So in this post, we’ll give you a basic overview of how the Australian tax system works. 

We’ll explain how you’re taxed on your income, and we’ll also take a look at some common tax deductions and allowances. So if you’re new to Australia or need a refresher on the basics, read on for all the information you need!

Trust us, with this information under your belt, you’ll feel like a financial superhero!

Let’s get started!

Why Do We Pay Tax? Where Does It Go?

We pay tax to the Australian Government based on the income we earn. This includes income from a business, government payments, or employer payments. 

Taxation money forms the brunt of our country’s budget, distributed across essential government services such as health, education, defence, roads and railways and Centrelink benefits.

The Australian Tax Office (ATO) manages everything regarding Australian tax. How much tax you are required to pay depends on your income level, the size of your business, your tax-deductible expenses, and a whole swathe of other factors. 

Whether employed, an individual or a business, it’s extremely important to calculate your taxation accurately to ensure you’re on the right side of the ATO and, therefore, strict Australian taxation laws.

How Much Tax Do You Need To Pay?

Australia works on a ‘progressive tax system,’ meaning the more income you earn, the more tax you’re required to pay. There is a tax-free threshold of up to $18,200 per year. If your income falls on or below that figure, you’re not required to pay tax. 

In any given year, you will not be taxed for the first $18,200 of your earnings under the tax-free threshold; but as soon as your income rises over that amount, you will begin to be taxed for every dollar earned. 

The lowest tax rate begins at 19% and rises in set increments. Calculate how much you’ll be taxed based on your expected annual income as an individual.

What Types Of Australian Taxes Are There?

There are many taxes applicable to individuals and businesses to keep things interesting. 

Australians pay at least 125 different taxes each year! From luxury car tax and agricultural levies to motor vehicle taxes and property taxes. We are a land that is not short on tax; it’s part of our day today.

1. Main types of tax for individuals

  • Income Tax Total assessable income (wages, business income, interest, rent and dividends) minus deductible expenses. 
  • GST (Goods and services tax) You pay 10% GST on any goods and services, such as prepared food and beverage, trades and service-based businesses. GST is paid for when you settle the account for the service – it does not need to be paid in your tax return.
  • Fringe benefits tax: Taxable non-cash benefits provided to employees by their employers, such as using a company car, housing allowances, and payments of private expenses.
  • Capital gains tax: Tax imposed on gains resulting from the sale of assets. Capital gains are included in your assessable income and taxed at your applicable income tax rate. 
  • Medicare Levy: A 1.5% Medicare levy is taxed at a flat rate of 1.5% of your taxable income. A 1-1.5% additional levy surcharge is applicable if you do not have private health insurance. 

2. Main types of tax for companies 

  • Company tax Paid by companies out of their profits. Company tax is calculated at 25% of the profits for small businesses with less than $2 million in revenue. 
  • GST (Goods and Services Tax) The 10% GST you have charged your customers for goods and services must be paid to the government. 
  • Luxury car tax (LCT) 33%: If you’re planning on buying or importing luxury cars into Australia from overseas, prepare to be hit with a flat-rate tax of 33% if the vehicle is valued at over $60K or $75K! 
  • Superannuation tax: Each employer must pay superannuation on top of their employee’s wages on their behalf. The Super guarantee is the minimum you must pay, which currently stands at 9.5% of your employee’s earnings. 
  • Payroll tax: Determined by each Australian State and Territory, the payroll tax is imposed on employers whose annual paid wages exceed the state-set amount. Generally, it is between 3 and 7%

What Is The Tax-Free Threshold?

As an employee, the first $18,200 of your annual income is not taxed under the tax-free threshold – provided you claim the tax-free threshold through your employer. 

If you have more than one job and your income exceeds $18,200 overall, you can only claim the tax-free threshold from one employer. Typically, you would claim the tax-free threshold from the job you earn the higher income.

