In 2021 Tax Tips

Understanding Australian Taxes

Are you an Australian citizen or permanent resident? Do you own a business or earn income in Australia? If so, you must understand the Australian tax system. 

This blog post will provide an overview of Australian taxes and explain how they apply to individual taxpayers and businesses. We’ll also discuss some common tax deductions and tax tips for Australians. So if you’re interested in learning more about Australian taxes, keep reading!

Unless you’re a tax accountant, the world of Australian taxes can be pretty confusing. For example, what’s the difference between income tax and capital gains tax? What are the rates for each? And what deductions can you claim? 

This blog post will help answer all of your questions about Australian taxes. We’ll cover the basics of income tax, capital gains tax, and GST, as well as some of the most common deductions that people claim. So if you’re unsure about your obligations come Tax Time or just want to learn more about how taxes work in Australia, keep reading!

When it comes to taxes, Australia is a bit of an enigma. But, while the system may seem complex at first glance, once you understand the basics, it’s not too bad. 

In this post, we’ll take a look at what you need to do to pay your taxes in Australia and some of the most common tax deductions available. So whether you’re a new arrival in Australia or just looking for a refresher course, read on for all the information you need!

If you are an Australian taxpayer, it is important to understand the tax system and your obligations. This guide will provide an overview of the main taxes in Australia, including income tax, goods and services tax (GST), and capital gains tax (CGT). It will also explain how to fulfil your tax obligations, including filing a return and making payments.

Did you know that there are over 2,000 taxes in Australia? So it’s no wonder that many people feel overwhelmed when it comes to tax time. In this blog post, we will look at some of the most common Australian taxes and how they work. We will also provide some tips on how to prepare for tax time.

Shocked by how much you owe in taxes? You’re not alone. Taxes in Australia can be confusing, especially if you’re from another country. 

This blog post will help clear things up by explaining the different types of Australian taxes and how they work. By understanding your tax obligations, you can better manage your finances and keep more of your hard-earned money in your pocket.

For Australians, tax time can be confusing. With various tax rates and rules that seem to change every year, it can be hard to keep track of what you owe and how to go about paying it. 

This blog post is designed to help make sense of Australian taxes – from what you need to pay each year to deductions and allowances you may be able to claim. We’ll also look at some tips for reducing your taxable income so that you can keep more money in your pocket!

Taxes can be confusing, especially when trying to understand how they work in a foreign country. 

This blog post is designed to help Australian expats understand the basics of Australian taxes, including what you need to do to file your taxes and what types of tax exemptions are available. With a little bit of knowledge, filing your Australian taxes will be a breeze!

So, let’s get started!

Progressive Tax System

Australia has a progressive tax system, which means that the more income you earn, the higher tax you pay. There are different tax brackets for residents, children, holidaymakers and foreign residents. You will also be required to pay a 2% levy on Medicare after tax.

There’s no way around it. If you earn an income in Australia, it’s a requirement of the Australian government that you pay income tax. 

This includes income earned from wages, salaries, profits from business, bank interest, side hustles and returns from investments. Income tax can also be applied to assets, such as property or shares. 

What Is ‘taxable Income’?

Taxable income is the amount left over after your expenses to earn your income has been deducted. To calculate the income, you will be taxed; you’ll need to add up your eligible claims and subtract that from your income earned during the financial year. 

The result is your taxable income and the amount you’ll need to pay tax on. Claiming all of your eligible deductions can considerably reduce your income tax.

How Do I Pay Income Tax?

Your income tax will automatically be withdrawn from your wage or salary if you work for an employer. Your employer is required to pay your tax to the Australian Taxation Office (ATO) directly with each pay period through their accounting software. 

If you earn an income separately from your employers, such as bank interest, shares or property, you’ll need to account for that income yourself.

Each year, you’ll need to complete an income tax return. Your tax agent will be able to access your income and tax already deducted from your employer, but you’ll need to let your tax agent know if you have other streams of income. 

Sometimes, your employer will have paid enough tax on your behalf, and after deductions are made, you’ll receive a tax return. 

Who Has To Lodge A Tax Return?

All taxpayers will need to lodge a tax return, even if they earn under the threshold. This includes:

  • Australian residents whose total income exceeds the $18,200 tax-free threshold for the income year 
  • Any resident taxpayer earning less than $18,200 who has had tax withheld for the income year through their job
  • Every individual carrying on a business or professional regardless of income or loss

When Do I Need To Lodge My Tax Return?

You’ll need to lodge your tax return between 1 July the 31 October (the last day for lodgement). However, extensions may be granted if you use a tax agent to lodge your return (up to 15 May). Contact your nearest ITP Tax Accountant to discuss your lodgement date if you need to apply for an extension.