When you begin work with a new employer, you’re required to complete a Tax File Number Declaration form. At question 8, the form asks, “Do you want to claim the tax-free threshold from this payer?” You’ll need to answer ‘yes’ to claim the threshold.

How Superannuation Works

Simply put, superannuation (or super) is money you put in a super fund while working to provide income later in life when you retire. 

Given the average Australian can expect around 20 years of retirement, and the Age Pension is designed to provide only the most basic needs, the more you can save now, the more comfortable and enjoyable your retirement years will be.

For most working-age Australians, super is a right. However, if you are over 18, earn more than $450 a month (see note below) and are regarded as an employee for tax purposes, your employer must pay money into a super account in your name, which a super fund then manages. 

This is called the Superannuation Guarantee (SG), and employers are legally bound to contribute 10% of your gross income, including bonuses, commissions and loadings.

1. Accumulation phase

The accumulation phase is the first stage of everyone’s super journey – when you contribute to your superannuation account or when your super balance is accumulating. 

All the contributions you make during the accumulation phase are ‘locked away’ (preserved) until your retirement.

Concessional (before tax) contributions and fund earnings in the accumulation phase is taxed at 15% (up to the concessional contributions cap).

2. Retirement phase

Super funds are transferred into the retirement phase when a member commences a super income stream (or pension). 

Since July 2017, there has been a cap on the amount transferred into the retirement phase (known as the transfer balance cap). On 1 July 2021, the transfer balance cap increased to $1.7 million from $1.6 million.

Fund earnings on assets transferred into the retirement phase to support the pension income stream are tax-free.

The retirement phase was called the pension phase until 1 July 2017.

3. A win-win

Once your money is inside super, it’s locked away for decades until you retire or reach another condition of release (see ‘When can I access my super’ below). That may seem overly restrictive, but it allows compound interest and time to create a substantial nest egg.

The reward for your patience is that your super contributions and investment earnings inside super are taxed at concessional rates, and you can generally withdraw your savings tax-free in retirement. 

It is also a win for the government, as the more we all save for our retirement, the less it needs to spend on the Age Pension and other welfare benefits in the future.

4. Putting money in

If you are aged over 18, earn more than $450 a month and are regarded as an employee for tax purposes, then your employer must make SG payments to your super fund on your behalf. 

The SG is currently set at 10% of your gross income, including bonuses, commissions and loadings but not overtime.

As always with super, there are exceptions:

  • If you are under 18, you may still be eligible if you earn more than $450 a month and work at least 30 hours a week (the government proposal to scrap the $450 a month threshold is expected to apply from 1 July 2022).
  • Since 2013–14, people over 70 who are still employed have been eligible for the SG.
  • The maximum amount of SG that employers must pay to high-income earners is capped at an annual salary of $235,680 in 2021–22, which translates to annual SG payments of $23,568 ($235,680 x 10%).

In most cases, employees can choose their super fund. There may be exceptions, though, such as where an industrial agreement specifies a fund, you are a member of a ‘defined benefit’ fund that meets certain conditions, or you work in the public sector.

Is The Superannuation Guarantee Enough?

The compulsory nature of these employer-funded payments takes the pain out of saving for many Australians, but it can also encourage a sense of complacency. Super is often out of sight, out of mind, especially for younger workers who still have up to 40 years until retirement.

According to Grattan Institute modelling, most people today – whether they are already retired, still working or just entering the workforce ­– can expect an annual retirement income of more than 70% of their pre-retirement income, the benchmark set by the OECD for a comfortable standard of living in retirement. 

Some low-income workers stand to be better off in retirement due to a combination of the Age Pension and their super entitlements.

Of course, comfortable means different things to different people, so everyone needs to set their retirement income target and work out how much super they will need to fund it.

The picture is not so rosy for people who entered the workforce before 1992, had to time out of the workforce, or were self-employed and not made regular super contributions equal to around 10% of their gross income. 