If you miss the tax deadline, it’s not too late – but don’t forget it entirely. The ATO has stiff fines and penalties for late tax returns. Working with a tax agent can help you minimise these penalties and help you navigate late tax return waters.

How Can I Claim My Tax Deductions?

It’s a good idea to claim as many tax deductions as you can on expenses you have incurred for your job, as it can drastically reduce your income tax. This is often why people receive a tax refund when they lodge their tax returns.

Suppose you have spent money to earn your income, such as purchasing and cleaning uniforms, paying for travel and meals, or ongoing educational expenses. In that case, you may be entitled to claim that cost as a tax deduction. But, remember, you can only claim work expenses. Personal expenses cannot be deducted against your taxable income.

Calculating And Paying Capital Gains Tax

businessman with financial concerns

1. Understanding capital gains and tax

A capital gain or loss is the difference between what you paid for an asset and what you sold it for. This takes into account any incidental costs on the purchase and sale. 

So, if you sell an asset for more than you paid for it, that’s a capital gain. And if you sell it for less, that is considered a capital loss.

Capital gains tax applies to capital gains made when you dispose of any asset, except for specific exemptions (the most common exemption is the family home).

Being organised is key when quickly calculating and paying capital gains tax. And a good way to be organised is to keep up to date records by holding on to things like: 

  • initial sale contracts and other receipts for other expenses
  • interest paid on related borrowings
  • receipts for ongoing expenses
  • expense records
  • valuations.

2. Deciding how to calculate capital gains tax

There are different ways to calculate your capital gains tax.

Capital gains tax discount

If you sell or dispose of your capital gains tax assets in less than 12 months, you’ll pay the full capital gain. But, you (as an individual) could get a 50% discount on your capital gain (after applying capital losses) for any capital gains tax asset held for over 12 months before you sell it.

Indexation

You can choose indexation if you acquired your assets before 21 September 1999 and have held it for at least 12 months. This is an alternative option to the discount method. The indexation method applies a multiplier to account for inflation on the cost base of your asset (up to September 1999).

You can choose the indexation method if you’ve carried forward any capital losses for assets held before 1999.

Capital loss

If you’ve made a capital loss, you can deduct this from your capital gains (that you’ve made from other sources) to reduce the amount of tax. If you don’t have other capital gains (during that income year), you can carry over any capital losses to other income years—something handy for another time.

3. Paying capital gains tax

When to pay

Although it sounds like it, capital gains tax isn’t separate. Your net capital gains form part of your assessable income in whatever year your capital gains tax happened.

Capital gains tax is payable as part of your income tax assessment for the relevant income year.

When not to pay

If you make a net capital loss in an income year, you shouldn’t pay capital gains tax. But the net capital loss cannot offset tax on any other income and can only be ‘carried forward’ to offset capital gains in future income years.

It’s worth noting, some assets and events are exempt from capital gains tax. These include selling your principal home or personal car or selling an asset acquired before capital gains tax was introduced on 20 September 1985.

Have read the ATO’s full list of capital gains tax exemptions.

Working out your capital gain (or loss)

To quickly figure out how much capital gains tax you’ll pay – when selling your asset, take the selling price and subtract its original cost and associated expenses (like legal fees, stamp duty, etc.). The remaining amount is your capital gain (or loss).

If you’ve made a capital gain and you’ve held an asset for greater than 12 months (assuming you don’t have other capital losses), you can apply the 50% discount to work out your net capital gain (unless the indexation method applies).

Companies and individuals pay different rates of capital gains tax. For example, if you’re a company, you’re not entitled to any capital gains tax discount, and you’ll pay 30% tax on any net capital gains. 

If you’re an individual, the rate paid is the same as your income tax rate for that year. For SMSF, the tax rate is 15%, and the discount is 33.3% (rather than 50% for individuals).

What Is The Tax-Free Threshold In Australia?

The tax-free threshold is the amount of money you can earn each financial year without needing to pay tax. According to the Australian Taxation Office (ATO), the tax–free threshold is $18,200. 

This means if you’re an Australian resident for tax purposes, the first $18,200 of your income each financial year is tax-free, and you only pay tax if you earn above this amount.

If you’re an Australian resident with a tax file number, the tax-free threshold could help reduce how much income tax you need to pay. Here’s how it works.

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

The good news is that claiming the tax-free threshold is normally fairly simple, as the Australian Taxation Office (ATO) explains. 