If this is you, you will likely need to make additional contributions to super to fund a comfortable standard of living in retirement.

The government tacitly acknowledges this retirement savings shortfall with tax concessions for voluntary contributions, but its generosity has limits. There are two contribution caps, based on whether you make contributions from before-tax or after-tax income.

Concessional (Before-tax) Contributions

tax return financial form concept

Concessional contributions are amounts paid into your super fund on a pre-tax basis. The term ‘concessional’ is used because you pay contributions tax on money going in at the concessional rate of 15%, rather than paying tax at your marginal rate.

Note: If your income exceeds $250,000, you pay an additional 15% tax on your concessional contributions or an effective tax rate of 30%. 

This additional tax is called Division 293 tax and is designed to close the gap between the 15% contributions tax and the top marginal tax rate of 45% and even the tax discount received by high- and low-income earners.

The maximum amount you can contribute at the concessional 15% rate is $27,500 a year. 

This includes employer contributions, salary sacrifice and any voluntary personal contributions you claim a tax deduction. If you split your pre-tax contributions with your spouse, they still count towards your concessional cap.

Under the new carry-forward rule, from 1 July 2018, you can carry forward unused concessional contributions for up to five years. 

This provides an opportunity for pre-retirees or anyone who has taken time out of the workforce to play catch-up and make additional super contributions at concessional rates. To take advantage of this new rule, your super balance must be under $500,000 on 30 June in the year before you make any additional contributions.

For example, say your concessional contributions in the 2019–20 financial year from all sources was $9,000, leaving you with $16,000 in an unused concessional cap. In 2020–21 your contributions totalled $10,000, leaving you with a further $15,000 in a used concessional cap. 

Your super balance as of 30 June 2021 is $220,000, so you are well below the $500,000 limit. Therefore, in the 2021–22 financial year, you could make concessional contributions of up to $58,500 (your annual concessional limit of $27,500 plus $16,000 plus $15,000 in unused cap carried forward from the previous two years). 

In the first year, the carry-forward rule could be used as 2019–20.

Important to know: If you go over your concessional cap (including any carried-forward contributions), even inadvertently, the excess amount will be taxed at your marginal rate.

One common mistake is to forget to include your employer’s SG payments in your calculations, especially where you receive contributions from more than one employer.

Also, be aware that contributions are counted towards your cap when they land in your fund, not paid, which could be a different financial year.

Non-concessional (After-tax) Contributions

Non-concessional contributions where no tax deduction is claimed are capped at $110,000 a year (up from $100,000 before 1 July 2021). 

This includes after-tax contributions made by you, your employer or your spouse. No contributions tax is paid on your money going in, but any excess contributions will be taxed at 47%.

You may be able to make additional contributions above the $110,000 annual cap under the bring-forward rule (not to be confused with the carry-forward rule mentioned earlier!). 

If you are aged under 67, you can contribute up to three times the annual non-concessional cap in a single year, provided they don’t exceed $330,000 in any three years.

From 1 July 2020, if you’re aged under 67, you can make personal or non-concessional contributions into your super account without needing to meet the work test. 

If you are aged 67 to 74, you are generally restricted to annual after-tax contributions of $110,000. Then only if you work at least 40 hours during a consecutive 30-day period in the financial year, the contribution is made.

Need to know: In the May 2021 Budget, the government announced a proposal to scrap the work test for people aged 67 to 74 who wish to make personal non-concessional contributions or salary sacrifice contributions. This change is not yet law but is expected to apply from 1 July 2022.

If you wish to make a personal contribution for which you claim a tax deduction, you will still be required to meet the work test.

However, from 1 July 2019, there is a new exemption from the work test for voluntary contributions in the first income year after retirement to allow retirees more time to prepare their finances. 

This means if you are aged between 67 and 74, you can make voluntary concessional and non-concessional contributions up to the annual limit of $27,500 and $110,000, respectively, for one more year after you stop working. 