Whenever you start a new job or apply for a new Centrelink payment, you’ll be given a ‘tax file number declaration’ form to complete, and all you have to do is answer ‘Yes’ to the question ‘Do you want to claim the tax-free threshold from this payer?’

2. 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).

3. Can I claim the tax-free threshold on more than one job?

Generally, not – standard practice is to only claim the tax-free threshold on one job at a time. However, the ATO says that in the case of people with two or more income sources in the same financial year, “we generally require that you only claim the tax-free threshold from the payer who usually pays the highest salary or wage”.

Only if you’re certain your total annual income from all payers will be less than $18,200 can you claim the tax-free threshold from each payer. 

However, if your income ends up being more than $18,200 for the year, you would need to fill out a withholding declaration form and give it to one of your employers to tell them you aren’t claiming the tax-free threshold from it anymore. 

If you don’t do this, you may end up being undertaxed, which would mean you have to pay extra tax at the end of the financial year. 

On the other hand, if you claim the tax-free threshold from only one employer, your second income stream and any other sources of income beyond that will be taxed at the higher, ‘no tax-free threshold’ rate. 

The ATO notes that this may lead to you being overtaxed during the year but that any excess withheld funds will be returned to you at the end of the financial year in the form of a tax refund once you do your tax return.

4. What happens if I don’t claim the tax-free threshold?

If you don’t claim the tax-free threshold at all for a financial year, then you may have to pay income tax on all the money you make. 

This would most likely result in you paying more tax than you need to during the year since Australia’s income tax brackets and rates assume you do claim the tax-free threshold to avoid paying tax on the first $18,200 you earn. 

The ATO will most likely give this overpaid tax back to you as a refund once you do your tax return, but this would still mean you pay more upfront tax during the year. 

The ATO adds that you can fill out a PAYG withholding variation application form if you want to reduce how much tax gets taken out of your pay packet going forward. 

5. How does the tax-free threshold apply to PAYG tax?

The yearly tax-free threshold figure of $18,200 is useful to be aware of when you’re doing your annual tax return. Still, it may not be particularly helpful if you want to figure out whether you need to make pay-as-you-go (PAYG) tax instalment payments on your regular income. 

Instead, the equivalent tax-free cutoffs that apply to regular earnings could be useful to know about. Based on ATO figures, these are:

  • If you’re paid weekly, you’ll pay tax on any earnings above $350.
  • If you’re paid fortnightly, you’ll pay tax on any earnings above $700.
  • If you’re paid monthly, you’ll pay tax on any earnings above $1,517.

You can also use our income tax calculator to get an idea of the tax you’ll pay on your annual income.

It’s important to note, however, that your employer typically won’t automatically apply the tax-free threshold to your earnings. Instead, as the ATO states, it’s something you have to actively claim when you start a new job or apply for a Centrelink payment. 

Otherwise, PAYG tax will be calculated from the first dollar, regardless of how much or how little you earn.

Superannuation

business chart showing financial success

1. Growing your savings inside super

A friend recently told me she didn’t want to put extra cash into her super fund because super is too risky. It’s a common misconception that super is an asset or investment class of its own that moves independently of other assets. It’s not.

A super fund is best imagined as a structure that holds your savings in various investments until you retire. For example, you could hold the same portfolio of shares, property, bonds, cash and other investments inside a super fund or outside super in your name or some other structure such as a family trust. 

Whatever the ownership structure, these investments earn income in the form of dividends, rent or interest and produce capital gains or losses when they are sold.

The thing that sets super apart is its taxation status; despite constant government tinkering, it is still the most tax-effective home for retirement savings. 

That and the length of time your savings are left to grow in super generally produce a better return on your money in the long run than you would earn if you invested in comparable investments outside super.

2. When can I access my super?

Generally, you need to wait until you retire. However, super offers generous tax concessions in return for ‘preserving’ your nest egg until you reach a minimum age set by law and retire. The only exceptions are in cases of financial hardship, disability, terminal illness or death.

People who had money in super before 1999 may also have some ‘unrestricted non-preserved’ benefits they can withdraw at any time.

Otherwise, your preservation age will depend on when you were born. For example, for Australians born before 1 July 1960, the preservation age was 55, but this gradually increased to 60 for younger age groups.

Remember that you need to be at least 60 for your super to be tax-free.

3. Taking money out of super

When you reach your preservation age and retire, you can withdraw your savings and accumulated earnings in a lump sum, as an income stream from a super pension or a mix of the two. Withdrawals are usually tax-free, but if you are younger than 60, there may be a tax to pay.

Suppose you are younger than your preservation age and withdraw a lump sum under the limited conditions of release described earlier. In that case, you will be taxed at 22% plus Medicare levy or your marginal rate, whichever is lower.