You may also be able to use the bring-forward rule to make non-concessional contributions of up to $330,000. To be eligible, you must have had a total superannuation balance of less than $300,000 as of 30 June the previous financial year.

While some rules have been loosened, others have been tightened. For example, from 1 July 2017, you cannot make any non-concessional contributions if your total super balance is above a certain limit as of 30 June in the previous financial year. This limit increased from $1.6 million to $1.7 million on 1 July 2021.

Important to know: You need to watch your personal contributions carefully because it’s easy to make an unintentional overpayment. Any excess concessional contributions will be added to your non-concessional contributions.

This can have a snowball effect if you have already reached your non-concessional cap, resulting in additional tax to be paid on both your concessional and non-concessional contributions.

PAYG (Pay as you go) for Businesses

1. The PAYG Withholding

As an employer, you have a responsibility to help your employees and contractors meet their end of financial year taxation liabilities. Therefore, you collect PAYG withholding amounts from payments you make to employees, contractors and businesses that haven’t provided you with their ABN (Australian Business Number). 

You will need to register for PAYG withholding and report the amounts withheld on your activity statements. The amounts you have withheld from wages and other payments must be paid to the ATO. Your employees and other payees should be provided with a PAYG withholding payment summary.

2. PAYG Instalments

PAYG instalments apply to individuals, organisations or trusts who earn a certain amount of income. However, special rules and exceptions apply to different business and company structures. 

PAYG Instalments are quarterly payments towards the expected income tax payable for the financial year. This system helps you and your business meet your annual income tax obligations and keep on top of profitability and cash flow.

When And How Do You Pay Tax?

As mentioned above, many businesses will pay taxes quarterly (as they go) on behalf of their employees and their business. Businesses registered for GST must lodge a BAS (business activity statement). 

The ATO will automatically forward your BAS once you’ve registered your ABN and for GST. The BAS declares and helps you pay your accrued GST, PAYG Instalments and PAYG Withholding, among other applicable taxes.

When you are required to lodge your EOFY (End Of Financial Year) Tax Return, if you have correctly calculated and paid your BAS, you’ll have less tax to pay, and that’s something to celebrate! 

Examples of BAS Services

  • Applying to the Registrar for an ABN on behalf of a client.
  • Coding transactions, tax invoices and transferring data onto a computer program for clients through processes that require the interpretation or application of a BAS provision.
  • Confirming figures to be included on a client’s activity statement.
  • Completing activity statements on behalf of an entity or instructing the entity which figures to include.
  • Providing advice about or confirming the withholding tax obligations for a client’s employees.
  • Services are declared BAS services through a legislative instrument issued by the TPB.
  • Preparing and providing an income statement that may include reportable fringe benefits amounts and the reportable employer superannuation contributions.
  • Registering or providing advice on registration for GST or PAYG withholding.
  • Services under the Superannuation Guarantee (Administration) Act 1992 to the extent that they relate to a payroll function or payments to contractors.
  • Advising about SGC liability, including calculating the liability and preparing the SGC statement.
  • Advising about the offsetting of late payments of superannuation contributions against the SGC
  • Completing the late payment offset election section of an SGC statement
  • Representing a client in their dealings with the ATO relating to the SGC – lodging SGC statements, being an authorised contact relating to SG and SGC and accessing these accounts in the ATO’s online services for BAS agents
  • Being an authorised contact with the ATO for payment arrangements relating to the SGC account
  • Being an authorised contact with the ATO for requesting penalty remissions relating to SGC
  • Being an authorised contact for any audit or review activity undertaken by the ATO relating to SGC
  • Determining and reporting the superannuation guarantee shortfall and 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 TFN declaration to the Commissioner on behalf of a client.
  • Providing a payroll service that involves interpreting and applying a BAS provision, including reporting employee payroll information through STP enabled software.
  • Undertaking a payroll compliance review, providing an assessment and opinion whether the client is compliant with one or more BAS provisions.
  • Determining eligibility, providing advice and assisting eligible clients in electing to participate in the JobKeeper Payments scheme.
  • Determining eligibility, providing advice and assisting eligible clients concerning their Cashflow boost entitlements.
  • Determining eligibility, providing advice and assisting eligible clients in claiming the JobMaker Hiring Credit.

1. Not a BAS service

businessman hand holding thai baht banknote stack. business, mon

  • Installing computer accounting software without determining default GST and other codes tailored to the client.
  • Coding transactions, tax invoices and transferring data onto a computer program for clients through processes that do not require the interpretation or application of a BAS provision.
  • General training about computerised accounting software not related to the client’s particular circumstances.
  • Preparing bank reconciliations.
  • Entering data without involvement in calculating figures to be included on a client’s activity statement.
  • Advising about claiming of an allowable tax deduction for superannuation contribution
  • Advising about superannuation contribution caps and the effect of exceeding those caps
  • Advising on salary sacrificing arrangements and salary packaging
  • Advising about fringe benefits tax laws
  • Advising about, preparing and lodging income tax returns
  • Transmitting data to the Commissioner through single touch payroll (STP) enabled software, where the data transmission does not require the interpretation or application of a BAS provision.

2. Labour hire firms and service trusts

Where a service trust or labour-hire entity provides services to a client and the client can reasonably be expected to rely upon the service to satisfy their liabilities or obligations or claim entitlements under a BAS provision, the service trust or labour-hire entity may be providing a BAS service and be required to register as a BAS agent.

Generally, a service trust or labour-hire entity is unlikely to be required to register where there is another registered entity (including a registered individual) that is providing the BAS service, and it is that entity that is directing the services being performed by the personnel provided by the service trust or labour-hire entity.

If you operate a labour-hire/on-hire firm and are unsure if you are required to be registered, please refer to the TPB information sheet labour-hire/on-hire firms TPB(I) 26/2016.

Lodging Your Tax Return

The financial year runs from 1 July to 30 June. If you are lodging your return, it is due for lodgement by 31 October. Individuals and sole traders can lodge their tax returns online Via MyTax. You will need a myGov account linked to the ATO.

You can also lodge your return with a registered tax agent. They will help you correctly calculate and prepare your return for a fee. Getting your tax return right and lodge on time is vital to avoid potentially hefty penalties. 

Unfortunately, some are less than honest regarding tax time, which can harm our economy and isn’t fair to those doing the right thing. 

To combat this issue, the ATO has put a Tax Avoidance Taskforce in place.

Tax Avoidance Taskforce

Established in 2016, the Tax Avoidance Taskforce was developed to ensure everyone – including large businesses and wealthy individuals – is paying the correct amount of tax in Australia. 

The Government has funded the task force with a cool $679 million over four years to ensure fairness and integrity of the taxation system for all Australians.

If tax avoidance is identified, an action is taken, and penalties may be imposed. You can be penalised for:

  • Making a false or misleading statement or taking a position that is not reasonably arguable
  • Failing to lodge a return or statement on time
  • Failing to withhold amounts as required under the PAYG withholding system
  • Failing to meet other tax obligations

Penalty amounts are calculated using a formula based on the amount of tax avoided, your behaviour, or nominated multiples of a penalty unit. For example, the current penalty unit for an infringement on or after 1 July 2017 is $210.

Tax Can Be Confusing

The best way to avoid avoidance and stay on the right side of the task force and Australian taxation law is to get professional assistance in proper record-keeping and reporting.

Hiring a good bookkeeper to organise, file and lodge all your documents frees up your time, takes a lot of stress off your shoulders, and helps to ensure you avoid any costly mistakes. 

They’ll also help you claim back entitlements that you might have missed and should be up to speed with the latest developments in the Australian taxation system.

Recent Posts

Start typing and press Enter to search

accountant calculating income and examining reportinvoice bill paid payment financial account concept