Before you can start taking money out of super, you need to transfer up to a maximum of $1.7 million (known as the transfer balance cap) into a pension account. 

Then you must withdraw a minimum amount each year based on your age and account balance. Although most retirees tend to err on the side of caution for fear their money will run out, there is no maximum withdrawal amount.

The most common type of super pension is an account-based pension. However, if you reach your preservation age, are under 65 and still working, you may be able to withdraw a portion of your super as a transition to retirement (TTR) pension. 

Income from a TTR pension is tax-free if you are aged 60 or more. If you are younger than 60, income will be taxed at your marginal rate, less a 15% tax offset.

If you have more than $1.7 million in super, you can leave the balance in your accumulation account or take it out of super entirely. You can keep an accumulation account open for as long as you like, even if you have retired.

Once you start a super pension, you can’t contribute more money unless you stop the pension (called a commutation) and start it again with additional savings up to a maximum pension account balance of $1.7 million.

If you reach preservation age, retire and withdraw your super as a lump sum before turning 60, you may have to pay tax. But, again, the rules are complex, so anyone contemplating early retirement should seek independent financial advice from a retirement expert.

4. What happens when you die?

If you die before all your super is withdrawn, your super fund pays a death benefit to your dependents, other nominated beneficiaries or your estate. 

Death benefits include the balance of your super account plus an insurance benefit if you have been paying life insurance premiums from within your fund.

You need to nominate who you want to receive your death benefits when you die. There are two types of nomination:

  • A non-binding nomination acts as a guide to your fund’s trustees, but it can be overturned in some circumstances.
  • A binding nomination allows you to name your dependent or legal representative, usually the executor of your will, and stipulate that they receive your death benefits. Your legal representative then distributes the money according to your will. You generally need to renew a binding nomination every three years to remain valid, and most funds charge a small fee.

In some cases, your fund may allow your spouse or other eligible beneficiaries to continue receiving your super pension after you die. This is called a reversionary pension because it ‘reverts’ to your chosen beneficiary.

Super death benefits are made up of taxable and tax-paid components. The amount of tax a beneficiary must pay depends on the component, whether they are dependent for tax purposes and whether the super is taken as a lump sum or income stream.

FAQs

1. Am I entitled to claim $300 for work-related expenses as this does not have to be substantiated?

You cannot just claim $300. You must incur any expense before it is claimable. Whilst you may not need receipts for expenditure up to $300, you must have spent the money, which must be relevant to your employment.

2. I have incurred travel expenses this year. What can I claim on my tax?

Your travel must be relevant to your job function for you to be eligible to claim a deduction for those expenses. 

Where this is the case, and you have the necessary documentation, you can claim the cost of transport and incidentals. For example, if your travel involved an overnight stay, you would be able to claim for meals. Travel overseas also requires you to keep a travel diary.

3. I am paid an allowance for travel. Can I claim a deduction for that on my tax return?

A deduction will only be allowed if you have incurred a work-related expense and have the necessary documentation. Travel to and from your job is generally not claimable unless, for example, you are carrying bulky equipment. 

Some awards allow for payment of an allowance even though the employee does not necessarily incur an expense. If a deduction can be claimed, it cannot be for more than the expense you incurred, even if the allowance you have received was higher.

4. I had an overseas holiday during the year and, while I was away, attended a seminar that was relevant to my job. Can I claim the cost of the trip?

You cannot claim the cost of the trip because the main purpose was to have a holiday, and attendance at the seminar was incidental to this. Therefore, you will only be able to claim the additional expenses you incurred to attend the seminar. These could include the registration fee, taxi fare to the seminar, etc.

5. I keep a room set aside for a home office and would like to claim some expenses.

If a taxpayer carries on all or part of their employment activities from home and has an office set aside to do the work, some of the running expenses can be deducted. A diary should be kept for a minimum of 4 weeks stating the hours the office was used for work-related purposes. 

The Commissioner’s rate of 52 cents per hour can then be claimed for the home office’s hours. Only running expenses (electricity, heating and depreciation of office equipment) can be claimed for home office unless the home is being used as a place of business.

Where a home is a place of business (and is easily identified as such – for example, a separate entrance, signage, clients/customers coming to set area of your home etc.), deductions can be claimed on occupancy and running expenses, including:

  • mortgage interest
  • rent
  • house insurance
  • council rates
  • insurance
  • repairs
  • cleaning
  • pest control
  • maintenance
  • decorating
  • telephone
  • heating
  • lighting
  • depreciation.
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